Geithner: As Wrong about Soccer as Regulation

By William K. Black

Timothy Geithner is usually smart enough to say as little as possible about his disastrous leadership of the Federal Reserve Bank of New York (NY Fed). Geithner was supposed to regulate most of the largest banking holding companies. The NY Fed was singled out by its peers and the Financial Crisis Inquiry Commission (FCIC) for its terrible regulation, e.g., of Citicorp. One of the best signs that someone is reinventing history is that they keep changing their excuses for their failures and Geithner is a good example of that practice. He infamously began his original defense by testifying to Congress that he was never a regulator. That had the virtue of (unintentional) truth. His duty as head of the NY Fed, of course, was to regulate so the fact that he refused to regulate is an admission rather than a defense.

Geithner’s book wisely tries to make it appear that life began with Lehman’s failure (where he also performed miserably, but that is a story for another column). But Geithner lacked the discipline to avoid throwing in a few efforts to defend his role as a failed regulator. His defense efforts are now disingenuous, but they continue to serve as admissions rather than defenses. The fact that his attempts to construct a defense of his monumental regulatory failures actually end up being admissions demonstrates that he remains clueless even today about what he would have done if he had been a competent regulator of integrity and courage.

Geithner: Citi’s Great Protector from Effective Regulation

Geithner’s book states that the NY Fed banned Citi from expanding for a time. It did (a terribly weak and inadequate response to Citi’s crimes). What Geithner deliberately does not tell the reader is that the NY Fed promptly removed that pathetically weak restriction as Citi’s criminality expanded greatly. As Gretchen Morgenson explained:

“His dealings with executives at Citigroup, a bank overseen by the New York Fed, are Exhibit A for regulatory capture. While he notes that the New York Fed banned Citi from making major acquisitions in 2005 after illegal activity was found in its Japan operations, he does not mention that a year later his colleagues lifted the ban, wrongly persuaded that the bank had fixed its internal controls.”

One important example of Citi’s frauds is available on line without charge from FCIC’s interviews of Mr. Richard Bowen. A far too brief and weak analysis of Bowen’s explosive evidence of one of Citi’s crime sprees appears in the FCIC report (2011: 19). FCIC notes that Citi’s leadership was so unresponsive to Bowen’s warnings that Citi was selling tens of thousands of bad loans through fraudulent “representations and warranties” (“reps and warranties”) that he cc’d Robert Rubin on his memorandum warning Citi’s leadership of the urgent need to stop the frauds. Instead (as Bowen’s interview and memoranda demonstrate, but FCIC does not mention), Citi allowed the incidence of fraud to grow substantially.

FCIC, unfortunately, allows Citi to get off with the vague claim that it fixed the problems in response to Bowen’s warnings. That claim is refuted by Bowen’s contemporaneous memoranda and to what Citi actually did to Bowen in response to his warnings.

“Bowen told the Commission that after he alerted management by sending emails, he went from supervising 220 people to supervising only 2, his bonus was reduced, and he was downgraded in his performance review.”

Geithner’s book is disingenuous in crafting a deliberately misleading impression that the NY Fed was tough against Citi and leaving out its prompt retreat from what was at best a weak feint at regulation by the faint-hearted Geithner. Geithner edits Bowen’s evidence of one aspect of Citi’s rampant frauds out of the historical record. Citi’s purchase of the Ameriquest – the most notoriously fraudulent “liar’s” loan lender in the world (it targeted minorities for its predatory lending) also gets excluded from Geithner’s censored history. (I highly recommend reading Michael W. Hudson’s – for NEP readers, the “other Michael Hudson” – fabulous book about Ameriquest aptly titled “The Monster.”) No honest firm would acquire Ameriquest. It is revealing that two of the worst banks in America – Citi and Washington Mutual (WaMu) eagerly acquired parts of Ameriquest’s rotten operations because they wanted to gain hundreds of staff whose relevant expertise was the art of fraudulent lending – an expertise they continued to hone after Citi’s and WaMu’s acquisitions. Geithner’s book never mentions (according to the electronic search I just ran) the words “Ameriquest” and “Bowen.”

Geithner’s “Man Crush” on Rubin and Bank CEOs

Geithner begins his (brief) discussion of his regulation of Citi by stating that seven months after he became NY Fed President the NY Fed imposed a “hefty fine” on Citi. And then one reads the single clause that he devotes to detailing Citi’s conduct. It deliberately targeted its customers in a scheme to profit by placing its customers in grotesquely unsuitable investments – and then it covered up that abuse by lying to the NY Fed’s examiners – which is a federal felony. The deliberate sale of unsuitable investments to its own elderly customers may not have been a crime, but it was reprehensible and could have provided the basis for the “removal and prohibition” of the officers who led the abuse and huge fines against them. The crime of lying to examiners to cover up the breach of Citi’s fiduciary duties and own procedures should have led the NY Fed to file a criminal referral and demand that the Department of Justice (DOJ) prosecute the Citi officers who committed the felony. Instead, Geithner imposed only a “hefty fine” (trivial from Citi’s perspective) as a minor cost of doing Citi’s abusive and criminal business. It is revealing that he chooses to start his brief discussion of Citi with example of his feebleness as a regulator under the delusion that it demonstrates how tough he was. His narrative is deliberately disingenuous and unintentionally damning of Geithner as a faux regulator.

Geithner’s book suggests that he kept letting Citi and its controlling officers off light because Rubin held a senior leadership position at Citi. Morgenson’s asks the correct questions but I would push harder to understand how non-introspective Geithner is.

“Mr. Geithner writes repeatedly that Citi’s risks were hidden from its regulators. But did he want to see them? His close associations with Citi officials may have blinded him — he was on a charity board with Sanford I. Weill, the creator of Citigroup; was an acolyte of Robert E. Rubin, the former vice chairman; and had frequent meetings with the bank’s top officials as the credit storm gathered.

Mr. Geithner does do some introspection. ‘I did not view Wall Street as a cabal of idiots or crooks,’ he writes. ‘My jobs mostly exposed me to talented senior bankers, and selection bias probably gave me an impression that the U.S. financial sector was more capable and ethical than it really was.’ That’s as close as he gets to saying that he was wrong to trust — not question — bankers he encountered.”

Geithner, Staying on Script” (May 17, 2014).

Remember, Geithner wrote this only months ago – after the federal government, state government, and investigators had demonstrated the three epidemics of accounting control fraud that drove the crisis, plus the Euribor and Libor cartels/frauds run by the world’s largest banks, plus the willingness of top banks to aid the most violent drug cartels in the world and (if Geithner believes his own agency’s findings) terrorist groups, and nations subject to Treasury sanctions because they are developing nuclear capabilities and/or support terror.

Geithner obviously still doesn’t get it. His story is preposterous – but it explains why there are zero prosecutions of any of the elite bankers for leading the frauds that caused the crisis. His story is that he was misled about the “capab[ility] and ethic[s]” of “Wall Street” because met almost exclusively with: “talented senior bankers, and selection bias probably gave me an impression that the U.S. financial sector was more capable and ethical than it really was.” Even Greenspan is more honest than Geithner – and failing that relative test means that Geithner should never be allowed to run anything.

“It seems clear that, if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically.”

Remarks by Chairman Alan Greenspan
Commencement address
At the Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
May 15, 2005

The obvious corollary is that if there are severe breakdowns in corporate ethics the CEO has not chosen to prevent those frauds and unethical and even criminal acts. “Control fraud” is the obvious reason why the FDIC’s Libor lawsuit implicitly alleges that every CEO at 16 of the world’s largest banks led a control fraud that produced the largest cartel (by three or four orders of magnitude) in history. Fish and banks “rot from the head.” Geithner dined regularly with some of the most destructive felons in the world, but even with the benefit of hindsight and “introspection” (?) he thinks his dinner and lunch hosts were “talented … capable and ethical” even though they grew wealthy through leading frauds that (as his book slightly gets) destroyed the global banking system and the solvency of most of the West’s largest banks – producing the mother of all bailouts to prevent (according to Geithner) the imminent collapse of the global economy into a Second Great Depression.

I have a question for Geithner that perhaps some reporter would ask when he is flogging his book: was it the “senior bankers’” supreme “talent[],” “capab[ility],” or “ethic[s]” – or some combination of those stellar traits – that proved most useful in making them fabulously wealthy through “looting” “their” banks (Akerlof & Romer 1993) and brought the global economy to the edge of destruction (Geithner 2014)?

Geithner is seriously peddling the claim – in 2014 – that the crisis was caused by the junior clerks and lending officers of the banks. The noble “senior officers” that dined with Geithner are blameless. After all, everyone knows that the systemically dangerous institutions (SDIs) are “too big to manage” – no, wait, must not admit that or my support for SDIs looks bad. Rewind tape. Delete last sentence. Geithner’s “introspection” is phony.

Geithner has contributed the ideal dishonest bookend book to pair with a book that blames the crisis on the idiot-savant hairdressers who conned the poor banks run by Geithner’s “talented … capable and ethical” “senior bankers” into making them home loans they could not repay. Please put the over-the-top paperback fictions novellas of your collection between those bookends so that they will feel at home in your library. And if you believe the “blame the loan officer” and “blame the hairdresser” memes – well, there’s a house in Las Vegas I’d like to sell you at its June 2006 price. Read Geithner to see where Wall Street accountability went to die. And then recall that Axelrod described President Obama and Geithner as having a mutual “man crush.”

That means that Wall Street’s “senior bankers” remain the beneficiaries of a derivative Presidential “man crush” – Obama to Geithner to his beloved Wall Street “senior bankers” (a CDO3).  

Geithner: Clueless about Fraud, Soccer, and Systemic Risk

Geithner makes only one other oblique, implicit reference to the use of regulation to stop the fraud crisis. He is again deliberately disingenuous (and unintentionally damning) about fraud, systemic risk, and his total failure as a regulator.

“I did not get very involved with the emerging concerns about the subprime mortgage market. Ned Gramlich, a Fed governor in Washington, was already leading a process to examine excesses and abuses in the mortgage business serving lower-income Americans. I was impressed by Gramlich’s work, and those issues seemed to be getting a fair amount of attention from the Fed in Washington. I didn’t want us to be like kid soccer players, all swarming around the ball. I wanted us to focus on the systemic vulnerabilities that were getting less attention – starting with our own banks, but looking outside them as well.”

The essential background to that passage, which the reader cannot learn from reading Geithner’s book, is that the Fed – and only the Fed – had explicit statutory authority to ban all liar’s loans, even those made by entities that had no federal deposit insurance and were normally not subject to federal regulation. The Fed got this exclusive authority in the Home Ownership and Equity Protection Act of 1994 (HOEPA), which was prompted by predatory lending practices. The Fed could also use its regulatory powers and examination and supervision powers to get the facts about nonprime lending by the banks it regulated and their affiliates in the case of bank holding companies. The Fed could have prevented the entire crisis by banning liar’s loans – which it knew were endemically fraudulent (the best study showed a 90% fraud incidence). The results of that study were presented to the Fed as a result of a regional hearing (mandated by Congress) through the testimony of Steven Krystofiak.

Liar’s loans had no upside for society. Banning them was one of the easiest calls for a competent regulator (we did it in 1990-1991 with no prior experience for the then completely new product and without the advantage of the industry calling them “liar’s loans” (which lacks subtlety). In our day they were called “low documentation” loans. The Fed had the advantage of our regulatory experience, the history of severe bank losses on such loans, the Krystofiak/MARI study, and copious testimony about the endemic abuses/frauds of liar’s loans and multiple Fed hearings – plus the fact that the industry called the loans “liar’s loans.” Nevertheless, the Fed refused to act and Geithner’s book makes plain (by omission) that he never advocated that the Fed ban liar’s loans in response to the warnings. Indeed, his one reference to liar’s loans (at p. 115) reports that when they began “defaulting in droves” and causing mortgage bank failures and downgrades on collateralized debt obligations (CDOs) his reaction was:

“I didn’t find any of this shocking, or even necessarily unfortunate.”

When you read the sentence in context I am confident that you will agree with me that he assumes that the banks (and the brilliant “senior bankers” that he was impressed with) were conned by the even more brilliant idiot-savant hairdressers. He remains absolutely clueless – two decades after we the regulators, criminologists, and Akerlof and Romer (1993) laid out accounting control fraud and “looting” – how these frauds work. This is despite testimony – to the Fed – confirming our explanation of how liar’s loan fraud schemes work and how they create a “Gresham’s” dynamic that can produce endemic fraud.

“[M]any originators … invent … non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications.

Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer

The subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share…. The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete” (Thomas Miller, Iowa AG: 2007).

To sum it up, Geithner implicitly admits that he remained clueless about the frauds that drove the crisis even as the crisis hit and unintentionally demonstrates that he remains clueless in 2014 – twenty-one years after it began building in 1993 when the Clinton-Gore administration eliminated the rule that we had used to ban liar’s loans by S&Ls in 1990-1991. My 2012 column responding to a defense of Geithner by one of the former head of the Wall Street firm that has now hired Geithner looks even better in light of Geithner’s unintentional admissions in his book.

Geithner’s Gramlich & Soccer Metaphor/Excuse

Here’s Geithner’s key passage again:

“I did not get very involved with the emerging concerns about the subprime mortgage market. Ned Gramlich, a Fed governor in Washington, was already leading a process to examine excesses and abuses in the mortgage business serving lower-income Americans. I was impressed by Gramlich’s work, and those issues seemed to be getting a fair amount of attention from the Fed in Washington. I didn’t want us to be like kid soccer players, all swarming around the ball. I wanted us to focus on the systemic vulnerabilities that were getting less attention – starting with our own banks, but looking outside them as well.”

“Disingenuous” is inadequate as a description of Geithner’s description of Gramlich. Gramlich tried to convince Alan Greenspan to get the Fed to do two things: realize that nonprime lending could produce a crisis and that the Fed should act to prevent that and the Fed could, and should, use its examiners to get the facts about nonprime lending by examining the bank holding company affiliates that were huge players in making and/or funding those loans. Greenspan flatly refused to take either action and Gramlich wrote that he gave up the efforts in light of Greenspan’s adamant refusals.

“He was opposed to it, so I didn’t really pursue it,” says Mr. Gramlich, a Democrat who was one of seven Fed governors.

Gramlich never “led” a “process” to crack down on nonprime loans and Geithner knows full well that there never was such a Fed process. (Bernanke finally used the HOEPA authority in mid-2008 to ban liar’s loans, but delayed the effective date by 15 months lest he inconvenience a fraudulent lender.) Gramlich was right and Greenspan was wrong, yet Geithner admits that he provided no aid to Gramlich when he desperately needed Geithner’s help to save the Nation from a crisis that Greenspan could have avoided by using HOEPA to ban liar’s loans. Geithner knows that the facts are the opposite of his description: “I was impressed by Gramlich’s work, and those issues seemed to be getting a fair amount of attention from the Fed in Washington.” Gramlich’s warnings were not “getting a fair amount of attention from the Fed in Washington.” Greenspan ensured that they got no serious attention and never even got considered by the Fed as an institution.

Note also this telling phrase that Geithner uses in his description: “the mortgage business serving lower-income Americans.” Recall Miller’s description of that industry (and mine). The mortgage business of making liar’s loans did not “serve” “lower-income Americans” – it targeted them as victims and its aim proved devastating.

Instead, Geithner retreats to what he always retreats to – “stress tests” – Tim’s cure-all for what ails you. He claims that, rather than focusing on preventing the massive increase in fraudulent liar’s loans that were hyper-inflating the residential real estate bubbles and spreading their fraud through the CDOs in a manner that was about to cause a systemic collapse, he decided to concentrate on stress tests – which as he designed them ignored the fraudulent lending – in order to “to focus on the systemic vulnerabilities.” Yes, he decided to ignore the real systemic vulnerabilities that were driving the crisis, in favor of faux “stress tests” that assumed fraud epidemics out of existence, and then even when the crisis hit he (didn’t realize it was hitting) and “didn’t find any of this shocking, or even necessarily unfortunate.”

And Geithner is Clueless about Soccer

Yes, “bunch ball” is a problem with young kids in soccer that we work with them as coaches to improve. But Geithner can’t even bring himself to be honest in his soccer metaphors.

“I didn’t want us to be like kid soccer players, all swarming around the ball.”

I coached for years and I still (simulate) playing soccer. (I get a lot better view of the back of opposing jersey’s than in prior decades as I run less – and much slower.) I don’t claim to be an expert (and the people I play with and who are reading this are thinking “that’s inadequate as a description of his ineptitude”), but I do understand the Fed and basic soccer geometry and teamwork.

First, Gramlich was the only person of any power in the Fed pushing for Greenspan to take nonprime lending seriously. So, there was no “swarm” of Fed leaders pushing a “process” of ending liar’s loans. There was one guy – a smart guy, but not remotely the kind of Argentine “Number 10” who had the personality and skills to dribble through over half of the English team at the World Cup to score the goal of the tournament.

Second, absent the rare superstar in the rarest of moments even for that superstar, soccer teams work through teamwork. If you watch the video carefully you’ll see other Argentines running off the ball to provide options to Diego Armando Maradona and to stretch and unbalance the defense. An isolated player on the ball gets double-teamed and trapped and typically loses the ball. Teamwork is all about running – hard, and hundreds of times – into intelligent positions that support your teammates. The jargon is forming (and reshaping) “triangles” but the concept is mutual support.

Gramlich desperately needed Geithner’s support. He was isolated and he was up against Greenspan, most of the Fed’s board, virtually all of the regional Fed presidents, and the Fed’s economists. In soccer terms, Gramlich was going up against the most powerful defender in the world and his supporting cast of fellow theoclassical “leg-breaker” defenders of deregulation that he had worked with for many years. Gramlich’s only chance to succeed was if the Geithners of the Fed had busted their guts to get into positions to support him. By his own admission, what Geithner did instead was to desert Gramlich by leaving the pitch, going home, and playing with his own ball.

Geithner decided to pursue his own personal goal that he claims was far more important than Gramlich’s goal, but the reality is that Geithner knew that the goal he was pursuing would not be defended by foes like Greenspan and the industry that would be out to break his legs. Little kids new to soccer tend to run to the ball to support their teammates. We can teach them how to develop that sound instinct into a supporting run. What we can’t teach very well is the kid who will not run hard to try to be first to the ball when there is a risk of collision. If they are unable to master their fears and commit to winning the “50-50” ball they will remain far less effective. But what really makes the team is the small percentage of players who believe they can win the “20-80” ball. I’m not talking about making reckless tackles that endanger either player. I’m talking about the unusual player who “chases lost causes” so effectively that he or she often succeeds where others would not even try. Effective financial regulators need to have a core group of staff that believes it can win the “20-80” balls and will provide mutual support even when the bankers’ “leg breakers” are at their intimidating worst.


Geithner never tried to be an effective regulator. Wall Street chose him because they knew he would never even try. He was paid by Wall Street when he served the interests of Wall Street’s “senior bankers” as President of the NY Fed. His protestation that he never worked on Wall Street – and the acceptance of reporters of that claim – is disingenuous. It is often wrong to claim that Geithner served the interests of Wall Street banks. Their CEOs frequently looted the banks. Geithner’s loyalty was to the oxymoronic “talented senior bankers” whose company he so greatly enjoyed rather than to the banks. Real regulators are the banks’ only real ally when the bank is being looted by its “talented senior bankers.”


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