Tuesday, August 4, 2009

Geithner Throws Hissy-Fit Over Power Struggle

Treasury Secretary Tim Geithner gathered the major financial regulators last Friday to discuss how Obama's regulatory overhaul of the financial system was going to play out. The meeting, which included SEC Chairwoman Mary Schapiro, FDIC Chairwoman Sheila Bair and Fed Chairman Ben Bernanke, became nothing other than Geithner throwing a hissy-fit about the lack of consensus to give the Federal Reserve all the power immediately.

It should have been clear from the outset that Geithner, previously the head of the New York Federal Reserve Bank, accepted his position as Treasury Secretary for the explicit purpose of consolidating the Fed's reach. I cannot see any reason for someone holding such a powerful position to accept such a demotion unless they have ulterior motives. And I think after seeing the skyrocketing deficits in the first 6 months, we can rule out any notions of altruism in "fixing the nation's finances."

But it has become apparent that both Bair and Schapiro are not prepared to budge on their authority.

The interesting undertones to this are that Geithner effectively holds a guillotine above the head of the FDIC. They are, for all intents and purposes, out of cash. There are three large banks (Colonial, Guaranty, and Corus) that require resolution, but the FDIC has only a pittance remaining to fund such action and requires tapping into their $500 Billion line of credit with the Treasury to do so.

Geithner's cavalier attitude in demanding more power for the Fed is likely not a coincidence in my mind.

From the Wall Street Journal:

Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration's faltering plan to overhaul U.S. financial regulation....

Mr. Geithner told the regulators Friday that "enough is enough," said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Mr. Geithner, without singling out officials, raised concerns about regulators who questioned the wisdom of giving the Federal Reserve more power to oversee the financial system. Ms. Schapiro and Ms. Bair, among others, have argued that more authority should be shared among a council of regulators..

The government's proposal would empower the government to take over and break up large financial companies, merge two bank regulators, and toughen oversight of mortgages, among other things.

Administration officials say they aren't worried about the overhaul's prospects, adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives. Treasury officials say they expected a big debate over the complex legislation. The first piece, which addresses executive pay, passed the House Friday.

"The industry is already back to their pre-meltdown bonuses," said White House Chief of Staff Rahm Emanuel. "We need to make sure we don't slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform."

Neal Wolin, Treasury's deputy secretary, said Mr. Geithner told regulators "they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal."...

The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal.

Both men, however, have suggested the overhaul could change from Treasury's proposal. Sen. Dodd favors giving extra powers to an oversight council rather than the Fed. Mr. Frank said Monday lawmakers were still working on a way to "make sure you have a sufficient broad base of participation and input" and "to make sure you have effective authority."

He said the flap several months ago over the Federal Reserve's role in allowing American International Group Inc. to pay large bonuses to employees "damaged the Federal Reserve politically."

The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed.

"A rush to judgment where they basically throw these things together without any consensus is going to be a disaster," Rep. Bachus said.

With various agencies and interests fighting for their own survival, who wants to bet that one or more of them aren't willing to hold the economy or the financial system hostage to prove that they're not bluffing.

For more on this matter, one may wish to investigate Karl Denninger's Market Ticker, "Is The FDIC Broke And Covering It Up?"

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Roger J said...


Should Geithner succeed in his purposes of handing the Fed complete financial system overhaul, should that be considered as a major threat to the dollar?

If given full power, what kind of havoc will the Fed likely to unleash?

Matt Stiles said...


I think there's too much speculation involved in order to coherently outline what would happen under such a situation.

Would congress have more authority over the Fed? Would the member banks have authority over their constituent banks or would the FOMC make all the decisions? Who oversees the FOMC? Who oversees the overseers?

Not worth the time speculating in my opinion.

mannfm11 said...

I think the NY Fed is too close to the wall Street and international bankers. I am beginning to believe that the world is going back to merchantile days and the NY merchantilist are going to attempt to use banking to rule the world. The Fed is a private organization engaged in forwarding the fortunes of its owners, which are for the most part the NY banks. The dollar has nothing to do with the United States other than it is US bank paper and it is backed by US property and the debt and good faith of the most powerful country in the world. They destroy the dollar, they wipe themselves out and with themselves, most of their overseas compadres. The Chinese have no paper save the link the dollar provides good collateral in the form I mentioned above.

Geithner is a Kissenger guy and Kissenger was a Rockefeller guy and Rockefeller, ran the Trilateralist and the CFR along with JPM/Chase, with a foot in XOM. All Presidents other than Reagan since Kennedy had Rockefellers stamp on them and Reagan's cabinet was dominated by Rockefeller guys all the same. I believe Geithners game is to give the wolves the keys to the henhouse and let them pursue their aims regardless of the good of the country. Some of you have read Michael Lewis' expose of Iceland and there really isn't much difference between the Iceland joke of a bank banks and the hedge fund banks on Wall Street along with the corporate raiders of the west. They bought into the CDO stuff and the huge leverage and the risk reducers, which were nothing but you can forget to charge for risk and take it on gadgets and almost sunk the world. A wide open Fed would allow them to get rich while finishing the trick.

Matt Stiles said...


I think the NY Fed is too close to the banksters as well. Literally:


mannfm11 said...

BTW Matt, I find your site a great source of information and I see it linked on a few pages and sometimes your posts on other pages as well. I am going to read the Denninger link you put up. They financial world doesn't talk about much they don't want the man in the street to know, mainly because they need to set their own hooks. A trained monkey could have known Citi was broke, but the media just said that banks were afraid to lend to each other. Citi needed to maintain $400 billion in bank credit, thus that was a lot of banks. They are now indicating the LIBOR is a sign banks are lending when in fact, the Fed merely pushed a lot of money directly to the banks in trouble. I notice Guaranty and Colonial are going broke. I used to broker mortgages 16 years ago and I dealt with Colonial and Lumbermans, which was also owned by Temple Inland. My Dad died with about $100,000 in Guaranty back in the 90's. I believe Colonial warehoused their conventional mortgages. They were a good outfit and they shaved a point or so off the FNMA rate. This is a prime mortgage meltdown and probably evidence of what is going on inside FNMA.

mannfm11 said...

One more thing. I get Denningers drift. The banking system is broke and they got rid of mark to market to hide it. I have never gotten off this, "they are all broke idea because bank credit can't be paid and if all this money on the sidelines is free and clear to buy stocks, that means the people that owe the debts don't have any cash". John X put up a link to a SPX spread sheet the other day that I examine from time to time, but have a hell of a time finding and SPX dividends are back to 2.2%. I did a huge amount of financial work on Shillers numbers back in late 2003 and one thing I saw was dividends had never been under 3% for over 2 months at a time prior to the 1990's. The times they touched 3% were 1929 and 1966 and maybe 1972 along with a month in 1987. All were long term peaks in the market except 87, which was an event prior to the blowing up of the bubble. We are 150% of peak value. I also ran into an article with a link to something Andy Xie supposedly wrote about China. The real estate bust over there will be worse than Japan if the boom goes on another couple of years. This is the link if you care to read it or haven't read it yet.


Roger J said...


Very nice article you put there. His discussions on Chinese bubbles are excellent. However, I find his analysis on the dollar wanting -- only relating the dollar's strength to interest rates, while ignoring the elephant in the room: global deleveraging.

I'm currently reading the history of South Sea Bubble in 1720 England (not finished yet). From what I've read, it just sounds darn alike -- higher prices justify even higher prices.

There's a funny saying that more or less sound: "when statesmen become stockjobbers, the state is jobbed." Well, the condition is fulfilled there in China. How will China be "jobbed"? Go figure.

Mike said...

mannfm1, I think the point you make about dividends is very important. Eventually the market will follow the fundamentals, which are based on balance sheets and cash flow. And with this low of a dividend yield stock prices will need to resume their downtrend since cash flows are continuing to decline for most businesses. Even back in early March the dividend yield on the s&p was not as high as levels seen during most major bear market bottoms.

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