The President has designated Treasury Secretary Timothy Geithner to head his administration’s team in the fiscal cliff negotiations. In my opinion, this is the most-best or least-worse choice he could have made from the perspective of getting a reasonable deal done. I base that not on my years serving with Tim on the FOMC—which were positive for my thesis—but, ironically, on his being cast as a villain in two books I recently read.
The two books are Bull By The Horns by Sheila Bair, former head of the FDIC, and Bailout by Neil Barofsky, former Special Inspector General in charge of oversight of TARP. The populist subtitle of Bailout is An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. I enjoyed both books and learned from them despite their rough treatment of a friend of mind.
There is, of course, a natural tension between the head of an organization, in this case the TARP (Troubled Asset Relief Program), and its Inspector General. The boss doesn’t like to be bossed, and the cop doesn’t want to be disrespected. Even so, Mr. Barofsky made a fairly convincing case that Mr. Guitner doesn’t (at least didn’t) play well with others. Ms. Bair also made that case convincingly, although she dealt with Mr. Geithner as a fellow regulator on a wider range of issues than just TARP. However, it is the TARP issue that I will address here.
Mr. Barofsky felt that TARP money was being shoveled out the door willy- nilly with inadequate safeguards. Based on personal observation of the other side of that process, I think he overstated his case in that regard. The fact that TARP assistance to banks made a profit for the taxpayer supports my view on that. Barofsky’s main complaint, however, shared by Ms. Bair, was that those in charge of TARP were not making the capital injections into banks conditional on the banks using the additional capital to expand lending. I find that charge illogical as well as naïve.
The banks that needed additional capital, as confirmed through a rigorous screening process by their regulators, had a hole to fill. They needed additional capital to fill that hole. The TARP injections of capital were designed to make up a deficiency. The banks couldn’t use their TARP capital to make up the deficiency AND expand lending at the same time.
There was admittedly some language used in the run-up to the TARP legislation passing that assistance would be given only to “sound” banks. And, there probably was some talk of needing to augment the ability of banks to lend. However, logic tells you that, if the banks were ALREADY sound, there would be no need for assistance. What “sound” had to mean was that the bank would be sound AFTER the injection of capital. Many banks were denied TARP assistance because their regulators didn’t think they met that test.
What Barofsky, and to some extent Bair, did was take the language of “only to sound banks” too literally and too seriously and constantly beat Geithner over the head with it. Barofsky kept insisting that TARP be tied to additional lending when he should have known that was impossible. Of course, Guitner resisted, although he was captive to some of the early misleading language used, and he certainly couldn’t acknowledge that TARP was helping “unsound” banks.
What does all this have to do with Geithner as lead negotiator on the fiscal cliff? The connection I make is that he has demonstrated an ability and willingness to resist the extreme positions of his “allies” in order to reach sensible outcomes. He is not an ideologue, and he is willing to compromise. He may well irritate those on his side of the table, but what is more important is that he can work with those on the other side of the table. We’ll see.