|The Nossiter Net
The net that shall enmesh them all
Edited, Written, and Published by Josh Nossiter
|Geithner's Fed Follies
Tuesday, November 25th, 2008
|The Nossiter Net is cast to snare some of the riper rascalities of the day. Comments? Send a letter to the editor.|
|"The New York Fed's supervisory activities are designed to ensure a safe and sound banking system. The New York Fed conducts onsite and offsite examinations of banks in New York…" That's according to the New York Federal Reserve Bank website. Timothy Geithner has been president of the New York Fed since 2003. Back when Geithner took over the Fed, the biggest bank under his supervision, Citigroup, was trading at about $50 a share. Last week he was named our new Treasury Secretary. Citi was trading at around $5 a share. We all know what accounts for Citi's 1000% decline – greedy over-expansion, reckless loans, foolish investments, no judgement, bad faith, arrant imbecility and sheer arrogance – because the pathology of the money center banks has been given a thorough airing lately.
But all that happened on Geithner's watch. The very banks he was supposed to supervise "to ensure a safe and sound banking system" were behaving like drunk Vegas gamblers mainlining cash. Our banking system is so unsafe and so unsound it's being nationalized, and that by doctrinaire free market ideologues. So what the hell was Geithner doing for the past five years? And why, instead of getting fired, is he being made boss of the Treasury Department?
The news and speeches archives of the NY Fed might shed some light on our first question. On his appointment back in 2003, Mr. Geithner said, "I'm honored to be selected for this post and to work with an institution that is central to domestic and global financial stability." So far so good. We're all in favor of domestic and global financial stability. Fast forward exactly one year, to a speech* Geithner gave on 11/17/2004. The subject was hedge funds, those giant pools of capital invested in creatively diverse and highly secretive ways in order to reap higher than average returns for their wealthy investors. Unregulated, illiquid, hedge funds are managed by modern day financial buccaneers who enjoy eight or nine figure salaries and a lower tax rate than any other class of worker in the nation. Panic selling on a vast scale by hedge funds, who were spooked by the prospect of mammoth investor withdrawals, has contributed materially to the cataclysmic volatility of the stock market recently, helping to impoverish millions of investors and retirees.
But we digress. Here's what Geithner had to say about hedge funds in 2004: After concluding that the financial system was stronger then than it had been five years before, he credits hedge funds for this happy outcome,"not just in the general contribution they provide by taking on risk, but as a source of liquidity in periods of increased stress and risk aversion in the rest of the financial system." And what about some of the voices that were raised about the exact extent of all that risk, that of Warren Buffet for example, who were advocating more oversight and regulation of the giant funds? "Prudential regulations, in the form of capital or leverage requirements, have not been considered a necessary or desirable step to date within the official sector in the United States, and are not on the horizon" said our Timmy. So no regulation, and also no transparency. Efforts to get the funds to disclose more information about their activities, strongly resisted by the funds themselves and their powerful political backers, will go nowhere: "progress is not likely to come easily or quickly" Tim concludes about the prospect of meaningful hedge fund disclosure.
So we have these gigantic and largely unregulated financial institutions making gigantic investments in largely unregulated financial instruments, derivatives for example. Here was Geithner's advice on how to mitigate some of the risks of all this opaque and unregulated financial activity: " Investors in hedge funds have a compelling direct interest in ensuring they are well managed. A more discerning and pro-active approach by investors in hedge funds should help to reduce the risk of failure by a major fund."
In other words, patient heal thyself. It's up to the investors, including the very money center banks Geithner was supposed to supervise, to oversee the institutions in which they are investing as well as the investments, now recognized as lethal, those institutions are peddling. Never mind that hedge funds are not obligated to disclose any useful information to anyone, including their investors. Never mind that investors don't have armies of auditors, monitors, and an entire legal enforcement agency at their disposal the way the Fed does. The Fed, Geithner was saying, chooses to sit on its hands where hedge funds are concerned.
Which answers our first question as to what the hell Geithner has been doing for five years: In a word, nothing. How did that work out for us? Ouch. And how was it for Timmy? Which begs our second question: why put the economy under the supervision of a person who appears to be allergic to supervising? It may be rude to answer a question with a question, but the only possible response is, "WHAT THE F---!?"
©Joshua C. Nossiter, 2008
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A NOTE TO READERS ***Update***
Another three week plus hiatus, from April 30th until May 23rd, again due to Yahoo Geocities dismal service.
There was nothing new at The Nossiter Net between March 3rd and April 26th, 2007, nearly eight weeks. The reason: tech sabotage. Yahoo Geocities, the host for this site, denied access for the entire period. At one point, they even managed to lose all the files. In many discussions with Yahoo staff, no clear explanation was forthcoming. No one seemed able to fix the problem. Ruling out the possibility of Dubbya’s revenge, I finally wrote to Mr. Terry Semel, Chairman and CEO of Yahoo! Inc and described the ordeal the page had undergone since the beginning of March. A week later, a helpful Yahooo engineer named Jason called. He had my letter before him. Though he couldn’t do the repairs on on the spot, he promised a fix by the next day. That was April 26th, nearly two months after shutting me down in the first place.
The Nossiter Net apologizes, which is more than I can say for Yahoo Geocities.
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