Monday's New York Times features a front-page article that continues for two full inside pages detailing Treasury Secretary Geithner's efforts to deal with the financial crisis. Without saying so, the article paints a perfect picture of how an industry captures the regulators responsible for overseeing it, and more telling, how even a seemingly honest, conscientious regulator fails to realize he's been captured.
The lengthy article by Jo Becker and Gretchen Morgenson focuses on Geithner's tenure first as President of the New York Federal Reserve -- the epitomy of a self-regulating bankers club -- and now as Treasury Secretary. It reveals how at each stage of the emerging and then exploding financial crisis, Geithner consulted and relied on industry executives who viewed the problem as how to save the banking system from itself, while shielding it from normal market discipline.
Most, perhaps all, of the pieces have been reported before, but seeing it all together gives a devastating portrait. A succession of anecdotes shows the extent of regulatory capture, but perhaps none more revealing than Geithner's own reflection on what might have been:
But he acknowledges that "the thing I feel somewhat burdened by is that I didn't attempt to try to change the rules of the game on capital requirements early on," which could have left banks in better shape to weather the storm.
But by this time, the article has already detailed how this happened. There was a long history of personal relationships, dinners, lunches and tutelage by Robert Rubin, Larry Summers and most of the CEOs of Wall Street's largest investment bankers, brokers and investment funds. Personal relationships built personal trust, which led to no-bid contracts for millions of dollars to carry out Treasury's bailout efforts. Geithner was their guy, even as he saw himself as independent; an honest, dedicated public servant. We are not surprised, then, to learn this (one of many such revelations):
In a May 15, 2007, speech to the Federal Reserve Bank of Atlanta, Mr. Geithner praised the strength of the nation's top financial institutions, saying that innovations like derivatives had "improved the capacity to measure and manage risk" and declaring that "the larger global financial institutions are generally stronger in terms of capital relative to risk."
Two days later, interviews and records show, he lobbied behind the scenes for a plan that a government study said could lead banks to reduce the amount of capital they kept on hand.
While waiting for a breakfast meeting with Mr. Weill at the Four Seasons Hotel in Manhattan, Mr. Geithner phoned Mr. Dugan, the comptroller of the currency, according to both men's calendars. Both Citigroup and JPMorgan Chase were pushing for the new standards, which they said would make them more competitive. Records show that earlier that week, Mr. Geithner had discussed the issue with JPMorgan's chief, Mr. Dimon.
At the Federal Deposit Insurance Corporation, which insures bank deposits, the chairwoman, Sheila C. Bair, argued that the new standards were tantamount to letting the banks set their own capital levels. Taxpayers, she warned, could be left "holding the bag" in a downturn. But Mr. Geithner believed that the standards would make the banks more sensitive to risk, Mr. Dugan recalled.
Regulatory capture doesn't require an official to be dishonest or corrupt; it only requires coming to view the world through the eyes, and more importantly, the private interests, of those one regulates. And that comes from years of personal and social contacts that, over time, continuously nourish the view that the preservation of those business interests is the same as the public interest.
Wall Street now has their guy watching over them, someone who genuinely believes that saving them is the same as saving the economy. But who is watching Geithner? And why isn't there someone equally dedicated, and equally powerful, watching out for the broader public interest? Does anyone trust Larry Summers in that role?
A more detailed critique comes from Yves Smith. Related: Simon Johnson on The Quiet Coup; Willem Buiter, More on robbing the US taxpayer...; Paul Krugman, Money for Nothing. One of the most readable and coherent overviews I've seen of where we are and what must be done: James K. Galbraith, No Return to Normal.
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