It is now long overdue. Treasury Secretary Timothy Geithner must resign his post. A story broke earlier this week on Bloomberg which details what appears to be an attempted cover-up by the Federal Reserve Bank of New York and AIG. Let's take a quick trip in the time machine.
On September 15, 2008, Lehman Brothers filed for bankruptcy. This triggered a freeze in the credit markets, which, in turn, exacerbated a brewing crisis at insurance giant AIG. The Federal Reserve stepped in the next day with an $85M loan facility which effectively nationalized the company. This was not the end of the government's largess. Additional credit lines were created by the Federal Reserve and TARP money was used to provide a capital infusion. Tim Geithner was President of the NY Fed during this time.
Two key controversies emerged over the following months. First, AIG awarded large bonuses to employees despite the massive failure of the firm. These retention bonuses were executed despite populist discontent and anti-bonus rhetoric from Obama. However, Geithner effectively shrugged his shoulders and said nothing could be done. Second, AIG settled credit default swap contracts at par (one hundred cents on the dollar). This was controversial since AIG was effectively bankrupt and the counter-parties would likely have received much less in either bankruptcy or any other rigorous renegotiation. Again, Geithner effectively shrugged it off.
It was this second issue which is at the center of the aforementioned Bloomberg article. It has now been reported that the NY Fed suggested that AIG might limit its disclosure in regards to the payouts. Darrell Issa (R-CA) obtained correspondence as part of his investigations on the issue as a member of the House Committee on Oversight and Government Reform. Issa has made the rounds this week on various news shows and penned an op-ed in the Huffington Post. More details and commentary on the story can be read here at Zero Hedge.
The White House has already begun its defense of Geithner (see the press briefing from today). Essentially, the argument is that (so far) none of the emails involve Geithner directly and that he was not aware of the details. However, he was President of the NY Fed. This happened under his watch. He is responsible.
Geithner has used these incidents and the rest of the financial crisis as a call for more government power and control. This should not be a surprise. He is a firm believer in the partnership of government and big business. His first job out of school was with Kissinger Associates. This is a firm founded by former Secretary of State Henry Kissinger, which employs high ranking former government officials and advises large multinational corporations. It is not hard to connect the dots that such a firm is paid big money to use its connections and knowledge to achieve public-private partnerships. Their number one goal is to exploit and expand corporatism. He continued on to serve in various roles in the Treasury Department in the Bush (41) and Clinton years. He then worked for the IMF (where he misreported his taxes) and finally the NY Fed. His entire worldview is based on corporatism and the significant role of the banking elite in world affairs.
Geithner will not change. There are likely more skeletons in the closet. He will continue to defend his actions since he believes that the government and large financial institutions must work together. In times of crisis, this means that the rules don't matter and taxpayers don't matter. His rhetoric may state otherwise, but his actions singularly serve the financial system. He embodies corporatism and cannot survive as Democratic populism strengthens while unemployment stays above 10%. Obama will ultimately have to make a choice between Geithner and his base. While I believe that Obama will continue to kowtow to the financial powers-that-be, he can make Geithner a sacrificial lamb to serve the progressives taste for blood. For this reason, my disapproval of his policies, and his reckless arrogance, Geithner should resign immediately.
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