garrett morlan

At a congressional hearing two weeks ago on the president's new proposals for financial reform, Washington senator Maria Cantwell gave United States Treasury secretary Tim Geithner a tongue-lashing for his failure to speed assistance to community banks with the same urgency he has shown for propping up the national giants.

It was the latest in a series of attacks in cable-news interviews, blog posts, and oversight hearings that have made Cantwell one of Geithner's most outspoken critics. Her chief complaints are what she considers Geithner's favoritism toward investment banks over taxpayers in the bailout of AIG and his overly deferential approach to the financial industry in coming up with the plan for reform that is heading toward an uncertain birth in Congress.

She is not alone. Secretary Geithner has become the government whipping boy of the crisis because of his unique double role in it. When the financial system nearly collapsed, he was (and had been for five years) president of the Federal Reserve Bank of New York, a job that gave him oversight responsibility for the largest banks in the country. And two months later, he was nominated to run the U.S. Department of the Treasury and thus to lead President Obama's response to the ongoing emergency.

On paper, he's the man for the job: an expert in financial crisis management with years of experience in Clinton's Treasury Department handling the Asian and Russian currency crises, and a lifetime civil servant who has never worked as a private-sector banker (unlike Goldman Sachs alums Robert Rubin and Henry Paulson). He would appear, then, to be the old progressive ideal—a technocratic steward of the public interest. But is he? Or has Geithner, along with the Fed and the Treasury, been, as they say in administrative law, "captured" by the industry he is supposed to regulate, as Cantwell and other recent finance populists suggest?

The nub of the accusation against Geithner for his first role in the drama, while president of the New York Fed, is that he failed to drive a hard bargain with AIG's big bank customers on taxpayers' behalf once authorities had decided to nationalize the company (itself an unprecedented act, because AIG is an insurer, not a bank).

Goldman Sachs, Morgan Stanley, and others had purchased from AIG what is, to most people, a bizarre kind of insurance: If your investment loses too much value, we'll cover your losses. Because AIG was offering insurance based on the price of houses, and because—as we all know—the price of houses never goes down, AIG didn't think it was necessary to set aside any cash to pay out on the policies as you might in the event of, say, a hurricane. They just took the banks' insurance premiums—the infamous credit default swaps—and paid themselves a shitload of money. When the hurricane arrived in the form of REALITY, Goldman etc. had billions in mortgage-related losses and they wanted their insurance company to pay for the damage. Only now, their insurance company had no money and was owned by you and me.

Trying to resolve this impasse, the Fed said to the banks, essentially, "We can't pay for the damage, but if you'll agree to rip up your insurance policy, we'll buy your damaged property." This at a time when the banks couldn't have sold a mortgage-backed security to a 15-year-old on peyote. "Yes," the banks said to the Fed. "That sounds good."

The question is, why did we pay full price for the damaged goods? Given that the banks had been speculating and would under normal circumstances assume the risk of their insurer going bankrupt, why did American taxpayers step into the breach and make Goldman and others whole at a time when millions were losing their savings and their jobs?

In Geithner's testimony to Congress last month, he said AIG/we had to pay full price because, as he put it, "Once a company refuses to meet its full obligations to a customer, other customers will quickly find other places to do business." The theory being that if the banks didn't get all their money, customers of AIG's other, more vanilla (and still profitable) insurance businesses would head for the hills, causing the parent company to further collapse.

This is disingenuous. The financial-products unit of AIG—the source of all the problems—was, in essence, already refusing to meet its full commitment by not paying up on the insurance polices it had written. If AIG's other customers were going to run for the hills because one London subsidiary had failed to "meet its full obligations," they had as much reason to flee after the Fed's intervention as before.

The Fed's offer to purchase the damaged goods from the banks was totally out of the ordinary in the first place. Moreover, the situation was highly fluid. At moments like this, the president of the New York Fed possesses a unique form of soft power, because he is the only player in the small group of elite financiers whom everyone is communicating with and he can thereby inject confidence into a necessarily improvisatory process of crisis management. It requires no ascription of dastardly intent to say that Geithner failed to use that soft power to compel Goldman and others to accept less than 100 cents on the dollar for their soured investments. He didn't insist because during this most extraordinary week in American financial history, his chief (and legitimate) concern was preventing an unchecked meltdown. He wanted the investment banks to get paid because he didn't want them to fail, and that week it looked as if they might.

M ore troubling than Geithner's post hoc explanation of AIG is his approach to the task of reregulating the industry since he's become secretary of the Treasury. It is here that the milieu effect of financial elites on Geithner is more apparent and distressing.

The United States has the most byzantine, overlapping system of bank regulation of any industrialized nation, and the problem of how to make it a match for the hyperfunded ingenuity of postmodern financial engineering is fiendishly difficult. But among other reforms, regulators must be given the power to oversee what are currently private trading arrangements for derivates that represent—no joke—$600 trillion in value and risk. However, Geithner supported a bill that contained a giant loophole for firms to avoid just such supervision. Thanks in large part to Senator Cantwell, that particular loophole has now been removed from the finance reform bill, though industry lobbyists continue to press for other escape hatches.

Similarly, when it comes to limiting executive pay, Geithner has consistently opposed a more aggressive approach. The argument seems to be that if you prevent people from earning $60 million a year, then all the "talented" ones will leave the regulated banks for firms where they can earn that much or more, and this will be bad for America's banks and thus the country. Talented? Really? I mean, seriously. These are the men whose speculation drove the country into a ditch. The idea of their irreplaceability is not only offensive but misguided. If one is so terribly concerned about them fleeing, then pass a law that would limit compensation across the entire industry, hedge funds included. If this sounds like "government intrusion," that's because it is. Much as Obama did with health care, what Geithner and the administration singularly failed to take advantage of was a period in the spring of 2009 when the strongest populist sentiment in many generations was just waiting to be tapped by a new president who'd promised profound change. In March of last year, in the darkest hour of the still cascading recession, the federal government's power over entrenched capital was higher than it had been since the 1930s. The public was willing. The Treasury effectively controlled the largest banks in the country.

This is not to say that radical proposals would have floated through a Congress bought and paid for by lobbyists. But the point at which negotiation began could have been moved to a dramatically more progressive place not only at little political cost but with potentially enormous political benefit. And it was Geithner, along with his mentor Larry Summers, who advised the president to, above all else, make sure we returned to the status quo. Only then, they counseled, could we begin to address the question of how to reform the system.

It is only now, after the House has already passed a financial regulation bill, that the president has belatedly decided to take a more populist stance, adopting the suggestions of former Fed chairman Paul Volcker about more forceful ways to limit risk-taking by large banks. Whether Geithner opposed these suggestions internally is a matter of conjecture. What we do know is that Volcker's ideas have been kicking around for a long time, that his advice in general has been sidelined by Geithner and Summers over the course of Obama's first year, and that now, to Wall Street's surprise and consternation, he is the one standing next to the president at the press conference to announce Obama's new tough line on the banks. At the very least, it is fair to say Geithner has been a follower, not a leader, in this new, more aggressive tack.

The picture of Timothy Geithner that emerges from all this is of a dedicated public servant with a basically conservative mind-set that helped him solve the immediate crisis but that, at the same time, prevented him from grasping the opportunity for progressive change that history had presented. He was a decent central banker. He's been a lousy Treasury secretary.

T his past December, Maria Cantwell, along with John McCain, proposed reinstituting the major provisions of the Glass-Steagall Act, the Depression-era law repealed under Clinton, which banned commercial banks from owning insurance companies and investment banks. It is a bold play to break up the Bank of Americas and Citibanks of the world and return deposit-taking, loan-granting institutions to the sleepy, boring businesses they ought properly to be. Even Obama's new, more far-reaching proposals don't go this far. And yet, depressingly, even his plans stand only a slim chance of getting through Congress.

The banks that were too big to fail are bigger now than they were before the crisis began—much bigger. As far as the economy goes, we may be only at the midpoint of the crisis. Once the government stimulus money runs out, there is no wave of consumer demand ready to take its place, and in Europe, a national-default crisis looms.

For the last 30 years, government policy makers, Geithner among them, have accepted the basic fallacy that the free market is a natural phenomenon and thus, ultimately, a subject of science rather than politics. This, more than any particular policy decision or response to the crisis, is the ethical and intellectual failing at the heart of American governance in the conservative era. To treat the economy as a beast that must be kept in good health rather than a collective human effort to fairly order all the various enterprises of life. To treat it as an invention of nature rather than of man.

As long as the media remains entranced to this notion, reform will remain mired in half measures. The fact is, all corporations are artificial entities granted charters by the state. And the state is us. We establish the rules by which they function. They are no more a phenomenon of nature than a voting booth or a school-board meeting.

Critics will complain that if we regulate too strictly, companies will take their business overseas in what is called "regulatory arbitrage," searching for laxer rules, like a sports franchise threatening a city with departure if it doesn't get its stadium and tax breaks. But as Volcker has recently noted, there is an appetite for stricter controls in the other financial centers of the world. International coordination is possible, if the United States is willing to lead. Money may be mobile, but the bankers in Westchester and Connecticut don't want to move to Singapore.

If he manages to get Obama's new restrictions enacted into law, Geithner could yet be seen as an effective secretary. But it will be despite his accommodationist instincts, not because of them. recommended

Adam Haslett's first book, You Are Not a Stranger Here, was a finalist for the National Book Award and the Pulitzer Prize. His latest, Union Atlantic, a novel about the banking industry, is out this month.