More Attempted Revisionism Out Of Washington
Is there any wonder as to why Washington has a huge credibility problem, especially when it comes to the ongoing financial crisis?
It seems as if there’s no end to the rubbish being spoon-fed to the American public these days in an attempt to revise what really took place.
First, there was Dick Cheney. From Deb Riechmann of the Associated Press back on January 8:
Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming.
During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration’s performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that “nobody anywhere was smart enough to figure it out.”
Don’t get me started.
Then, there’s Vice President Joe Biden, who said on ABC’s “This Week” last Sunday:
The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures in most of the blue chip indexes out there… No one was talking about that we would be moving towards – we’re worried about 10.5 percent, it will be 9.5 percent at this point… We’re much too high.
Hiding among the masses is one of the oldest tricks in the book when it comes to trying to avoid responsibility for one’s statements or actions.
And, now, there’s Timothy Geithner, the nation’s Treasury Secretary. From the Associated Press’ Anne Flaherty this morning:
The huge amount of money tied up in complex derivative transactions helped cripple the economy, Treasury Secretary Timothy Geithner told lawmakers Friday as he laid out a case for greater government control over a generally unregulated sector of the financial markets.
“Establishing a comprehensive framework of oversight is crucial,” Geithner said in his opening remarks to a joint hearing by the House agriculture and financial services committees…
Geithner said the ease with which derivatives were bought and sold in an era of easy credit encouraged financial institutions and investors to take on too much risk. At the same time, government regulators weren’t given the proper tools to mitigate those risks and protect the American consumer, he said.
“The complexity of the instruments overwhelmed the checks and balances of risk management and supervision,” he said.
Say what?
Robert O’Harrow, Jr., of the Washington Post and Jeff Gerth from ProPublica, an independent, non-profit newsroom that produces investigative journalism in the public interest, collaborated on an article which appeared in the Post back on April 3. What they wrote contradicts the statements that Secretary Geithner made this morning:
In September 2005, Timothy Geithner made one of his most visible moves as a supervisor of the U.S. banking system. He summoned the nation’s top financial firms and their regulators to streamline an antiquated system that threatened Wall Street’s boom.
Billions of dollars worth of financial instruments known as credit derivatives were being traded daily, as banks and investors worldwide tried to protect against losses on increasingly complex and risky financial bets. But the buying and selling of these exotic instruments was stuck in a pencil-and-paper era. Geithner, then head of the Federal Reserve Bank of New York, pressed 14 major financial firms to build an electronic network that would cut backlogs and make the market easier to monitor.
Geithner’s summit, held at the New York Fed’s fortress-like headquarters near Wall Street, was a success. By fall 2006, the new system had all but eliminated the logjam, helping derivatives trade more efficiently. One financial industry newsletter honored Geithner as part of a “Dream Team” for his leadership of the effort.
Yet as Geithner and the New York Fed worked to solve narrow mechanical issues in the derivatives market, they missed clear signs of a catastrophe in the making.
When the housing market collapsed, derivatives stoked the fires that ignited inside some of the biggest banking companies. The firms’ failure to assess an array of risks they were taking has emerged as a key element in the multi-trillion dollar meltdown of the global financial system.
Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued [1]. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.
A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the “intuition” of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office [2] (PDF). The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews.
Let’s breakdown the Treasury Secretary’s statements.
First off, there was no secret to the dangers posed by derivatives. From my post back on June 13, 2007:
Richard Bookstaber, a risk manager and derivatives designer, played a role in the 1987 Wall Street crash and 1998 LTCM collapse. In his new book, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, he says, “The financial markets that we have constructed have become so complex. And the speed of transactions so fast that apparently isolated actions and even minor events can have catastrophic consequences.” In the Wall Street Journal on May 18, Bookstaber warned, “The odds are pretty high that we’ll see other dislocations that match the type of turmoil we saw with the crash in 1987 and with the LTCM crisis… Any one derivative, with some exceptions, may be easy to track. But by the time you layer a lot of them one on top of the other, it becomes increasingly complex, so a small, unexpected event can propagate in surprising and nonlinear ways — and there’s no way to anticipate all these possible events.”
Peter Bernstein, a Wall Street legend who encouraged Bookstaber to write his book, is also deeply worried about the threat posed by derivatives. Bernstein, author of the just-released Capital Ideas Evolving and 1992’s Capital Ideas, fears derivatives because of the number of inexperienced investors (speculators) utilizing them. [Paul] Farrell adds, “Meanwhile, the irrational exuberance of all the inexperienced masses continues blowing the bubble while ‘playing’ with $370 trillion in derivatives worldwide.”
By the way, isn’t it ironic that Geithner’s streamlining of the derivatives traction process might have made the crisis even worse, if what Bookstaber said about the speed of transactions is true?
Second, concerning the Treasury Secretary’s statement that “the complexity of the instruments overwhelmed the checks and balances of risk management and supervision,” Geithner played a major role in supposedly making the derivatives market easier to monitor when he spearheaded the upgrade of the trading process. From what Gerth and O’Harrow wrote, it sounds like Mr. Geithner and the regulators still completely missed out on the threat posed by this financial weapon of mass destruction. While it doesn’t help that “banking companies could not properly assess their exposure to a severe economic downturn and were relying on the ‘intuition’ of banking executives rather than hard quantitative analysis,” if the monitoring process is at fault, then by extension shouldn’t Geithner be blamed as well?
Finally, what about that other statement- “At the same time, government regulators weren’t given the proper tools to mitigate those risks and protect the American consumer.” Well, if you believe what was written in that collaborative Washington Post piece:
Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued… The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews.
Then, it’s not that the regulators had inadequate tools. It’s just that the regulators never used them.
God forbid they might have pulled the punch bowl away before the party had officially ended.
Hope everyone enjoys the hangover.
Sources:
“Geithner says derivatives blindsided the gov’t”
Anne Flaherty
Associated Press, July 10, 2009
“As Crisis Loomed, Geithner Pressed But Fell Short”
Jeff Gerth, Robert O’Harrow, Jr.
Washington Post, April 3, 2009
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