Blaming the New York Fed

According to an audit report from Office of the Special Inspector General of the Troubled Assets Relief Program (SIGTARP), the New York Federal Reserve Bank bungled its negotiations with various New York banks and the insurance companies A. I. G. in fall of last year:

The banks and the regulator were confident that the New York Fed was not willing to push A.I.G. into bankruptcy, because earlier in the fall the New York Fed had stepped in with $85 billion to prop up the insurer.

The New York Fed, led then by Timothy F. Geithner, who is now the Treasury secretary, therefore had little leverage in the negotiations, according to a post-mortem of what has emerged as the most inflammatory episode in the rescue of A.I.G.

The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.

The complete report is here.

As I have been maintaining for some time Tim Geithner may be a very good man but he is a very bad wizard.

In all honesty Secretary Geithner is far too clubby with those he was supposed to be regulating for my taste. If his approach to date had been effective it would be one thing but it hasn’t. The “troubled assets” remain on the books of the banks and they’re as toxic as ever. I’m afraid he has conflated the good of the bankers with the good of the banking system which are manifestly different things. Perhaps we need a stress test for Federal Reserve Board presidents. And for Secretaries of the Treasury.

4 comments… add one
  • In all honesty Secretary Geithner is far too clubby with those he was supposed to be regulating for my taste.

    And previous Treasuery Secretaries?

    I’m afraid he has conflated the good of the bankers with the good of the banking system which are manifestly different things.

    Where do you think he is going to go work after he is done as Sec. Treas.? Back to the New York Fed? That job is already filled.

    Perhaps we need a stress test for Federal Reserve Board presidents. And for Secretaries of the Treasury.

    The problem is the incestuous nature between Wall Street and D.C. Until something about that is done, the problems really can’t be addressed.

  • Regulatory capture has been a problem for a long time. I’ve already proposed one solution to it, a sort of bounty system that would incentivize an adversarial system rather than the current collegial system which clearly isn’t working.

  • steve Link

    Caught the tail end of an interview with Barofsky (?) on the way home and he conceded that while these programs were not optimal, it is partly just sniping after the fact. it prevented financial Armageddon.

    Why not just make things simpler. Make the banks smaller. Then minimize regulations and the role of regulators. If they crash, they crash. Since they would not pose systemic risk, no bail outs. Bet you dont see too many banks with 60:1 leverage ratios.

    Steve

  • Why not just make things simpler. Make the banks smaller. Then minimize regulations and the role of regulators. If they crash, they crash. Since they would not pose systemic risk, no bail outs.

    I agree with that. I mark the start of our bank problems to the move to legalize branch banking. However, as Steve Verdon would no doubt point out, no big banks, no multi-million dollar salaries working for a big bank after leaving government service.

Leave a Comment