Rosner: “Has the New York Fed been serving the public trust? Has Geithner?”

By , a managing director of an independent financial services research firm who writes for

In Geithner’s AIG testimony before the House Oversight Committee, the Secretary again tried to that ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’. Even if this were true, why did they have to pay these counterparties one hundred cents on the dollar? The answer may be because, as President of the New York Fed, the counterparties you paid out on AIG owned your company.

To simply say “we had to” is an oversimplification and a partial story. Those of us who saw the crisis coming and recognized the fragility of the system before the Fed or Treasury disagree with the “we had to act” line, but the story is actually larger than that, and predates the unfolding of the crisis. The full story puts Tim Geithner and Larry Summers dead center in creating the environment that drove us to crisis.

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question. The NY Fed’s most important jobs, arguably, are safety and soundness supervision and capital market supervision. Success in carrying out those responsibilities should be the basic litmus test for the measuring how well the NY Fed is serving the public trust. In these roles it is supposed to examine, regulate and oversee the Federal Reserve regulated bank holding companies in , the largest bank holding companies in the country, many of which were AIG’s counterparties.

The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is , the District Bank is Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those is has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

We do not know the full roster of shareholders, but the list of the NY Fed’s Board and management group is particularly interesting, reading like a Who’s Who of sell-side financial corporations that the taxpayer has bailed out and whose systemic riskiness Washington would rather take indirect and half measures to address rather than take a head-on approach of resolving.

In truth, Geithner’s ineffectiveness in his role at NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident. After all, in a previous “public service” role, Geithner was the lead negotiator for the WTO’s General Agreement on Tarrifs and Trade for financial services. In this role, Geithner reported to Larry Summers, who in turn reported to Secretary of Treasury Robert Rubin. In 1998, this team won the banks EVERYTHING they requested from that treaty. From open access to new markets to unrestricted growth in equity and credit derivatives, they opened the door to rapid and deregulated growth of the large multinational banks, allowing them to become “too big to fail”. Moreover, the terms of the agreement has made it almost impossible to put the “too big to fail” genie back in the bottle without running afoul of rules of this international agreement. That was the work of Geithner as “public servant”.

It appears that his reward for this work was to run the privately owned NY Fed. The nomination was orchestrated by many of those same banks that own the NY Fed and for whom he delivered on that GATT (General Agreement on Tariffs and Trade) “Understanding on Commitments in Financial Service” (an international agreement, won by arm-twisting, that led to global deregulation of the fnancial services industry and encouraged the largest firms to enter new business lines and new financialmarkets without resistance).

I expect documents to come to light that will show that Geithner and Summers did the WTO negotiations on behalf of the industry and viewed the completion as a ‘deliverable’ to their financial constituents. How can , while Summers and Geithner are his team, “if the banks want a fight, I am ready to fight them”?

Geithner’s comment from January 1998 demonstrates that he was working on behalf of the industry and not necessarily the public:

Second, we, I think, established — I hope you agree, Bob — very effective cooperation with the U.S. financial community, both in defining priorities, and more importantly in some ways… mobilizing a coordinated approach with other globally active financial institutions in other jurisdictions…Fourth, we worked very closely with the international financial institutions so that they made a very strong, compelling analytical case for the benefits of liberalization, so that they built specific conditions into programs where that was appropriate, and so that they provided technical support and technical assistance to countries who were trying to find the right path of liberalization in an environment of considerable financial stress… the agreement establishes quite substantial new opportunities for access to these rapidly growing markets, with substantial increases in the equity thresholds open to foreign firms… the agreement provides protection for the substantial existing presence of U.S. financial institutions from the threat of future discrimination or future protection. And this is not a static commitment. It means that they can participate fully in the growth of these markets as they evolve further.

I expect more damning statements of Geithner and Summers using the office of the Treasury to work on behalf of the bankers.

So how did this WTO process to liberalize the global financial regulatory structure begin? Well, according to the “Financial Services and the GATS 2000 Round” report:

In 1975 Pan American, which was still there, and American International Group (AIG) took a shot at trade in services. In 1979, I was in New York with the American Express Company and was in charge of strategic planning and acquisitions. We were having problems, which we now call market access problems (we did not have this kind of terminology at that time), in thirty or forty countries. We had no remedy under the trade laws or under the General Agreement on Tariffs and Trade (GATT), which only covered goods.

To make a long story short, we decided that we would have to change that, which meant starting a new round of trade negotiations including services. My boss, Jim Robinson, chief executive officer (CEO) of American Express, asked me to start a new trade round as soon as possible. He asked, ‘How long will it take?’ I said, ‘I don’t know, ten years maybe. I don’t know. I have never done it. I am just reading this book by Ken Dam called the GATT.’ He said, ‘Well, do it as soon as you can.’ I said, ‘I need some money.’ He said, ‘Don’t worry about money. This is so important, you will have an unlimited budget.” If there was one phrase that really pushed trade and services, that was it. We put a person in Brussels, a person in Tokyo, two or three people in Washington, three people in New York, and so forth.

We enlisted the aid, which was really important, of Citicorp and also AIG. John Reed came along a few years later as CEO. We had an alliance in which Jim Robinson of American Express, John Reed, and Hank Greenberg of AIG were working together. I was the go-between. Having those three men with a lot of staff was the key. We went from zero probability of success to having a chance…One of the things that distinguish the American private sector from the rest of the world again is its relationship to the media, which is very good. All kinds of events are held with the U.S. media and sometimes the foreign media in attendance. This is very, very important. We do not see this any- where else in the world.

Finally, in 1998 Geithner and Summers delivered. What did they deliver? What are the realities of the “Understanding on Commitments in Financial Services” in the GATT agreement that were thrust on the global sovereign world? Well, as two small examples

Notwithstanding Article XIII of the Agreement, each Member shall ensure that financial service suppliers of any other Member established in its territory are accorded most-favoured-nation treatment and national treatment as regards the purchase or acquisition of financial services by public entities of the Member in its territory.

And:

A Member shall permit financial service suppliers of any other Member established in its territory to offer in its territory any new financial service.

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense. The same logic that allows senior officers of Lehman, Pepsi, Pfizer, GE, and Loews to be selected as ‘Class B Directors’ of the New York Fed, chosen as “representatives of the public” makes Geithner the perfect “public servant” to oversee those instutions these largest banks have successfully robbed. To be fair, it is also the same twisted logic that seated the last Treasury Secretary, a man who is being publically whitewashed in the media today — even though, as Chairman of Goldman, he single handedly convinced the SEC to allow Goldman and other investment banks to lever-up so wrecklessley that they would need to be bailed out as AIG counterparties.

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22 comments

  1. Yves, just wanted to let you know that this article needs a little HTML editing. The opening <STRONG> macro isn’t terminated properly, and so the rest of the front page is in bold face. The problem is that the end of the link, the </A> thing, is inside the end of the </STRONG> macro. I use capital letters to identify the macros, by the way, but they’re actually in lower case on your site.

    Meanwhile, I’ll try to close it for the page where comments are visible.

  2. OK, now that I see how the comments work here, just change this:

    <</a>/strong>

    to this:

    </a></strong>

    and everything will be wonderful.

  3. gruntled

    Rosner’s article is highly revealing. And depressing. There really is an incestuous relationship between the Wall Street and the White House, with the New York Fed serving as a facilitator of sorts.

  4. Josh

    I had to look at the status of the FRB versus the individual regional banks in the last few years, and came away surprised with the result.

    There is one thing to add though. There are court decisions out there that construe the individual regional banks as quasi-governmental when they are deemed to act as agents/instruments of the government. Its a bit arcane, and our research was not extensive, but the dichotomy between the governmental FRB and the privately-held individual banks is there as described in Rosner’s article. The article does a great job explaining who Geithner was working for at the time.

  5. LeeAnne

    I recommend a little book to those interested in further reading on the agreements described on this post have proliferated “Anti-Drugs Policies of the European Union: Transnational Decision-Making and the Politics of Expertise.” by Martin Elvins, Palgrave-Macmillan 2003.

    Its the Transnational Decision-Making part that is an eye opener; about the worldwide meetings of small specialist groups [like those assigned to Geithner to GATT] that routinely making decisions affecting our lives, tearing away at our sovereign rights, and bypass democratic processes in all the democracies of the world.

    I love the way Geithner appreciates the captured American media, in his words, unlike any other in the world: “…One of the things that distinguish the American private sector from the rest of the world again is its relationship to the media, which is very good. All kinds of events are held with the U.S. media and sometimes the foreign media in attendance. This is very, very important. We do not see this any- where else in the world.”

    The corporate world with not only government at their back and call but the media as well.

    The absolutely chilling part of this is the cavalier way in which the democratic process is pushed aside; Congress has nothing to say prior to and no authority to change these agreements.

    Here’s Geithner interrupted while he’s reading a book on the subject chosen to negotiate an addition to a treaty about which he knows nothing assigned a bunch of corporate honchos to get the job done with no Congressional consultation, authority, oversight, nada.

  6. Hugh

    As with the Warsh piece earlier today, this post highlights the crony aspects of the Fed. I don’t know if the structure of the Fed ever made sense. It certainly was never Constitutional. The current crisis shows that it doesn’t function in even a minimal way in the public interest. Like so much else in our financial system, it is part of the problem. Its activities lead to recurrent bubbles, wealth destruction, and economic instability. It needs to be completely restructured and made both public and transparent.

    Its ties to Wall Street need to be cut. As in, the current president of the NY Fed, William Dudley, is the former chief economist at Goldman Sachs. Whose interests do you think he’s serving?

  7. Sundog

    Rubin, Summers and Geithner were negotiating trade agreements that favored service corporations based in the USA? What a shock!

    And those very corporations supported their work? Astonishing.

    I don’t have a bumper sticker for this yet, but the real problem is something like <<>>, , , <<>>.

    Legitimacy is breaking down because Americans are finding they prefer to have access to first-world health care services rather than poisoned dog food and innovative financial products.

  8. scharfy

    I wish the public knew and cared that the very foundation of this once proud nation is run by an den of thieves.

    Not a conspiracy nut but 3 years after the Federal Reserve Act president Woodrow Wilson says:

    A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men … [W]e have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.

    -Senate Doc. 23, 76th Congress, 1st Session

  9. i on the ball patriot

    Its round two … and vanilla greed comes out swinging … pow! bam! smash! wack! … the big fight is really on now … vanilla greed has just landed a flurry of blows straight to pernicious greed’s body … the fans are screaming for blood and out of their seats as pernicious greed begins to look a little confused and groggy … some of the fans want a third fighter in the ring to beat the living hell out of both vanilla greed and pernicious greed … they are enraged … and they are beginning to throw bottles, trash and other debris into the ring … wow … this could possibly be a long drawn out, hard-fought battle ending in a complete and total riot in the arena…

    Deception is the strongest political force on the planet.

    1. Skippy

      ROFLMO…well, i on the ball you make me think and laugh at the same time and that too is a worthy combination.

  10. stevenstevo

    This article is very misleading.

    First and foremost, the Reserve Banks are definitely NOT the same thing as a private company. They are a government agency. Granted, the 3,000 member banks are required to subscribe (6% of their capital) to stock in the Reserve Banks. I realize the word “stock” here makes it so tempting to conclude that these stock subscriptions are identical in substance and form to common “stock” in a private company. However, the two are not the same and are actually very different. Holdings in stock in Reserve Banks are more like debt: legal obligations to maintain reserves in vault currency or on account with the Reserve Banks. The stock carries no financial interest nor voting rights and is not transferable. As specified by law (which I assume was passed by Congress, not that this is relevant or anything like that), Reserve Bank members are entitled to a dividend equal to their capital investment, 6%, in order to compensate them for the lack of interest earned on their reserves. This 6% is not even adequate compensation really. It restricts and reduces each bank’s capital and of course precluding the member banks from earning income (which could be more than just interest income) on this capital.

    As for the independence thing, that is a bit of a misnomer. As evidenced by the shameless, wanton and incredibly misguided comments made by our President, a graduate of Harvard law school no less, criticizing the Supreme Court in his State of the Union Address, it is simply misleading to interpret rulings of law in circumstances outside that which were specifically considered in the court case. There was indeed a court case that ruled that a Reserve Bank does not meet the definition of a federal agency under the Federal Tort Claims Act. This ruling was based primarily on the court’s determination that the federal government does not direct the day to day operations of the Reserve Banks. The court deemed the Reserve Bank similar to an independent corporations under the laws controlling jurisdiction in the case, given their private ownership and what not. The US federal government has sovereign immunity and cannot be sued. However, the Federal Tort Claims act makes an exception in certain limited circumstances. The court’s ruling merely held that the plaintiff could not sue the Federal Government because the Reserve Bank did not qualify for the exception. The plaintiff could legitimately sue the Reserve Bank itself–it makes no sense to sue the Federal Government when it does not control the actions of the Reserve Banks.

    1. Francois T

      As evidenced by the shameless, wanton and incredibly misguided comments made by our President, a graduate of Harvard law school no less, criticizing the Supreme Court in his State of the Union Address…

      Is that so? Like Presidents cannot criticize SCOTUS rulings? Where did you get this hairy-brainy idea? On several occasions, Presidents have been at odds with the SCOTUS since the foundation of the Republic. There is nothing “shameless” or “wanton” in that. It’s called freedom of speech, it’s granted to corporations, groups and persons. Last time I checked, the President is still a person. BTW, if you think Obama went postal on the SCOTUS, I’m curious to see how you would qualify .

      As for being “misguided”, this case was a hard one. Eminent constitutional scholars in the US and abroad have, and will disagree with this decision for quite a while, to say the least.

  11. Geithner is such a little prick suggesting that, ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’.

    If that isn’t total bullshit, then what is? First off, millions have lost their jobs and during this job-loss process, thousands of bankers and thousands of AIG pigs have been given bonuses for fucking over the millions that have lost jobs.

    Maybe I should say what I mean … I mean, why would people want someone like Geithner to lie to them about the fact that AIG was not and continues to not be held accountable for its accounting fraud? Why would anyone trust a bogus person like Geithner and take anything he says as being the truth? Obviously the mafia-backed congress buys into his shit and they all buy into the web they spin, and they buy into illusions and no one is accountable for fraud …. oh, well, taxpayers are accountable and taxpayers do need to provide cash flow and taxpayers do need to remain in the dark and accept what these fascist pigs offer us.

    I’m still not sure that gets across what I mean, so I’ll work on it.

  12. stevenstevo

    Regarding the GATT thing, this is some of the worst crap I’ve read in a long time. Not only does it not make any sense, but the author doesn’t even appear to understand what he’s talking about. Some 40 countries signed that agreement, and there are about 20 right now trying to negotiate further reduced restrictions. This is free trade 101.

    Blaming Geithner for reporting to someone who reported to someone who helped negotiate a WTO treaty that reduced discriminatory restrictions on foreign capital is retarded for so many reasons. For starters, Geithner should get credit for such a treaty. Free trade is a good thing, especially given how hard it is to deal with companies like China.

    This is pure sensationalism, attempting to off the ignorance of conspiracy-minded retards who fully believe there will soon be a “revolution” in this country and the jealousy of those who envy the bonuses that big bankers get.

    The sad thing is that this article doesn’t even address the one true criticism of Geithner that can reasonably be argued: that Geithner and the rest of the Federal Reserve failed to regulate and supervise the banks. A much more illuminating article would address this, discussing perhaps how and why the banking regulations were not stronger, how/why they failed, etc.

    1. Marshall Auerback

      Really? Geithner should get credit for the treaty? This is another instance of neo-liberal ideology trumping reality. The current agreement has nothing to do with “free trade”. Before the Uruguay Round (1986–94) the international trade regime recognized the right of “special and differential treatment” for developing countries, and allowed this to qualify the basic norm of “no discrimination” (no discrimination between suppliers based in different countries, as in the “most favored nation” principle). At that time the policies of developing country governments and the thrust of multilateral trade and investment negotiations concerned the terms on which goods from developed countries would get access to developing country markets. But during the Uruguay Round and the negotiations of the three capstone agreements—the Trade-Related Intellectual Property agreement (trips), the Trade-Related Investment Measures agreement (trims), and the General Agreement on Trade in Services (gats)—all this changed.
      The agreements at the end of the Uruguay Round represent a basic change of norms governing world trade. “Reciprocity” eclipsed “development”; or more exactly, “reciprocity,” “uniform rights and obligations,” and “all countries (except the smallest and poorest) as equal players” eclipsed “special and differential treatment for developing countries.” At the same time, the earlier norm of “no discrimination” between national suppliers became the norm of “no (trade and investment) distortions.” The “no distortions” rule makes it against wto rules for a government to use policies that “distort” trade and investment flows—including performance requirements on incoming foreign direct investment (such as local content requirements, trade balancing requirements, export requirements, technology transfer requirements, r&d requirements, joint venturing requirements, public procurement tied to local suppliers, and the like) As a specific example, Article 27.1 of the trips agreement says that a “patent shall be available and patent rights enjoyable without discrimination as to … whether products are imported or locally produced.” This makes it illegal for a government to curb a patent for a product whose domestic production the government wishes to encourage but whose producer refuses to establish a local production facility, thus blocking the process of import replacement.
      The three agreements together greatly restrict the right of a government to pursue most of the industrial policies successfully implemented in East Asia.. The sanction is market access: a country that attempts to implement East Asian industrial policies can now be legally handicapped in its firms’ access to developed country markets. This represents a dramatic change in the dynamic of trade and investment negotiations. It also represents a development model very much at variance with what every single developed country – Britain, the US, Germany – used to further their own respective development when they were “emerging economies”.
      In Dani Rodrik’s words, “The rules for admission into the world economy not only reflect little awareness of development priorities, they are often completely unrelated to sensible economic principles. For instance, wto agreements on anti-dumping, subsidies and countervailing measures, agriculture, textiles, and trade-related intellectual property rights lack any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in advanced industrial countries.”
      In light of the evidence reviewed earlier we should be skeptical of claims by representatives of developed countries that “ever-freer trade and investment benefits just about everybody.” The claims are better understood in the light of List’s observations about how countries with head-start advantages behave.

      “It is a very clever common device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him….Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.”

      And then there are capital flows, the liberalisation of which has no place in a free trade treaty, but clearly benefit the US. If momentum is reestablished to make all countries remove all restrictions on flows of capital, the disadvantage to developing countries, deprived of potent instruments to protect themselves from capital volatility, will be even bigger. imf Managing Director Camdessus said in 1999, “I believe it is now time for momentum to be reestablished…. Full liberalisation of capital movements should be promoted in a prudent and well-sequenced fashion…the liberalisation of capital movements [should be made] one of the purposes of the Fund.”And the U.S. insisted that the free trade agreements with Singapore and Chile include provisions penalising them for the use of any restrictions on capital flows, even during a financial crisis and even if the imf approves their use. American investors (and only American investors) would have to be compensated by an amount determined by trade arbitrators Why? Because, claims the Treasury, investor freedom to move funds in and out of jurisdictions at will is a “fundamental right”;and, because free capital mobility brings large benefits to developing countries without posing dangers beyond the capacity of “sound” bank regulation to avert

      Yes, Geithner does deserve “credit” for this treaty. He’s done exactly what has paymasters have asked him to do, much as Josh Rosner indicated in this excellent analysis.

  13. stevenstevo

    Do you people not realize that Congress was who authorized the bailout. Without such authorization, neither the Fed nor the Treasury has the power to bail the banks out. Which brings up another important point. The Fed was only authorized to bail the banks out, and that’s it. They do not have the authority to do anything else. For instance, they cannot tell AIG to not pay out the bonuses it contracted with its employees. It cannot cancel contracts secured by AIG collateral.

    Congress passed the law, and at the time no one criticized it. No one. In fact, when the Democrats rejected the bill at first and the market tanked 400 points, everyone was calling them stupid.

    1. alex

      “Congress was who authorized the bailout”

      Congress authorized TARP, which was only one aspect of the bailout and had nothing whatsoever to do with AIG. That was handled by the Fed, which didn’t have any (and arguably didn’t need) any congressional authorization.

      “[The Fed] cannot cancel contracts secured by AIG collateral”

      The Fed had no obligation (and arguably no authority) to bailout AIG (and indirectly it’s counterparties). Hence it was in a position to make a deal – accept X cents on the dollar or we walk. It’s called negotiating.

      “Congress passed the law, and at the time no one criticized it.”

      No one criticized TARP? What planet didn’t the complaints reach?

      “the market tanked 400 points”

      Compared to the rest of what happened to the stock market, that was a blip.

      “Democrats rejected the bill at first”

      You do realize that it was mostly the Democrats that eventually passed the bill, right? Most Republicans rejected it and never changed their votes.

  14. Lyle

    It was worse recall that Benjamin Strong the head of the New York Fed in the 1920s ran the Fed with the board in Washington being an irrelevance. After 1933 the Board of governors became stronger and the Sec of the Treasury and the Comptroller of the Currency got kicked off the board. Also the FOMC was set up with 7 governors of the Central Fed board and 5 regional presidents of banks. This moved a good bit of power to Washington from NY. The number and location is a result of log-rolling in 1913 to get the bill passed, else why do both Saint Louis and Kansas City have Federal Reserve Banks.
    It has been suggested that the boards of directors of regional banks be confirmed by the senate, but it was shouted down, as making the Fed less independent. Perhaps the solution is to take the regulation from the Fed and leave just the FOMC there.

    1. alex

      Interesting history.

      “It has been suggested that the boards of directors of regional banks be confirmed by the senate, but it was shouted down, as making the Fed less independent.”

      Just as the farmer has no right to lock the hen house, as it makes the fox less independent.

  15. This is a good short primer on how the gangland gambits of globalization and financialization work in synergy, and Geithner’s role as an upper-level soldier.

    And the elemental level of Obama’s personal Mafia mindset, the full extent of the crimes he retroactively embraced and validated the day he appointed Geithner and Summers, becomes ever more clear.

    (I’ve been thinking for a while that each and every try at defending Obama shipwrecks immediately on that simple fact: appointing Summers and Geithner. Just keep repeating that and no Obama hack has a snowball’s chance in hell at making a coherent argument.)

    It’s funny that several of the comments seem to be using the very magnitude of the crime as a defense. Just as the Big Lie is more likely to be believed, so the Big Crime is more likely to be accepted as “normal”.

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