So Long, So Long, and Thanks from All the Banks

Various news sources, including The Wall Street Journal and Bloomberg have been reporting that Treasury Secretary Tim Geithner has advised President Barack Obama that he is likely to step down once the debt-ceiling extension is approved (that might be a long time from now given that the Republicans could agree to temporary extensions to maximize their leverage).

The story created such buzz Thursday that Geithner took pains to deny that he has any immediate plans to quit. His status as a lame duck would undermine his authority on a variety of fronts, from the debt-ceiling negotiations to implementation of Dodd-Frank.

Still, the original leak had all the signs of being authoritative, so let's assume Geithner goes this year. That would mean the departure of the last of the original group of economic advisers -- chief economist Larry Summers; Office of Budget and Management Director Peter Orszag; and Christina Romer, Austan Goolsbee and Jared Bernstein of the Council of Economic Advisers.

Well, good luck and good riddance to Geithner. The problem, given Obama's own extreme caution and the Republican ability to block anyone who'd be a tough regulator of Wall Street, is that his successor is likely to be even worse.

Geithner's main role in the great financial crisis was to shore up the large Wall Street banks without demanding any serious systemic reform in return. The window of opportunity in the spring of 2009 came and went with several zombie banks being propped up with hundreds of billions of taxpayer dollars and trillions of dollars in advances from the Fed, but no progress toward the too-big-to-fail problem, much less any major change in the bankers' business model that caused the collapse.

Geithner's main function in crafting what became the Dodd-Frank Act and the lobbying around its key provisions was to argue for weaker rather than stronger ones. Backbenchers in Congress like Senators Merkley, Levin, Kaufman, Reed of Rhode Island, and Franken were instead the advocates of strong reforms. Geithner explicitly opposed many efforts by progressive senators to toughen the bill, as when he opposed a ban on "naked" credit-default swaps (the Dorgan Amendment) or setting explicit limits on the market share of large banks or returning to the strict separations between speculation and investment of the Glass-Steagall Act. Obama, to Geithner's great discomfort, invoked that reform as the "Volcker Rule," but then Geithner successfully fought to undermine a serious version of it.

One of Geithner's first administrative acts in making a decision to implement Dodd-Frank was to water down a key provision on derivatives so that any derivative involving foreign currency (a huge part of the derivatives market and Wall Street profits) was exempt from Dodd-Frank's sunshine and anti-manipulation provisions. The Wall Street Journal piece on Geithner's likely departure quotes Jim Vogel, a strategist at FTN Financial Capital Markets, as saying, "Since 2009, the capital markets have gotten very comfortable with Secretary Geithner's steady approach to both the debt markets and financial policy."

Well, yes, why wouldn't they be very comfy? Wall Street has returned to pre-collapse profitability without any fundamental change in its business model. Overly complex financial products and proprietary trading, too-big-to-fail banks, and immense Wall Street influence over policy continue to undermine the recovery and pose the risk of a second collapse.

You can see the lingering influence of an unreformed system in the Greek mess. The European authorities are putting Greece through the austerity ringer, in part to protect banks that are major holders of Greek bonds. But the same banks are also holders of credit-default swaps. Hedge funds use swaps to bet on a Greek default, putting the banks at double risk. So a restructuring of Greek debt, of the sort used in the case of much larger Latin American countries in the 1990s, becomes prohibitively expensive.

Geithner's legacy will be this: He took a historical moment that offered a rare and overdue chance for systemic financial reform and used it instead to paper over the cracks in a dangerous system.

Geithner's nemesis has been Sheila Bair, whose term as chair of the Federal Deposit Insurance Corporation expired June 30. Bair was, of all things, a Republican, a holdover from the Bush administration, but far more progressive than Geithner.

Bair's view, for which she fought tenaciously, was that big insolvent banks like Citi should be subjected to a negotiated bankruptcy or "resolution" process. That way, the government exposure would be finite; management, which had a stake in covering up what happened, would be replaced; and a successor bank would have a clean start. Geithner and the rest of the old boys' club shouted her down.

Bair also used the FDIC to pioneer an exemplary solution to the mortgage mess. In the case of banks taken over by the FDIC, underwater homeowners got to refinance their mortgage to a level they could afford. Geithner resisted this approach as national policy in favor of the administration's pitiful HAMP program, which has helped about one distressed mortgage in ten. He opposed stronger medicine in order to protect the banks.

Obama could send a salutary signal by appointing Bair to succeed Geithner. The odds of that happening, of course, are infinitesimal. He will probably name someone even closer to Wall Street, if that's possible.

As for Bair, she has told friends that she is likely to teach or go to a think tank, write a book, and speak out. She has no plans to cash in by going to K Street or Wall Street, where she could pull in a salary of $5 million to $10 million.

Let's see where Tim Geithner goes.

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