All Commentary
Friday, May 1, 2009

Of, By, and For the Elite

The New York Times pulled back the curtain this week to give readers a rare glimpse at the workings of a political-economy essentially run by a ruling elite. Anyone who thinks representative democracy can’t coexist with rule by a political class is in for a surprise. The clique need not control everything. The pervasive money and banking industries are more than enough.

The story, titled “Geithner, Member and Overseer of Finance Club,” chronicles Treasury Secretary Timothy Geithner’s close and repeated contacts with Wall Street moguls when he was the president of the Federal Reserve Bank of New York and on his way to becoming the “leading architect of [the financial] bailouts.” The Times story did not quite suggest corruption on Geithner’s part. Rather, its orientation is more systemic, the point being that whoever regulates banks, especially those on Wall Street, is bound to be caught up in a particular culture in which regulators and regulated tend to see things from the same perspective. It’s not that Geithner would knowingly put the interests of Wall Street ahead of those of the people in general. It’s that he would tend to equate those interests, even when they objectively diverge.

As the Times put it, “His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.”

In fact, as the New York Fed is structured, the line between regulator and regulated is quite fine. The bank, the Times notes, oversees “many of the nation’s most powerful financial institutions.” At the same time, “The New York Fed is, by custom and design, clubby and opaque. It is charged with curbing banks’ risky impulses, yet its president is selected by and reports to a board dominated by the chief executives of some of those same banks. . . . [T]op executives of global financial giants fill many seats on the board. In recent years, board members have included the chief executives of Citigroup and JPMorgan Chase, as well as top officials of Lehman Brothers and industrial companies like General Electric” (emphasis added).

As to be expected, Geithner’s contact — personal and professional — with “bankers, hedge fund managers and others” was hardly infrequent. His meal and meeting partners were top people from Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase. Some of these get-togethers were at the executives’ homes.

Geithner began his career with Kissinger and Associates, an international consulting firm founded by former Secretary of State Henry Kissinger, a Rockefeller family confidant. Geithner worked in various capacities for Treasury beginning in 1988, spent some time at the Council on Foreign Relations, then moved to the International Monetary Fund. His mentor is Robert Rubin, who was Treasury secretary under President Clinton. Before that, Rubin had been a top executive at Goldman Sachs. After leaving Treasury he went to Citigroup, “the largest bank under his [Geithner’s] supervision” at the New York Fed.

Thus before he took over the New York Fed at age 42, he was a man with deep connections to the financial establishment. Rubin was on the search committee that recommended Geithner for the job. Sanford Weill, a major Goldman Sachs figure, was on the board of the bank. “He didn’t have a lot of experience in dealing with the industry,” Weill said of Geithner. Thanks to what Weill calls “his willingness to listen to people,” however, he apparently quickly learned the ropes from the people he was monitoring.

Financial Meltdown

When Wall Street’s mortgage-related problems, which Geithner did not foresee, began to surface, he worked behind the scenes for a plan favored by Citigroup and others to reduce their capital requirements. Around this time, late 2007, when the company was looking for a new CEO (after Rubin became chairman), Weill proposed Geithner for the job. (Of course, he didn’t take it.)

As the government-built financial house of cards began to tumble, Geithner was a key designer of the bailouts, along with then-treasury secretary Henry Paulson (another Goldman alumnus) and Fed chairman Ben Bernanke. Geithner helped get JPMorgan Chase to assume control of Bear Stearns – with the aid of a $29 billion government check in exchange for Bear’s toxic paper.

When AIG (American International Group) started tottering, Geithner, again, was there. While looking for private money to save the insurance giant, he enlisted Goldman Sachs to assist in the rescue, even though AIG thought that would involve a conflict of interest. When the government took on the rescue itself, “A.I.G.’s trading partners, including Goldman, were compensated fully for money owed to them by A.I.G.”

As New York Fed chief, it was Geithner’s idea to have the FDIC guarantee the debt of banks and investment companies. “Mr. Geithner’s program was enacted and to date has guaranteed $340 billion in loans to banks,” the Times wrote. (The government has collected about $7 billion in fees from the banks.)

Finally, Geithner raised eyebrows by awarding three no-bid contracts, worth about $71 million, to the BlackRock financial company for help in managing the iffy assets bought by the Fed bank. “Mr. Geithner socialized with Ralph L. Schlosstein, who founded the company and remains a large shareholder, and has dined at his Manhattan home. Peter R. Fisher, who was a senior official at the New York Fed until 2001, is a managing director at BlackRock” reports the Times. Geithner says no other company had the expertise to handle the contracts.

Since becoming Treasury secretary in the Obama administration, Geithner has continued to devise ways to help struggling giant financial companies. For example, he launched a program to provide FDIC-backed loans to hedge funds for the purchase of consumer-debt-backed securities. Thanks to Geithner and others, the U.S government has committed the taxpayers to $12.8 trillion in various forms of assistance to the financial industry. That’s almost equal to the country’s GDP.

Geithner also advocates comprehensive new powers that would permit the government to take over (“rescue”) not only banks, but insurance and other financial companies, such as hedge funds, whose failure would allegedly pose a systemic risk.

The extent of Geithner’s connections are startling — but only until one understands the origins of the Federal Reserve System. Seen in that context, the Geithner saga seems more like business as usual. You’ll see why next week when we look at the Fed’s origins.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.