As Crisis Loomed, Geithner Pressed But Fell Short
- See Also Posts: 841, 847, 877, 878, 882, 896, 908, 911, 914, 918, 923, 930, 939, 965, 967, 987 and 988
As Crisis Loomed, Geithner Pressed But Fell Short
Before Timothy Geithner became Treasury chief, he regulated major U.S. banks. Now he says: "We're having a major financial crisis in part because of failures of supervision."
Friday, April 3, 2009; Page A01
In September 2005, Timothy Geithner made one of his most visible moves as a supervisor of the U.S. banking system. He summoned the nation's top financial firms and their regulators to streamline an antiquated system that threatened Wall Street's boom. This Story As Crisis Loomed, Geithner Pressed But Fell Short Billions of dollars worth of financial instruments known as credit derivatives were being traded daily, as banks and investors worldwide tried to protect against losses on increasingly complex and risky financial bets. But the buying and selling of these exotic instruments was stuck in a pencil-and-paper era. Geithner, then head of the Federal Reserve Bank of New York, pressed 14 major financial firms to build an electronic network that would cut backlogs and make the market easier to monitor.
Geithner's summit, held at the New York Fed's fortress-like headquarters near Wall Street, was a success. By fall 2006, the new system had all but eliminated the logjam, helping derivatives trade more efficiently. One financial industry newsletter honored Geithner as part of a "Dream Team" for his leadership of the effort. Yet as Geithner and the New York Fed worked to solve narrow mechanical issues in the derivatives market, they missed clear signs of a catastrophe in the making. When the housing market collapsed, derivatives stoked the fires that ignited inside some of the biggest banking companies. The firms' failure to assess an array of risks they were taking has emerged as a key element in the multitrillion-dollar meltdown of the global financial system.
Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.
A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office. The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews. Geithner defended his tenure as New York Fed president in an interview last week. He said he had been "deeply concerned about risk in the system" and worked assiduously behind the scenes to cajole banking institutions to do more to identify weaknesses and protect the financial system. But he also took some responsibility for falling short. "These efforts to improve risk management did change behavior, but they did not achieve enough traction," Geithner said. "We're having a major financial crisis in part because of failures of supervision."
Even as critics have questioned how he used existing power before the crisis, Geithner, as Treasury secretary, now leads the push for the biggest expansion of financial regulation since the Great Depression. His sweeping plan to overhaul the U.S. financial system would empower regulators to broadly analyze risk and would grant more authority to the Fed and its 12 reserve banks. Geithner says he is applying lessons from his five years at the most important of the Fed's reserve banks. This week, he assumed an even more prominent platform, joining President Obama in London at a meeting with the Group of 20 industrialized nations to discuss global financial regulatory reform. Looking back at his time at the New York Fed, Geithner said: "I wish I had worked to change the framework, rather than to work within that framework."
Geithner, 47, adopted the diplomatic approach to supervision that had long held sway at the New York Fed, a hybrid institution that is owned by the banks but implements monetary policy for the Federal Reserve. Like the other regional Feds, it also shares supervisory authority with the central bank. Six of its nine board members are chosen by the commercial banking companies it supervises. The board plays a role in the selection of the New York Fed president.
See Also Posts: 841, 847, 877, 878, 882, 896, 908, 911, 914, 918, 923, 930, 939, 965, 967, 987 and 988
Media Hero Brooksley E. Born: One year too Early!
In recent days both the Washington Post and the New York Timeshave lionized Brooksley E. Born, who during her 1996 to 1999 tenure ashead of the Commodity Futures Trading Commission (CFTC) pushed toregulate the trading of derivatives.
"A decade ago, long before thefinancial calamity now sweeping the world, the federal government's economic brain trust heard a clarion warning and declared in unison:You're wrong," a Post article from today opined."
That "clarion warning," said the story, was issued by Born and was "met with hostility" by Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin [Obama's Advisor but not in Cabinet -BayPointMike] and Securities and Exchange Commission Chairman Arthur Levitt Jr."all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power."
If there's a silver lining to the economic crash, it's seeing stuffed shirts like Greenspan and Rubin have their reputations brought down to earth. But the current hagiography (a saint's biography) of Born is a bit ironic, given that her "clarion warning"seems to have been pretty much ignored by the press back at the time, when it mattered.
During her heroic three-year stint as head of the CFTC, the New York Times mentioned Born's role there 17 times, according to a Nexis search.Seven of those mentions came in filler items that noted her appointment or departure from the agency. There was very little detailed coverage of Born's struggleto regulate derivatives trading. Instead, there was the usual "fair and balanced" coverage in which all points of view are given equal weight,making it impossible to draw any informed conclusions.