Too Tim to fail
A week before Thanksgiving, Wall Street’s top brass were forced to reckon with an entirely new sensation: nostalgia for their former overlord, Tim Geithner.
Masters of the Universe who were gathered at Manhattan’s Pierre Hotel on Nov. 20 gave a warm welcome to the former U.S. Treasury secretary. He was a surprise presenter to Rodgin Cohen, the Sullivan & Cromwell grandee who has been involved in most of the deals that created today’s mega-banks. Cohen was on hand to receive The Clearing House’s Annual Chairman’s Achievement Award, an honor previously bestowed upon Mayor Michael Bloomberg and the Federal Reserve’s Donald Kohn.
The lingering applause Geithner received from leaders of the country’s biggest financial institutions could be taken as confirmation that he had gone easy on the industry when he was its watchdog-in-chief. That, however, would be too facile an interpretation. Geithner’s recent ovation was as much an indication that bankers feel the current regime doesn’t have its heart in the business of financial regulation.
From the moment he arrived with President Barack Obama in the eye of the financial storm, to his departure just under two years ago, Geithner fought off charges he was in thrall to the banks. Despite a career in public service, he was regularly forced to disabuse people of the notion he had worked at Goldman Sachs. Since publishing his memory of events, “Stress Test: Reflections on Financial Crises,” and becoming president of investment firm Warburg Pincus earlier this year, Geithner has been decidedly less visible.
The way his successor Jack Lew has gone about implementing the changes Geithner championed, principally ones mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act, is casting Geithner’s tenure in a different light. The simplistic question of who is harder or softer on the banks has given way to how those efforts, now enshrined in law, are coordinated, and how they benefit the overall public good.
Part of it comes down to priorities. Geithner took over for Hank Paulson – the actual Goldman alum – amid an existential firefight. At the New York Fed, Geithner had been intimately involved in helping shape his predecessor’s bailout programs. His first order of business at Treasury was to restore credibility in the banking system. He did this most lastingly with the rollout of stress tests. Forcing the industry to prepare for economic doomsday was harsh medicine. Banks hated it, especially the ones forced to raise $200 billion of capital, and swiftly.
Indeed, the difficulty of imposing such draconian measures is one reason European regulators delayed their own version of stress tests. Moreover, weeks after stressing out the banks, Geithner’s Treasury provided a white paper on regulation that served as a blueprint for the bills that both houses of Congress then developed into the most sweeping financial reforms since the Great Depression.
With that historical backdrop, it was odd to see Geithner receive hearty applause from executives at Citigroup, U.S. Bancorp, Deutsche Bank and BB&T, all of whom attended the Clearing House shindig. These bankers have seen the alternative, though: a group of 15 regulators, meeting under the auspices of the Financial Stability Oversight Council, with no clear direction from Geithner’s successor.
To be fair to Lew, he was brought in when the White House still reckoned there might be a chance to clinch a grand bargain on taxes, spending and social safety nets, something his background as a budget maven would have facilitated. That never happened, however, and Lew has shown less interest in the weeds of finance, handing over more authority to surrogates like Fed Governor Daniel Tarullo.
Without a strong hand coordinating the oversight council’s constituents, each has a tendency to operate within a vacuum, a problem reminiscent of the pre-crisis regulatory landscape. Back then, it was a race to the bottom, with miscreant agencies like the Office of Thrift Supervision wooing banks with the promise of soft treatment. Now it’s just breeding confusion.
One prominent example has been the absence of guidance from the Fed on applications by the 31 biggest bank holding companies to disburse capital to their shareholders as part of the Comprehensive Capital Analysis and Review, or CCAR. Tarullo has made clear he doesn’t want banks to game the process. That’s fine up to a point. The unintended consequence is that it is uniting the banks to share information and collaborate as a more powerful lobbying force.
Or consider the recent changes made by Fannie Mae and Freddie Mac to their representation and warranty policies. Federal Housing Finance Agency chief Mel Watt acknowledged they “did not provide enough clarity to enable lenders to understand” when the two government-sponsored entities might require them to repurchase loans they previously made. While the clarifications were designed to get firms lending again, bankers say they are reluctant to do so without some acknowledgement that other agencies, and the Department of Justice, are on board.
That’s the sort of thing a strong FSOC leader would be ideally positioned to make happen. Someone maybe like Tim Geithner.