The Case Against Geithner

It's a staple scene of countless alien invasion and zombie movies. The lead character encounters an old friend, who looks normal but something subtle is off. There's a glassy look in the friend's eye or his voice is strangely monotone. Pretty soon, it becomes clear that this no longer the old friend. He's become one of them.

That sums up my growing horror with Treasury Secretary Timothy Geithner over the last several weeks. It's becoming increasingly clear Geithner is not the tough-minded reformer Obama had hoped would clean up the banking mess, but a creature of the financial system itself -- too intertwined with its interests to usher in a new era.

Geithner's role in the AIG bonus firestorm is nothing short of shocking. Despite reports that he protested AIG's bonuses, I just can't fathom how Geithner didn't shut them down. He claims the administration's hands were tied by AIG's pre-existing contracts with employees. Employees might sue AIG for breach of contract. This just doesn't hold water. As has been widely noted, unions at the auto companies were forced to renogotiate their contracts when they were in-line for a bailout. Geithner should have said the bonuses would not fly and forced AIG down the same road. It's supremely troubling that AIG is calling the shots on bonuses -- and the Treasury is unwilling to forcefully challenge them -- when taxpapyers own 80 percent of the company. That should give us a little leverage, no?

Furthermore, why wasn't this issue discussed when the government gave AIG $30 billion more in bailout money a couple of weeks back? And further furthermore, I say let any AIG employee sue who think he or she deserves a ridiculously large bonus for running the company and our economy into the ground. Somehow I think there'd be few takers. A decision would be rendered in the court of public opinion long before any judge makes a ruling. The employee would suffer a lifetime of humiliation.

What's even more troubling is that Geithner had a hand in creating a loophole that allowed the bonuses to go through. The American Recovery and Reinvestment Act signed by Obama in February places limits on executive compensation for companies receiving TARP funds from Feb. 11 forward (as AIG did). As it was initially written by Sen. Chris Dodd, the act would have had a clause retroactively limiting bonuses for contracts signed before Feb. 11. AIG's bonus contracts were penned back in April. Guess who lobbied to have this provision knocked down? Geithner. Firedoglake has the best rundown of this affair. Here's an excerpt from a Wall Street Journal story at the time:

"The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said."

So Geithner went to bat for the banks on Dodd's bill. Not only did he not stop the bonuses, he actively abetted their dispersal. This is hardly Geithner's only offense, or even biggest for that matter. There is another scandal waiting in the wings that positively dwarfs the AIG bonus debacle.

Scarily, I will quote the Wall Street Journal's editorial page:

Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then?

Where was Geithner on this one? Why didn't he raise a stink that an investment bank that claimed it needed no bailout got $13 billion or our bailout money was funding foreing banks? Did he know and, if he did, when? Add to all this Geithner's half-baked plan to bailout the banks, which was unveiled to universal derision in February. Here's Paul Krugman on who benefits from the plan:

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

It seems at every turn Geithner is looking out for Wall Street, not taxpayers. Back to the alien invasion analogy, maybe Geithner really is one of them? The scariest part is Geithner could very well pull the Obama Administration down around him.