February 16th, 2015
in Op Ed
by William K. Black, New Economic Perspectives
Timothy Geithner's penchant for speaking about things he does not care enough about to get right has led to him uttering many of the most cringe-worthy phrases about the economic crisis. The latest example is in David Axelrod's new book about the Obama administration's response to the financial crisis.
This column was prompted by Sam Stein's piece in the Huffington Post about Axelrod's key points.
"Axelrod was 'livid' when he found out that Geithner and [Larry] Summers 'had quietly lobbied' against an amendment to the stimulus that would have restricted the payment of bonuses at firms that received bailout funds. Those bonuses had become a huge political sore point for the administration, but the finance guys argued that retroactive steps to claw back the money would have violated existing contracts.
'This would be the end of capitalism as we know it' Geithner told Axelrod, to which Axelrod says he responded: 'I hate to break the news, Mr. Secretary, but capitalism isn't trading very high right now.'"
This story confirms two pathologies that are well-known about the Obama administration. First, Geithner was a faithful servant of his Wall Street masters when he was Treasury Secretary, just as he was when he was the President of the Federal Reserve Bank of New York. Notice that there is a contradiction in the description of the issue. Preventing banks that received bailouts from paying future bonuses is not "clawing back" bonuses. Clawing back bonuses means recovering bonuses that were improperly paid based on false accounting statements that massively overstated bank income. Neither of the practices I have described would have "violated existing contracts." The people that "violated existing contracts" were the bankers who massively inflated reported net income in order to collect massive bonuses while the bank suffered huge losses and the bankers that made massive bonuses by leading frauds that ripped off customers. Both forms of fraud invalidate any contractual claim by the managers to bonuses. Bankers should not get paid in full under normal bankruptcy provisions when they run the bank into insolvency (including a liquidity crisis).
The perverse incentives of the compensation systems were a major contributor to the three financial fraud epidemics that bankers led that caused the greatest financial losses of any property crimes in history. It was grotesquely improper and immoral to pay the bonuses. It literally made crime pay. It was (and is today) vital that those perverse compensation incentives (which include the deliberate generation of the "Gresham's" dynamics that suborn supposed "controls" such as the loan officers and brokers, credit rating agencies, auditors, and appraisers) be ended to make the financial world far less criminogenic. The "sure thing" of "accounting control fraud" (aka "looting") makes "capitalism" as we know it a disgraceful oxymoron. What "we know" bears no resemblance to "capitalism." Our largest banks became criminal enterprises virulently opposed to markets, competition, democracy, and customer service. At best, we suffered from crony capitalism, a variant of plutocracy.
Anyone that wants to save "capitalism" must destroy the current corrupt system "we know" that is posing as "capitalism." To sum it up, there was no greater service that the Obama administration could have done for (real) capitalism than to produce "the end of capitalism as we know it." Geithner was absolutely right in his diagnosis and absolutely wrong in his response. Wall Street hates "capitalism" - Geithner and Summers acted to save, rather than exorcize, its corrupt doppelgänger.
Geithner and Summers were so wedded to serving the interests of Wall Street - and crony capitalism - that they secretly sabotaged the efforts of progressives (supported in this unusual case by President Obama) to enact a legislative reform of compensation that was (1) legal, (2) economically efficient, (3) essential to restore "capitalism," (4) essential to justice, and (5) politically popular. Obama discovered that he, and more importantly the American people, had been betrayed by Summers and Geithner - and did nothing. His administration died that day when he failed the most elemental test of leadership and integrity.