Is Geithner Wall Street’s man in Washington?
Yes, the treasury secretary talks to bankers, says the Associated Press:
The calendars, obtained by the AP under the Freedom of Information Act, offer a behind-the-scenes glimpse at the continued influence of three companies — Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. — whose executives can reach the nation’s most powerful economic official on the phone, sometimes several times a day.
But as my pal John Carney of Clusterstock points out, he’s isn’t talking to everybody:
But these generalized claims miss something important: not all banks are equal in the eyes of Treasury Secretary Tim Geithner. Today the AP revealed that Geithner doesn’t give equal access to all of the banks, or even all of the largest banks. Likewise, being one of the biggest, most well-connected investment banks doesn’t get you close to Geithner. Instead, it’s a small select group of financial firms that have Geithner’s ear, at least judging by a review of his phone records.
Who is Geithner chatting with on the phone.?
- Goldman Sachs
- JP Morgan Chase
Most obviously left off the list are Bank of America, Wells Fargo and Morgan Stanley.
Me: To me, the interesting question is to what extent Geithner shares Wall Street’s world view, and how that has influenced policy. He certainly is sensitive to the systemic nature of these institutions and their role in the financial system, which is why he was a voice against nationalization or debt-for-equity ideas. As Megan McArdle put it earlier this year:
It’s easy to blithely say “Why don’t they just make the bondholders take a haircut?” Harder when you think about who those bondholders are: insurers. pension funds. the bond component of your 401(k). Financial debt makes up something like a third of the bond market, and the largest holders are pensions and insurers.
The insurers are the biggest problem, because they’re just so heavily regulated. They’re not allowed to hold risky assets. Convert their bonds to equity and they will be forced to dump that equity at prices that will trend towards zero. Many insurers will see their capital impaired below the regulatory limits, requiring a government bailout.
Pension funds are the next biggest problem. They’re already in big trouble because of stock market declines. The bonds are the “safe” portion of their portfolio, the stuff that’s supposed ot be akin to ready cash. Convert their bonds to equity–or worse, default–and suddenly they’re illiquid and even further underwater.
Nor is the 401(k) problem small. Bond funds are typically held most heavily by the people closest to retirement; they’re for income, not capital gains. What is your mother going to do when a third of her mutual fund income gets converted to equity that produces no cash and can’t be sold because the insurers have all had to dump their shares on the market at once? Or simply disappears into the land of bankruptcy lawsuits?
I think what Geithner et. al. fear is that nationalizing or reorganization will put the government on the hook for massive and immediate losses in both the banking system, and the “safe” entities that lent it money