In his sworn testimony today before the House Committee on Oversight and Government Reform, U.S. Treasury Secretary Timothy Geithner reasserted that he had recused himself from making any decision in connection with AIG payments to Goldman Sachs in November 2008. But he also testified that he was made aware by Fed officials that the payments had been made. He knew this at a time when it was not public information and even Congress itself had been kept in the dark.
Some scepticism has been expressed on these pages before about the credibility of this scenario.
I have had some experience over the years in advising government agencies and public officials about issues related to conflict of interest and when there is a need to step aside. When they do, they keep out of any aspect of the matter; they don’t get updates and briefings on the decision in which they did not take part.
The Committee needs to dig deeper into what the details of Mr. Geithner’s recusal were and what legal advice he had on that subject. It also needs to look more carefully at what the mechanism was by which he became aware of the AIG counterparty decision – and why he felt he should be kept in the loop on the decision from which he says he removed himself.
The latest flap over taxpayer payments to Goldman Sachs confirms the culture of secrecy upon which the Fed in Washington and its New York counterpart are dependent. They like the dark, closed-curtain life that bankers prefer, where the sunlight of public scrutiny is seldom an invited guest. It is a culture to which Mr. Geithner adapted well.
There is a legend that the Great Sphinx once promised a young prince in a dream that he would gain a kingdom if he would clear away the sand that had almost entirely covered over the watchful guardian’s stone body. But the mystery of the Sphinx pales in comparison with its modern equivalent, the Federal Reserve System, which is enrobed in sands of obscuration and opaque practice that hide its true meaning and actions in the world. This is an institution that rarely seems what it is and is seldom susceptible to being seen in its true light.
The most recent evidence in this regard came from a series of emails that show officials of the New York Federal Reserve tried to keep multi-billion dollar payments to Goldman Sachs and other huge banks, made through insurance giant AIG, secret. The mystery deepens when it is recalled that Timothy Geithner, currently U.S. Treasury Secretary, was at the time president of the New York Fed. We were among the first to raise the propriety of these payments nearly a year ago.
It is asserted by senior New York Fed officials that Mr. Geithner had no influence in the outcome, as he had removed himself from any decision-making. Influence comes in a variety of shapes and sizes, however. As its CEO, Mr. Geithner set the tone and culture for the New York Fed during his five-year tenure. If he didn’t actually hire the staff who made the decision about the payments to AIG et al., he was involved in assessing their performance. They were his kind of people. It is unlikely they would have done something they knew he would disapprove of or that would have been likely to cause him trouble in his new post. That is not the way organizations work.
Then there is the issue of the Fed’s governance, which, as we have observed on numerous occasions before this latest revelation, resembles more a committee of the Society of Freemasons than an actual supervisory body. On this board during Mr. Geithner’s reign sat such luminaries as Jamie Dimon, CEO of JPMorgan Chase and Richard Fuld, CEO of Lehman Brothers. Jeff Immelt, head of giant GE, was also a director. Mr. Geithner was hired by top Wall Street players to serve Wall Street’s interests. From that point on, the success of banks and the satisfaction of those who ran them was the center of Mr. Geithner’s universe. He showed no discernible concern throughout his entire term over the run-up leading to the housing/mortgage bubble, the rise of unprecedented levels of risk and leverage, or the complexity of collateral debt obligations. When problems arose and breakdowns began, when hedge funds were collapsing, and right up to or even beyond the fall of Bear Stearns, did Mr. Geithner launch an internal examination of possible failures in oversight and regulation? Did he urge the directors of the New York Fed to review that organization’s governance practices? The answer on both counts is NO.
Mr. Geithner’s role at the New York Fed in many respects is no mystery at all. The mystery is why professional regulators actually think it is credible to assert that even though he was president of the New York Fed, he had no more role in a key decision to re-channel taxpayer funds ostensibly intended for AIG to Goldman Sachs and other counterparties than the man who operates the boiler in the Fed’s basement.
The riddle people need to be looking at is how it is that, as the new Treasury Secretary, Mr. Geithner was apparently shocked at the abuses and excesses that had occurred on Wall Street and in the banking industry, but as a major regulator of that sector, the same abuses and excesses were occurring on his watch, apparently without objection.
The contradictions and unanswered questions about Mr. Geithner and the New York Fed are, of course, part of the wider mystery, as we have noted, about what happens at the 20th Street Northwest, Washington headquarters of the Federal Reserve System.
Here, details about the collateral that is accepted by the Fed, which institutions are using various Fed-sponsored programs, and what really happened to the $29 billion in Bear Stearns so-called collateral, are kept under wraps. The Fed is desperately attempting to fight an access request under the federal Freedom of Information Act made by Bloomberg News for details surrounding the central bank’s $2 trillion loan program it launched to bail out financial institutions in the wake of the Lehman Brothers collapse. A court hearing on the matter was held today.
Last month, Fed chief Ben Bernanke bristled at Congressional proposals to have the Government Accountability Office audit monetary policy decisions, even half a year after they have been made. Then there is the free money that the Fed has tossed at the banking sector, with a funds rate that is lower than at any time in U.S. history. Add to that the fact that never before have so many trillions been committed or spent to bail out, prop up, guarantee and support the banking industry.
The culture of the Fed in Washington and its New York counterpart is one that thrives, indeed, is dependant upon, secrecy. They like the dark, closed-curtain life that bankers prefer, where the sunlight of public scrutiny is seldom an invited guest. The Fed draws many of its staff and members from that world, and when they leave it they often return to work for banks and financial institutions as consultants and advisors. It is the coziest of clubs, and one that many of the players are anxious not be disturbed.
Whether the Fed and all the steps it has taken will withstand the gales of turbo populism outrage (our terms) remains to be seen. If you believe the legend carved in stone in front of the statue nearly four millennia ago, had Tuthmosis IV not cleared away the sands from the Great Sphinx, he would have lost a desert kingdom. If the U.S. taxpayer and all those who depend upon American capitalism do not clear away the sands of secrecy and obfuscation that the Fed has come to represent, their losses will be even greater.
