Geithner’s Duplicitous Efforts to Reinforce the Oligarchy

Bloomberg’s blockbuster story–showing that the Fed was dumping $7.77 trillion into the same banks that Treasury was claiming were solvent to qualify them for TARP–shows a number of different things. It focuses on the $13 billion in profits the banks made off of massive secret loans from the Fed.

The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.

More importantly, IMO, the Bloomberg piece also shows how Ben Bernanke, TurboTax Timmeh Geithner, and Hank Paulson used secrecy to get DC’s bureaucracy–both Congress and Executive Branch officials–to push through his preferred plan to prop up the TBTF banks.

They did this in two ways: first, by keeping details of the Fed’s massive lending secret from the people implementing TARP.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

This meant the Fed could hide the fact that the six biggest banks were basically insolvent, and should have been wound down rather than propped up with a strings-free TARP.

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The article makes it pretty clear that both Citi and Morgan Stanley would be non-existent right not but for the secret Fed lending. Yet as both Judd Gregg and Barney Frank make clear, neither of them were told that the banks were insolvent.

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”

The effort to prevent Congress from learning the truth extended though the passage of Dodd-Frank. Glass Steagall advocates Ted Kaufman and Byron Dorgan both claim (though I’m not convinced) that had Congress been informed how much these big banks relied on Fed lending to stay afloat, it would have been easier to persuade colleagues to break up the banks.

Instead, TurboTax Timmeh–one of the few people who appears to have been privy to the extent of the lending–told Congress imposing size restrictions on banks was too much for democratically elected representatives to handle; instead, hand-picked bank regulators–the people who are today imposing austerity in an effort to prevent banksters from taking their share of losses–should do the job.

On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

As the article’s punch line makes clear, TurboTax Timmeh got his way. And the “limits” the bank regulators put in place don’t go into effect for another 7 years.

The story as a whole is mind-boggling. But behind all the stunning numbers, the important takeaway seems to show how TurboTax Timmeh and a few of other oligarch’s other captive servants managed to bypass both Executive Branch bureaucracy and democratic oversight or input to bail out banks while making the banking system still more fragile.

Marcy Wheeler is an independent journalist writing about national security and civil liberties. She writes as emptywheel at her eponymous blog, publishes at outlets including Vice, Motherboard, the Nation, the Atlantic, Al Jazeera, and appears frequently on television and radio. She is the author of Anatomy of Deceit, a primer on the CIA leak investigation, and liveblogged the Scooter Libby trial.

Marcy has a PhD from the University of Michigan, where she researched the “feuilleton,” a short conversational newspaper form that has proven important in times of heightened censorship. Before and after her time in academics, Marcy provided documentation consulting for corporations in the auto, tech, and energy industries. She lives with her spouse in Grand Rapids, MI.

30 replies
  1. Bay State Librul says:

    The 3 R’s

    Restore Glass-Steagall, Repeal Citizens United, Rip-up Barney’s retirement papers.

    Can anyone tell me what the world would have looked like, if they
    did not bail out the Banks?

  2. rugger9 says:

    Fragile only for the rest of us, since the seven year window gives the MOTUs time to settle into their new Bahamian island homes.

  3. rugger9 says:

    @Bay State Librul: #1
    Iceland, where the banks were told basically to bugger off and they’re doing just fine now, thank you.

    The key thing not being reported is that with the CDOs creating 4-5 vaporware dollars for each dollar in real assets, there were haircuts to be had all over the place, but the banksters didn’t want to take them. Hence, the deceptions about the deficit and the need for austerity, until OWS changed the discussion. And, those 4-5 v$ are the ones being paid off with the TARP and Fed money. After the bonuses, of course.

  4. scribe says:

    @Bay State Librul: To answer your last question: “not much different, though there would have been a lot more work for us lawyers.”

    The long and the short of it is that the bankers who got haircuts or laid off would have – within weeks or even days – formed new businesses in the banking field, regenerated themselves as new, smaller i-banks, and would continue doing investment banking in all the flavors they were doing before. What Timmeh avoided was people asking hard questions of bankers under oath in the inevitable lawsuits and bankruptcies which would have come. The support people in the I-banks would have taken a hit – the document people, the back office, etc. – and been laid off. A lot of the Bear Stearns people were hit hard by being laid off when Bear went under, but there was an understanding in the financial community that being out of work from Bear wasn’t a sign you were a bad guy, just that the sluts at the top had run it into the ground and you were collateral damage, not damaged goods.

    But protecting the people at the top and especially those behind the curtains – from questions, let alone consequences – were Timmeh’s objectives. To paraphrase a distinguished jurist who I heard speak as a 1L: “if the problem is too complex for Congress to handle, it (and the institutions causing it) should not be allowed to continue to exist.” (The jurist said that if the law was too complex for an ordinary juror to understand, it should not be the law.)

    As a consequence, rather than lancing and draining the boil and preventing the spread of sepsis, we have a doctor who says boils are good and we should have more of them. He’s going to wind up killing the patient.

  5. scribe says:

    Do remember, too, that rather than indict Timmeh (or just have him whacked, al-Alwaki-style) Obama went all Odysseus-cruising-by-Siren-Island with him. Personnel as policy….

  6. bmaz says:

    Right. That was my first comment last night. “And yet there sits Timmy Geithner”. And there is no one in Congress who will meaningfully go after him, and Obama does not seem to care.

  7. rosalind says:

    (ew: in the sentence beginning “Instead, Turbo Tax Timmeh…” is “landing” supposed to be “lending”?)

  8. Cathleen says:

    Not to mention the fact that all of this was going down right around the same time that Dick Shelby was holding a gun to the head of the automakers and threatening 2-3 million American jobs over union wages and rides to Congress in company planes. The automakers were asking for bread crumbs in comparison to what was happening under the table in the financial industry.

    The punchline that struck me was this:

    Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”

    Who was it, Baker? Reich? claiming the other day that the crisis in Europe may put us in the position of more bank bailouts here if it all goes bad?

    Won’t that be a treat.

  9. GulfCoastPirate says:

    I read the article but still can’t figure out how much of this was known to Obama. If he ends up getting beat next year it’s this financial stuff that is going to do it.

  10. bmaz says:

    @John Casper: Interesting question. Not overly familiar with it, but maybe. I think the defense is, they were not false, they just weren’t telling why they could claim the health they did.

  11. emptywheel says:

    @Cathleen: We’re already there. Europe has decided it won’t bail itself out, is asking the IMF to bail it out. And we provide a big chunk of the funding for the IMF.

  12. emptywheel says:

    @Casual Observer: Good point.

    And I half wondered whether it was a coinkydink that Barney announced his retirement today. Maybe it started looking more urgent to set up his sinecure at Goldman while the getting was still good.

  13. catlady says:

    to the folks who think Iceland is doing just fine after repudiating the banks, you should check out the latest news: Iceland failed to kill the banksters dead. Vulture capitalists have now taken over, and they are draining the populace dry. The government has taken the side of the oligarchs and despite public support in the single digits, refuses to have an election that would result in their being ousted. The banksters are zombies, and must be killed over and over again if economic justice is to prevail.

  14. MadDog says:

    The Bloomberg blockbuster that EW rightly trumpets should be read in concert with another blockbuster piece by Barry Ritholtz (h/t Andrew Sullivan):

    Examining the big lie: How the facts of the economic crisis stack up

    …Here are key things we know based on data. Together, they present a series of tough hurdles for the big lie proponents.

    •The boom and bust was global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust.

    A McKinsey Global Institute report noted “from 2000 through 2007, a remarkable run-up in global home prices occurred.” It is highly unlikely that a simultaneous boom and bust everywhere else in the world was caused by one set of factors (ultra-low rates, securitized AAA-rated subprime, derivatives) but had a different set of causes in the United States…

    [snip]

    •Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom.

    Check the mortgage origination data: The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie…

    [snip]

    •Private lenders not subject to congressional regulations collapsed lending standards. Taking up that extra share were nonbanks selling mortgages elsewhere, not to the GSEs. Conforming mortgages had rules that were less profitable than the newfangled loans. Private securitizers — competitors of Fannie and Freddie — grew from 10 percent of the market in 2002 to nearly 40 percent in 2006…

  15. prostratedragon says:

    @catlady: Have a link (to nakedcapitalism). This story does not yet seem to be sufficiently widely known, but should become so, quickly. Here’s the gist:

    After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.

    Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.

    The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?

  16. Bill Michtom says:

    @Casual Observer I would highlight differently:
    “We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

    I read that and burst out laughing.

  17. readerOfTeaLeaves says:

    The Bloomberg article blew my mind, and I’d also second MadDog’s rec for the Ritholtz article eviscerating the Big Lie (that banks are blameless, blameless – relish the irony that the Big Lie was most recently perpetrated by the same Mayor Bloomberg for whom Bloomberg Financial reporting is named).

    Barney Frank better damn well be at the head of a whole lot of people retiring from Congress this year. Vote out the lot of them (except for Brad Miller, Bernie Sanders, and a few others).

    IIRC, the Bloomberg reporter who originally requested the FOIA info had a rough time getting it, and has since passed away. Good to see others carrying on. This article is one for the ages.

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