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Timothy Geithner Doesn't Get It—A Commentary by Jonathan Macey ’82

The following commentary was published in the Washington Post on April 22, 2009.

Timothy Geithner Doesn't Get It
By Jonathan Macey ’82

Yale University corporate law professor Jonathan Macey filed this guest blog post:

Yesterday, Treasury Secretary Timothy Geithner made his first appearance before the Congressional Oversight Panel, which is one of the cadre of government-sponsored entities overseeing the massive bailout and recapitalization of the U.S. financial industry.

In an article called “The Quiet Coup” that appears in the May issue of Atlantic magazine, Simon Johnson argues that the finance industry effectively has captured the U.S. government. The bailout, under this view, is not about the U.S. economies, it is about serving the interests of the financial institutions that are in charge of the political process.

While Johnson does not have a smoking gun to point to as evidence (such as a document in which Geithner admits to serving the interests of Wall Street and selling U.S. taxpayers down the drain), he amasses an impressive array of circumstantial support for the position. Specifically, he points to a startling list of government initiatives that greatly contributed to the financial crisis, including, but not limited to: regulatory forbearance; the congressional ban on the regulation of credit-default swaps; the vast increases in the amount of leverage allowed to investment banks; a no-show Securities and Exchange Commission; the promotion of homeownership; cheap money from the Federal Reserve; and last, but not least, Basel, which is the international agreement to allow banks to measure their own risk.

Add Geithner’s speech yesterday as another major piece of evidence in support of this hypothesis.

First, as reported earlier in the Financial Times, Geithner is not only declining to force banks to repay the bailout money they have received from the government, he is forbidding them to do so. Claiming, farcically, that his “basic obligation is to make sure the system as a whole...has the ability to provide the credit that recovery requires," Geithner is going to allow the banks receiving bailout funds to have the best of both worlds. They get to keep the government money and they also get to claim to an outraged public that they would pay it back if only they could. No private sector creditor would behave so outrageously as to refuse to be repaid by its debtors, particularly debtors in such fire financial straits as these big companies.

It would be irresponsible for Geithner not to make vigorous efforts to obtain repayment of the public money that the government is owed. To refuse repayment in full from these borrowers appears downright sinister.

The core of Geithner’s remarks focused on identifying the major challenges facing the financial system. Geithner’s concerns reveal that his focus is not on the health of the economy; not on inflation; not on the growing tax burden facing Americans; and certainly not on whether the government will be repaid the hundreds of billions of dollars it has transferred to the financial industry. Rather, the Treasury secretary’s principal concern was the fact that major financial institutions have reported unprecedented losses.

Further to the idea that the federal government is by the banks, of the banks and for the banks, and consistent with the government policy that no bank should be left behind, Geithner promised that, “We cannot allow doubts about the viability of major institutions to undermine the financial system as a whole. The U.S. government must continue those policies critical to sustaining confidence in the core of the system.” In other words, what’s good for America is bailing out the banks.

Geithner went on to say that regulators did not do enough to help the banks. I have no doubt that the government will do a lot more in the future.

Perhaps the most amusing part of Geithner’s testimony was his observation that “in early phases of the crisis, some financial institutions were able to raise significant amounts of private capital. But as the crisis deepened, this became impossible.” Geithner appears unable to comprehend the fact that the reason that private capital has dried up is because it has been supplanted – pushed out – by the government. As we have seen over and over again, no private sector financial institution will lend money when there is eminent risk that it likely will lose its investment entirely (or find its investment seriously diluted) by subsequent government interventions of precisely the kind we have observed in the U.S. lately.

Elizabeth Warren, the law professor who heads the oversight panel patiently tried to point out to Geithner that, “People are angry because they are paying for programs that haven't been fully explained and that have no apparent benefit for their families or the economy as a whole.” The Treasury is not there to mollify the public. It is there to preserve and protect its clientele -- the financial industry -- down to the last derivatives trader.

Jonathan Macey is Sam Harris professor of corporate law, securities law and corporate finance at Yale University, a member of the Hoover Institution Task Force on Property Rights, and author of “Corporate Governance: Promises Made, Promises Broken."