Monday, March 2, 2009
I've previously pointed out that the head of Obama's National Economic Council - Larry Summers - is the worst possible guy for the job.
Two new articles show why Tim Geithner is the treasury secretary from hell.
As Robert Kuttner writes:
Geithner has ... come up with the idea of subjecting the largest banks to "stress tests" to determine just how badly damaged their balance sheets are. This has been advertised as government examiners crawling all over bank records, but much of this belated effort will rely on the banks' own risk models--the same risk models that got the banks into this mess.
Come to think of it, where have the examiners been all along? Why wasn't there serious investigation of bank balance sheets all along? Why should stress tests be performed only after disaster has struck (shades of Hurricane Katrina)?
The worst culprit among the feeble regulators is the Federal Reserve Bank of New York, whose examiners are responsible for assessing the safety and soundness of the holding companies of Wall Street's largest banks. It was high risk speculative activities by holding company affiliates that put the big banks under water.
Who dropped the ball? You may recall that Secretary Geithner, before he assumed his present post, was president of the New York Fed Bank. According to a withering feature piece from Bloomberg, he was asleep at the switch, and far too cozy with the banks. Heckuva job, Timmy.
And in his must-read piece from today, Cenk Uygar writes:
Tim Geithner and Larry Summers and many others are missing the fundamental flaw in the system. The bankers don't care about the banks; they care about the bankers. ...
These days, the way executives make money instead is in the form of bonuses for years where they bring in a lot of return (and often times for years they don't), but the threat of being fired for too much risk taking is minimal. The more risk you take, the more money everyone makes. And it's not the partner's money you're playing with anymore. You're playing with house money. No one is minding the store anymore. ...
So, now we have Tim Geithner and the rest of Treasury working so hard to prop up not just these failed banks - but these failed bank executives - because we don't want government running these large companies. The self-interest of the market will do a better job of managing these companies. But it hasn't - because of this fundamental flaw.
These executives did not actually fail. They succeeded wildly. It's just that they had a different goal - to take home as much money as they possibly could for themselves. Mission accomplished! ...
The Treasury plan is all wrong. We have to first acknowledge that the boards of these companies are not truly representing the shareholders. They are largely friends with most of the CEOs and they do not have an incentive to reign in out of control compensation for the top executives. Then those CEOs pass on the wrong incentives to the executives below them. The more risk they all take, the more money they take home. And if their company goes broke one day - who cares?
Most of these guys took home millions upon millions of dollars already for profits that never really existed. If the company goes under, okay the gravy train came to an end but they still have all the money they made from all those years. It's in their personal bank accounts. That's enlightened self-interest!
Do you know that last year, as Merrill Lynch was in its death throes, 696 executives got bonuses over a million dollars? 696! As the company lost tens of billions of dollars, the executives took home a combined $3.6 billion that year. Billions in bonuses in the worst year in the company's history. They're not stupid; they're smart. They're looting the store before the cops show up.
This is the financial equivalent of the federal government not showing up to rescue people after Hurricane Katrina. Last year the five biggest Wall Street securities firms lost $25.3 billion. The executives at those companies still took home $26 billion in bonuses. In other words, they wouldn't have lost a nickel if they hadn't taken any bonuses. ...
The Treasury Department still hasn't shown up to take over these looted stores. In fact, they keep pouring taxpayer money into these same shops, as the money continues to move out the back door. Tim Geithner is the worst sheriff in the world.
But we already knew that. Because the main guy who was overseeing all of these banks in New York, as they took these giants risks, was the president of the Federal Reserve Bank of New York - Tim Geithner.
He is under the misimpression that his job is to protect the sanctity of the banks. Not only is that not his job, but that is working against his actual goal. His real job is to stabilize the financial system, with or without these particular banks or bank executives. The longer he keeps these guys in charge, the longer the looting continues.
Summers and Geithner are guaranteed to make things worse. They must be fired.
And see this.