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Elliott Morss | July 25, 2014

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Bloggers at the Treasury – What Can We Learn?

Introduction

As part of its public info/transparency policy, the Treasury Department invites financial bloggers for meetings with senior Treasury officials 4-6 times a year. A good idea. And as a blogger, I have considerable respect for the bloggers invited. Whatever their views, being invited means the Treasury believes they have a significant following and their opinions matter. One of the bloggers invited to a recent such meeting was John Lounsbury. And John just reported on it. Using John’s report as a backdrop, this piece will comment on some of the issues raised (or not raised) at that meeting.

Confrontational Questions

John reports: A number of guests raised confrontational topics….

It occurs to me there are some confrontational questions that can and should be raised while there are others that would sour the event. I will offer examples of each.

  1. Appropriate Questions

I would put the following questions to Secretary Geithner about actions taken by the Federal Reserve Bank of New York (FRBNY) at the time he was President.

Secretary Geithner:

  1. In the government’s first meeting with AIG to plan the bailout, do you think it was appropriate to have the CEO of Goldman at the meeting, the only outside party? Whose idea was that?
  2. It was widely reported that AIG executives were willing to negotiate the firms they owed money to down to 60 cents on the dollar. Instead, the government insisted that AIG pay 100 cents on the dollar. That decision cost $37 billion. Whose decision was it, and what was the rationale?
  3. The government then instructed AIG not to release the names of who got paid. The names finally came out when Jeffrey P. Riedler, Assistant Director of the SEC, send a letter to AIG requesting the details on who got paid. Who made the decision to withhold the names, and what was the rationale for it?

2. Inappropriate Questions

It would not have been appropriate to ask Geithner about the following report that appeared in the Washington Post at the time of his appointment:

Over several years, Treasury secretary nominee Timothy F. Geithner failed to pay Social Security taxes, even though he was advised by his employer to do so, signed an agreement indicating that he understood that such payments were his responsibility and received extra pay from his employer specifically for that purpose.

Mr. Geithner “came clean” only when he was caught, first by an IRS audit that found he owed Social Security taxes for 2003 and 2004 and then when additional tax liabilities for 2001 and 2002 were discovered after his nomination. He has been praised for repaying these additional taxes for the earlier years, which apparently may not have been required under a statute of limitations, but this raises another question: Why didn’t he voluntarily correct his 2001 and 2002 taxes once he found out that he had made the same error in 2003 and 2004?”

This is a clean cut issue: Geithner cheated on his taxes, like former VP Agnew. What point would there be in bringing it up again?

Financial Reform

Lounsbury reports that Treasury was very enthusiastic about the new Dodd-Frank Financial Reform Bill recently passed into law. Why? Depository institutions are still allowed to trade, and it was their trading that caused the bank collapse in the first place. And here is the killer: the bill calls for federal financial regulators to study the measure, and then issue rules implementing it based on the results of that study. The financial lobbyists will be all over the financial regulators. Binyamin Appelbaum wrote a great article in the New York Times on what will happen next. I quote from his article:

…Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion….

Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group’s president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group’s budget and staff. “Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,” said Mr. Hunt….

One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too.

A question for Geithner: What happened to the Volcker Rule to ban trading in depository institutions? I can hear Geithner’s response now: “well, while trading was not banned completely, with our new regs in place….”

Too Big To Fail

Lounsbury was not satisfied with the discussion on this topic:

The sense I took away from this part of the discussion was that much depends on (potentially hundreds of) studies authorized by FinReg. The Treasury is charged with forming an Office of Financial Research to conduct research to guide future regulation implementation. This really translates to me that we are still in the process of conducting a Grand Experiment.

The Appelbaum points made above are relevant here as well. The lobbyists will be ready.

My view of too big to fail? A red herring issue. In the financial world, all we should care about is keeping our depository institutions safe. If we did that by not allowing them to trade and insisting that they manage their own loans, they would be safe. The only reason we had to bail out AIG was that our depository institutions would have collapsed if AIG went under. With Volcker’s rule in place, depository institutions would be safe. Let other financial institutions go under. Who cares? Caveat Emptor.

Conclusion

Despite the above commentary, I think it is great that the Treasury is meeting with bloggers. And I tip my cap to the bloggers who get invitations to the meetings.

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