Treasury Secretary Timothy Geithner wants to be able to hire and fire executive-level employees at financial institutions that require “exceptional” assistance from the Federal Government.
As the old saying goes, “he who owns the gold makes the rules.” So be it. It might be tempting to simply write off Geithner’s remarks as a lesson explaining why a private entity should never take government money, but Geithner’s Treasury Department (and by extension, the Obama Administration) is interested in much more than just controlling the goings-on within a few struggling dinosaur banks.
Geithner has already petitioned Congress for the power to “initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy.” And these seizures would not have to be triggered by a bankruptcy filing; they could be instigated solely at the discretion of the Treasury Department. Imagine the government having the power to seize control of a financial company simply because it refused to submit to Treasury Department directives.
As Kim Priestap noted a few days ago, this has already happened. Last September, the Treasury Department extorted banks like Wells Fargo into accepting TARP money under the threat that refusing to do so would automatically trigger a time-consuming, expensive and embarrassing comprehensive financial audit. Now that the banks that originally accepted TARP money are beginning to understand the level of control that the government expects to have over their operations, they are lining up to give the money back. Too bad — the government isn’t accepting refunds.
The real irony here is that while the Treasury Department seems to be openly planning a complete take-over of the American financial sector, the real instigators of the current credit crisis — the executives and their subordinates who cheerfully sold “liar’s loans” — have largely escaped prosecution for the fraud committed in the process of writing those loans:
In the wake of the bursting of the housing bubble, you’d think there’d be a significant number of investigations into criminal wrongdoing and accounting fraud, similar to what occurred after the S&L crisis and bursting of the stock bubble in 2000.
But two years into the crisis the FBI “doesn’t have a single major conviction or indictment of anyone,” notes William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City.
Black, who was counsel to the Federal Home Loan Bank Board during the S&L crisis of the 1980s and blew the whistle on the “Keating Five” in 1989, reiterated what he told us in November: Though the FBI warned of an “epidemic” of mortgage fraud in 2004, they subsequently made a “strategic alliance” with the Mortgage Bankers Association, which Black calls the “trade association of perps.”
Black estimates there are as many as 500,000 cases of mortgage fraud that need to be investigated. Furthermore, such extensive mortgage fraud led to accounting fraud, which led to securities fraud at any/all publicly traded mortgage lenders. As with the FBI, the SEC was “completely ineffective” in stopping such crimes, much less investigating them now, he says.(emphasis added)
William Black was also interviewed last week by Bill Moyers. Naturally, since this was a Moyers interview, there was plenty of Republican-bashing. But according to Black, Timothy Geithner and other government officials know a lot more about the collapse of the sub-prime mortgage market than they are letting on:
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they’re much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they’re outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.’ But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That’s a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who’s covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion because they have mass[ive] losses, and that they’re fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator.(emphasis added)
The lead-in to this segment isn’t correct, of course. A lot of senior corporate officers in the finance industry, including many once-powerful CEO’s, have been terminated. All together at least 20,000 white-collar workers in the financial sector have lost their jobs. Most of that 20,000 (like the majority of AIG retention bonus recipients) were not responsible for the failure of their employers, and they do not deserve to be treated as criminals. Further, at this critical time America cannot afford to be completely drained of its financial talent, which is what would happen if we allowed the kind of mob mentality that followed the AIG bonuses to continue unabated. But right now there ought to be hundreds, if not thousands, of managers and executives from private banks, Fannie Mae, and Freddie Mac facing charges of fraud.
In the light of the uproar that Democrats made over the Enron and WorldCom accounting scandals just a few years ago, this is indeed puzzling. Angelo Mozilo and Franklin Raines ought to be today’s Jeffrey Skilling and Ken Lay. Why aren’t the Democrats interested in locking them up and throwing away the keys? How foolish of me to ask — would you do that to your friends?
Lawrence Summers, a top economic adviser to U.S. President Barack Obama, was paid about $5.2 million by hedge fund D.E. Shaw in the past year, financial disclosure forms released by the White House showed on Friday.
Summers, a former U.S. Treasury secretary and Harvard University president, also was paid $2.7 million in speaking fees by a range of organizations and companies, including several troubled Wall Street financial firms, they showed.
The disclosure documents on Summers and other White House officials advising Obama on the global financial crisis covered 2008 and the first few months of this year. Summers became an official adviser on January 20 when Obama took office.
Summers, who was a part-time managing director of D.E. Shaw after stepping down as Harvard president, had speaking fees of $67,500 from JP Morgan, $45,000 from Citigroup, $135,000 from Goldman Sachs and $67,500 from Lehman Brothers, which went bankrupt in the mortgage crisis last year.
And Timothy Geithner shouldn’t be let off the hook either. As Chairman of the New York Federal Reserve from November 2003 to January 2009 he was the top government official responsible for oversight of our nation’s banking system. Now he says, “We’re having a major financial crisis in part because of failures of supervision.”
So here’s where we are: Treasury wants the power to seize control of financial institutions, but apparently they have little interest in ensuring that banks correctly value their equity or tie their derivatives directly to tangible assets. And the Obama Administration will eagerly persecute scapegoats who happen to be in the wrong place at the wrong time, but has no real interest in prosecuting those responsible for hundreds of billions of dollars worth of credit, accounting, and securities fraud.
I don’t know what Obama and Geithner are up to exactly, but I have no doubt about the fact that ultimately it will be no good.