Opinion

The Great Debate

If Geithner didn’t bully S&P, he should have

As part of its defense against a Department of Justice lawsuit alleging $5 billion in fraud, ratings agency Standard & Poor’s has argued that the United States has singled it out for persecution as payback for S&P’s 2011 downgrade of U.S. Treasury debt from “AAA” to “AA-plus.” Harold McGraw, chairman of McGraw Hill Financial, the owner of S&P, says that an angry Treasury Secretary Timothy Geithner called to threaten him after the downgrade, warning ominously that he had earned the government’s ire and scrutiny. A spokesman for Geithner, who now works for a private equity firm, denies the claim.

Well, if it’s not true, it should be. As Treasury Secretary, Geithner represented the financial interests of the American citizens who might have suffered greatly had fixed income and equity markets not ultimately shrugged off the downgrade. The S&P downgrade could have caused U.S. borrowing costs to spike, hurting the government’s ability to refinance its debts at a crucial moment in the economic recovery. It might have made already scarce credit less available to businesses and consumers operating throughout the economy.

Besides, S&P made a mistake in its calculations, overestimating the total debt outstanding by $2 trillion. Even after Treasury pointed this out and S&P agreed, the agency stuck by the downgrade. The report that S&P issued was really more of a “letter to the editor” than financial analysis. S&P downgraded the U.S. largely based on the dysfunctional reality of divided government that led to a near breach of the debt ceiling. S&P is entitled to its opinion, but putting the U.S. on the same credit footing as Lichtenstein over a public political dispute that everybody already knew about seems silly in hindsight and didn’t make much sense even then, as Warren Buffett pointed out.

The move did win some attention for S&P and allowed the agency to claim its independent mindedness and willingness to make tough calls. But the agency had showed little of that resolve when it came to taking fees for rating mortgage backed securities for its private clients. At issue now is whether or not S&P handed out inflated ratings for asset-backed securities so as not to kill the lucrative new issue market. This is the same S&P that years earlier exhibited extreme credulity about Enron’s solvency. Enron was another big debt issuer and thus a fee-generating player in the debt markets.

But, howl the Wall Street Journal editorial writers, the government cannot be seen as bullying private companies like S&P. This ignores the fact that the government is the reason S&P has a business in the first place. The SEC recognizes Nationally Recognized Statistical Rating Organizations, and that imprimatur is what allows public companies and investors to make use of S&P’s ratings when issuing new securities or reporting on the quality of their own balance sheets. Anyone can analyze a bond or make a judgment about the credit worthiness of an entity issuing securities. But S&P is, because of the government’s blessing, among a handful of organizations with ratings that are part of the financial lingua franca. For McGraw Hill this means $227 million in operating profit from its ratings unit in the third quarter of 2013.  S&P is less being abused by the government than it is a ward of the state.

Tim Geithner’s principal hypocrisy

Last week the acting director of the Federal Housing Finance Agency, Ed DeMarco, made a familiar argument. He announced that he would not approve the Obama administration’s request that struggling borrowers whose mortgages are backed by Fannie Mae and Freddie Mac receive debt relief through principal reductions subsidized by the Troubled Asset Relief Program (TARP). DeMarco’s refusal was based on his concern that granting such relief would encourage other borrowers to “strategically default” by not making payments on their loan to take advantage of the promise of a reduction in their debt. This is a version of the moral hazard argument we heard about so often in the early days of the financial crisis. Secretary Geithner, in response, argued in a public letter that notwithstanding such concerns, and for the greater good of the overall economy, such relief should be granted whenever it would result in a better economic outcome than foreclosure.

This is not the first time this debate is happening – but last time around, Geithner was the one arguing DeMarco’s points. Although one can argue whether principal reductions are the right way to address the ongoing housing slump – I have championed principal reductions for years but acknowledge that there are passionate arguments on both sides of the issue – no one should be fooled that the administration’s entreaties to DeMarco are anything but political posturing. As I recount in my recently released book, Bailout, during my time as the special inspector general in charge of oversight of the TARP bailouts, Treasury Secretary Timothy Geithner, using the same justifications now offered by DeMarco, consistently blocked efforts to use TARP funds already designated for homeowner relief through a principal reduction program that could have a meaningful impact on the overall economy.

For example, in 2009, $50 billion in TARP funds had been committed to help homeowners through the Home Affordable Modification Program (HAMP), a program that the president announced was intended to help up to 4 million struggling families stay in their homes through sustainable mortgage modifications. Hundreds of billions more were still available and could have been used by the White House and the Treasury Department to help support a massive reduction in mortgage debt. But Geithner avoided this path to a housing recovery, explaining that he believed it would be “dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness.” Treasury amplified that argument in 2010, after it reluctantly instituted a weak principal reduction program in response to overwhelming congressional pressure. That program incongruously left it to the largely bank-owned mortgage servicers (and to Fannie and Freddie) to determine if such relief would be implemented. In response to our criticism that the conflicts of interest baked into the program would render it ineffective unless principal reduction was made mandatory (when in the best interests of the holder of the loan), Treasury reinforced Geithner’s early statements, refusing to do so primarily because of fears of a lurking danger: the ”moral hazard of strategic default.” The message was clear: No way, no how would Treasury require principal reduction, even when Treasury’s analysis indicated it would be in the best interest of the owner, investor or guarantor of the mortgage.

from Rolfe Winkler:

Geithner’s faulty apologia

Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

from Commentaries:

Geithner of Oz

Earlier today I wrote that Sheila Bair is one of the few financial regulators who gets it. And by getting it, I mean not sucking up to the banks and the big money interests on Wall Street. You know, the guys (and most of them are guys), who got us into this financial mess. Tim Geithner, on the other hand, is a regulator who just doesn't get it.

It's not that the Treasury secretary isn't smart--he is. And it's not that he's not up to job--he is. It's that Geithner is too much of a politician and his views have been molded by people who work on Wall Street.

So, that's why we have Geithner telling The Wall Street Journal today that Wall Street isn't reverting back to its old ways--even though everything indicates that's exactly what is going on. In Geithner's world, things are getting better and the banks are becoming better citizens:

California, harbinger of hard U.S. choices

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

California’s fiscal train wreck should be watched warily by investors in U.S. Treasuries; as the start of a trend among states seeking bailouts, as a source of pressure on Federal funds and as a harbinger of hard choices at national level.

California voters last week rejected a finance bolstering proposal, setting the stage for billions of dollars worth of  cuts in services, layoffs and a shortened school year.

Failure is the only success in stress test

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The stress test of banks now underway in the U.S. is one exam in which failure will be the only true measure of success, at least in terms of speeding a recovery.

The U.S. will release some information about the methodology of the stress test of 19 major banks on Friday according to reports, with results slated for release in some form on May 4.

Goldman’s TARP out: give up ALL state aid

goldman-crop – Jonathan Ford is a Reuters columnist. The views expressed are his own –

Goldman Sachs wants to do its duty by the American people and give them their TARP money back. Some spoilsports have urged the government simply to say no because allowing the investment bank to repay the cash would make other banks look bad.

But this seems rather un-American. Why shouldn’t taxpayers get their money back if Goldman really doesn’t need it? The point to insist upon is that they get all of it back — and on commercial terms.

“Truman doctrine” could boost IMF firepower

Paul Taylor Great Debate– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The day before he returned to the U.S. Treasury for six weeks to help the understaffed Obama administration, Edwin Truman published a proposal to give the International Monetary Fund more firepower to fight the financial crisis.

Truman’s idea — a one-off $250 billion allocation of Special Drawing Rights (SDRs) to IMF member states — looks like the quickest way to put a safety net under developing countries and avert financial contagion. The Group of 20 world leaders should embrace it at the meeting in London on April 2.

Too failed to live not too big to fail

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The U.S. policy of keeping zombie financial institutions alive is so clearly failing that it is now attracting attack from inside policymakers’ circle of covered wagons.

The most interesting intervention in the banking debate in the past few weeks was an extraordinary attack by Kansas City Federal Reserve President Thomas Hoenig on what he termed a policy of “piecemeal” nationalization which leaves discredited management in place, repels new capital from the banking system and allows bad assets to fester rather than be cleared.

Geithner’s hair of the dog plan for banks

jimsaftcolumn– James Saft is a Reuters columnist. The opinions expressed are his own. –

U.S. plans for a public-private fund to buy up toxic assets are likely to amount to a fig leaf with which to hide subsidies to failing banks.

It is also, inevitably, an entirely new subsidy to outside investors, who by definition will only participate if they get better terms than now available in what we formerly thought of as the free market.

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