The confirmation hearing for Treasury secretary nominee Timothy Geithner's confirmation has been postponed until at least next Wednesday, reports the Associated Press, as a handful of Republican senators try to act tough on the news that the New York Fed president neglected to pay some taxes while employed at the International Monetary Fund, and for three months in 2005 employed a housekeeper whose work authorization papers had expired.
Senate Democrats and President Obama are standing by their man, confidently maintaining that Geithner's sins are minor, especially when compared to the "gravity" of the economic crisis the new Treasury secretary will be facing. But there's going to be more to talk about than taxes next week. The nonprofit news organization ProPublica has waded into the fray with a much more serious charge; former New York Times reporter Jeff Gerth (infamous in some circles for his coverage of the Whitewater scandal and Wen Ho Lee) all but accuses Geithner of colluding with Citigroup to ease regulatory scrutiny of the superbank.
Gerth's story is a bit short on on smoking guns, but should be taken seriously. As president of the New York Fed, Geithner was Citigroup's primary supervisor. During his tenure, Citigroup made a bunch of bad decisions that laid the groundwork for the company's current woes. Q.E.D.: Geithner could have done better. Gerth also digs up two instances in which the Fed loosened regulatory oversight of Citigroup while Geithner was in charge.
One enforcement agreement in place before Geithner took office in 2003 -- an order requiring quarterly risk reports -- was lifted during his watch. A ban on major acquisitions also was eliminated a year after it had been imposed in 2005.
I look forward to hearing Geithner's explanation of why the Fed eased up on Citigroup when he finally appears before the Senate Banking and Finance Committee. The nitty-gritty of how regulators attempted to watch over Wall Street is far more relevant to Geithner's competence than his housekeeper's immigration status. But Gerth spends much more of his article documenting how Citigroup maintained a "thinner capital cushion" than its peers -- even as Geithner was making numerous public statements to the effect that the biggest financial institutions should be increasing the percentage of capital they put aside to protect against possible losses. Yet not one "enforcement action" was initiated against Citigroup during Geithner's tenure.
I do think it's worth noting that Geithner stood out among the regulatory community during the Bush era as one of a handful of officials who routinely called out for higher capital requirements. But the basic point is valid: What good is talking the talk when you don't go ahead and enforce them on the biggest bank of all -- Citigroup?
My main problem with Gerth's piece is his implication that Geithner was somehow being hypocritical when he called for "building stronger capital margins," and yet, as the financial crisis accelerated in mid-2008, declared that it would be better to wait until the economic crisis stabilized before actually forcing banks to do so:
Speaking at a conference in New York in June, Geithner discussed the role of regulators in reducing risk or building capital, especially at major firms. He didn't mention Citigroup; regulators avoid talking about specific institutions.
It wasn't "realistic" to "expect supervisors to act preemptively to defuse pockets of risk and leverage," he said, but they could make the "shock absorbers stronger."
That meant "inducing institutions to hold stronger cushions of capital and liquidity in periods of calm."
But mid-2008 was not the time.
"After we get through this crisis and the process of stabilization and financial repair is complete," Geithner said, "we will put in place more exacting expectations on capital, liquidity and risk management for the largest institutions."
My recollection of mid-2008 is that Citigroup and every other major financial institution on Wall Street were at that point realizing that they did not have anywhere near enough capital to cover the mounting losses on their bets on mortgage-backed securities. That they should have been more prudent beforehand goes without saying, but was it feasible to require at that juncture, higher capital reserves? How exactly was that supposed to happen? Where were they going to get the money? Sovereign wealth funds were scrambling over themselves to avoid offering any further infusions to U.S. financial institutions. Any sale of assets to raise capital would have just exerted more downward pressure on stock prices, sending stock markets around the world into even deeper spirals and further worsening the capital positions of financial institutions. The only way to raise capital, by that point, was to have the government step in. Which is, ultimately, exactly what happened.
Does Geithner deserve blame for not doing more to change Wall Street's ways? Given what happened while he was president of the New York Fed, it seems obvious that he should bear the brunt of some criticism. But let's also recall that he was the lone Clinton appointee left remaining on the Federal Reserve Board of Governors, surrounded by people whose public positions and private actions were far more indulgent toward the "free market" than he was. It would have taken a Superman to buck the White House, Alan Greenspan and the titans of Wall Street single-handed. If Tim Geithner is ultimately confirmed as Treasury secretary, that dynamic is going to be a little different, this time around.