All Blog Posts from Econwatch

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Special Inspector General for TARP (aka "SIG TARP") Neil Barofsky said something we've all known for a while: the government gave away the farm when AIG failed.

If you recall, AIG's failure meant that the companies on the other side of all of its contracts (counterparties) were going to be left holding the bag. Under normal cases of bankruptcy, the court would impose haircuts to the amount of money due to counterparties, but because AIG didn't actually declare bankruptcy, the counterparties claimed that they were owed 100 cents of every dollar. The only bank that even considered taking a haircut was UBS - the Swiss, for goodness sakes - hard to imagine that a Swiss bank could make US banks look bad, but here's a case in point.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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Why is everyone surprised to learn that Treasury Secretary Timothy Geithner's speed dial is filled with Wall Street CEOs? Even before the financial crisis, when he was running the New York Fed, Geithner was delighted to act as the nerdy wanna-be for the exclusive power club, garnering invitations to corporate dining rooms from his former mentors.


In fact, Geithner was chosen as Treasury Secretary precisely because he was wired into the big banks. There's a reason that Wall Street cheered his nomination to the post. For all of its talk about change, the Obama Administration is filled with recycled Clintonistas, like Geithner and Lawrence Summers, who were at the forefront of deregulation.

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It's just so predictable: use the anniversary of Lehman's bankruptcy to talk about regulatory reform. President Obama's Financial Rescue and Reform speech today at Federal Hall (a beautiful building downtown, that's worth a visit if you are in the neighborhood) was laden with some harsh words: "there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them."


As my mother likes to say, talk is cheap. There are three distinct trends that belie the President's "tough" stance on financial reform:

1. President Obama has made health care the number one priority, eclipsing financial reform

2. The economic and stock market recovery makes people lazy. This is especially true for lawmakers, who all of the sudden remembered how much money financial firms pour into their coffers.

3. Inter-regulatory turf battles are downright ugly, although who among us does not want to see Sheila Bair take down Tim Geithner?

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Treasury Secretary Timothy Geithner appeared to have lost his cool in an hour long meeting with financial regulators last Friday, according to a report in the Wall Street Journal today.

Deemed by the Journal as "an expletive-laced critique," the meeting involved such top financial regulators as Federal Reserve chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

An official told the WSJ that they felt surprised at Geithner's tone and attitude at the meeting. Mr. Geithner stated that "enough is enough" after listening to concerns over the proposed financial overhaul by the Obama administration.

Since the plan was released in June, it has faced much criticism from the industry, and some financial regulators are weary of allowing the government to enter their "turf." The administration's proposals include creating a new federal agency to oversee consumer regulations, merging two bank regulators and allowing the government to take over large financial companies.

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In the first few weeks of the then-new Obama administration, Treasury Secretary Timothy Geithner announced a sweeping but vague overhaul of the U.S. financial system. The stock market showed what it thought of that idea by tumbling nearly 400 points.

Don't expect a repeat of that exercise when Geithner and President Obama announce another regulatory revamp on Wednesday: their aides have tried to avoid the possibility of surprising the market by assiduously leaking details. After a week of disclosures, bit by bit, the broad outlines of tomorrow's news may turn out to be the least-surprising White House announcement this summer.

In Wednesday's announcement, Geithner and Obama are expected to outline another reshaping of the financial system -- scaled back from earlier drafts -- that would put the Federal Reserve in charge of overseeing companies so large or significant that their collapse would lead to market turmoil. But a bigger consolidation into one uber-regulator is unlikely.

The administration believes the change is necessary because of the crop of regulatory agencies, with acronyms including SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and the FRB, that grown like weeds in the nation's capital. One possibility is the elimination of the Office of Thrift Supervision, which is tasked with the job of maintaining the soundness of savings banks and savings and loans, with poor results.

"Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated," Geithner and National Economic Council director Lawrence Summers wrote in an opinion article this week in the Washington Post.

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The White House is moving closer to recommending the creation of a single agency to regulate all banks, according to a Wall Street Journal report Wednesday.

That would move the U.S. away from the network of federal regulators that was seemingly powerless to protect the country from the financial crisis that has choked the economy since last year.

Treasury Secretary Timothy Geithner and other officials are expected to include the recommendation in a proposal to Congress in the next few weeks, according to the report.

Under the plan, which the Journal say is still in flux, the Federal Reserve and Federal Deposit Insurance Corp. would be stripped of their supervisory roles, though both agencies would gain other powers. The Office of the Comptroller of the Currency and the Office of Thrift Supervision would be also consolidated.

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Wall Street finished the week with another champagne-popping rally as investment managers exhaled after the government published the results of its stress tests on the nation's major banks.

The healing process has begun, Quincy Krosby, the chief investment strategist at Hartford Investments told the New York Times. "You're seeing more conviction buying the banks, where investors are culling the weak from the strong and going into the strong names. The strong will get stronger and the weak will get weaker."

But the headlines buried the real lede.

On the face of it, Wall Street's rally came in response to the better-than-expected news that 10 of the banks must raise $75 billion in new capital. Turns out, however, that the banks had a significant hand in shaping the outcome of their own government-administered exams.

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The Washington Post has reported on the healthy 2008 earnings of some of President Obama's top advisors, including Lawrence Summers, chairman of the National Economic Council.

Summers, one of the principle architects of the economic recovery plan, took home $5.2 million from D.E. Shaw, a hedge fund in which he was a managing director, and $2.7 million in speaking fees from several financial companies that received TARP government bailouts.

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Days after GM's CEO Rick Wagoner was forced out by the Obama administration, Treasury Secretary Timothy Geithner left open the possibility that such moves could happen again.

In an interview with CBS Evening News anchor Katie Couric, Geithner acknowledged the government has had to do "exceptional things" – citing AIG as well as Fannie and Freddie Mac.

"We have changed management aboard," he said. "And where we've done that, we've done it because we thought that was necessary to make sure these institutions emerge stronger in the future."

When asked if he would leave open the option to pressure a bank CEO to resign, Geithner replied: "Of course."

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After a few weeks of ceaseless hazing and calls for his resignation, Treasury Secretary Timothy Geithner has emerged as a "keeper." He heads to the G20 summit in London after a bold week on Capitol Hill, where he introduced plans to buy up to $1 trillion in toxic assets and outlined the government's proposal to the rewire the crippled banking industry.

The reception to the Geithner’s plans was mixed, but at least the stock market had an up week. As Geithner keeps repeating, the country's economic problems are unprecedented and complex, and require some risk on the part of the government and taxpayers.

"We're not going to get through this unless we [are] willing to take risk again," Geithner said during an appearance on "Meet the Press" on Sunday. "You know, the financials took too much risk. The great danger for us now is they're going to take too little risk, they're not going to take a chance on a viable business or a family that wants to put their kids through college."

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