Allison Kilkenny: Unreported

Damning Bloomberg Article Reveals Geithner As Incompetent

Posted in Barack Obama, deregulation, Economy, politics by allisonkilkenny on March 1, 2009

Yalman Onaran and Michael McKee, Bloomberg News

timothy_geithner_reutersIt was 2004 and Tim Geithner, president of the Federal Reserve Bank of New York, had a message for the Federal Open Market Committee in Washington. He told his 18 colleagues gathered around the long mahogany table that a clearinghouse was needed to monitor risks in the burgeoning $5 trillion market for credit-default swaps — the over-the-counter derivatives that would later spin out of control and help take down Wall Street.

In a move that may have foreshadowed his role as President Barack Obama’s Treasury secretary, Geithner over the next two years nudged financial firms to voluntarily clear a backlog of swap trades. They stopped short of creating a clearinghouse to bring more transparency to the market.

“Geithner was making noise on reining in derivatives, but he didn’t push hard enough,” says Jane D’Arista, a former economist at the Congressional Budget Office in Washington and a longtime Fed observer. “Maybe he’ll be more forceful now that he’s in a position with real power. But I’m not so sure.”

From his years as a Dartmouth College student and mid-level Treasury official through his stint at the New York Fed, Geithner, 47, has thrived as a backroom negotiator and conciliator. Now, as he struggles to rescue Wall Street from a crisis that happened on his regulatory watch, investors and economists question whether the 75th Treasury secretary can transform himself into a bold leader equal to the challenges ahead.

Wall Street executives have cheered Geithner’s nomination.

Brief Honeymoon

“Treasury Secretary Geithner possesses the intelligence and experience needed to partner with President Obama and his economic team to lead us to a recovery,” says Robert Wolf, head of UBS AG’s Americas unit based in Stamford, Connecticut.

The rookie secretary has already learned that the honeymoon won’t last long. After Geithner presented a $2.5 trillion financial rescue plan on Feb. 10, the Dow Jones Industrials tumbled 4.6 percent because investors found it bereft of details. Geithner also gave no indication that he would act quickly to dismantle the weakest of the banks, a move that Joseph Mason, a former bank regulator who teaches finance at Louisiana State University, says he should take now.

Japan prolonged its credit crunch and recession for almost a decade before it finally nationalized two of its biggest banks, the Long-Term Credit Bank of Japan and Nippon Credit Bank, in 1998.

“The key to all our problems is the zombie banks,” Mason says. “We’re giving them money, which is not going to solve anything. We’re repeating the mistakes of Japan, which wasted a decade by not moving decisively against its zombie banks.”

Henry Morgenthau

No Treasury secretary since Henry Morgenthau, who served from 1934 to ‘45 under President Franklin D. Roosevelt, has faced so many crises at once. After receiving $800 billion in loans, guarantees and capital injections since October, the financial industry is still hunkered down, unwilling or unable to put the wind back into the sails of capitalism. Geithner played a role in shaping the $787 billion stimulus plan, and now he and Lawrence Summers, head of the National Economic Council, must recommend to President Obama whether to give General Motors Corp. and Chrysler LLC an additional $14 billion in loans on top of the $17.4 billion Bush administration bailout or force them into bankruptcy. At the White House, the new Treasury secretary may have to compete for the president’s attention with Summers, his former mentor, and Paul Volcker, who has been clamoring for more power as chairman of the Economic Recovery Advisory Board.

Methodical Style

Geithner’s strengths — his methodical style and bureaucratic savvy — were honed over 21 years in government, as he dealt with crises from Asia to New York.

“He really understands process and decision making and how to advance an agenda,” says Michael Froman, who was former Treasury Secretary Robert Rubin’s chief of staff. “Some people are just better at it than others, not just having the big idea but breaking it down into the several dozen steps that need to make it work. That’s Tim.”

The Treasury secretary’s experience at the New York Fed from 2003 to ‘08 gave him an inside view of Wall Street that will help him choose the best remedies for today’s crisis, says Alex Pollock, resident fellow at the American Enterprise Institute in Washington and a former president of the Chicago Federal Home Loan Bank. “He’s very well qualified,” Pollock says.

‘He’s Not Change’

Keep reading…

(more…)

The Summers Conundrum

Posted in Barack Obama by allisonkilkenny on November 13, 2008

 dr-lawrence-h-summers-82Alternet.org via The Nation

Mark Ames explains why Barack Obama’s possible appointment of Lawrence Summers will be bad news, and deliver inevitable disappointment earlier than expected.

—————–

We all know in the backs of our minds that Barack Obama’s incredible victory will eventually be followed by disappointment. But does it have to come so soon, and hit so hard? The answer will be yes, if Lawrence Summers is named treasury secretary in the president-elect’s cabinet, as many observers believe will be the case. Summers was one of the key architects of our financial crisis — hiring him to fix the economy makes as much sense as appointing Paul Wolfowitz to oversee the Iraq withdrawal. And when you look at the trail of economic destruction Summers left behind in other crisis-stricken countries who sought his advice in the past, then “terror” might be a more appropriate word than “disappointment.”

The conventional wisdom is that Summers is the “centrist” choice — Fareed Zakaria (“I think Summers is an extraordinarily brilliant guy”) and David Gergen (“Larry Summers would be superb at this job”), two titans of centrism, both weighed in Sunday on the Stephanopoulos show in favor of Summers. And yet so far the debate over Summers has been largely confined to two outrageous moments in his career: his 1991 World Bank memo calling Africa “UNDER-polluted,” and his more recent declarations, while serving as president of Harvard, about women’s genetic inferiority in math and science. By themselves, these two incidents might be dismissed as merely provocative in a maverick-moron sort of way, as many of Summers’ supporters argue; but in the context of Summers’s track record, in which he oversaw the destruction of entire economies and covered up cronyism and corruption, his Africa memo and sexist declarations aren’t exceptions but rather part of a disturbing pattern.

From the start, Summers has been on the wrong side of Obama’s supporters. In 1982, while still a graduate student at Harvard, Summers was brought to Washington by his dissertation advisor Martin Feldstein, the supply-side economist, to serve on Ronald Reagan’s Council of Economic Advisors. Those first years in the Reagan administration were crucial in the right-wing war against New Deal regulation of the banking system and financial markets — a war that Reagan’s team won, and that we’re all paying for today. Although Summers eventually identified himself with the Democratic Party — albeit the right wing of that party — nevertheless, as the New York Times‘s Peter T. Kilborn wrote in 1988:

 

He worked for 10 months as a top analyst in President Reagan’s Council of Economic Advisers when his mentor, Martin S. Feldstein, was running it, and his colleagues don’t recall him venting anti-Reagan heresies then ….

 

“One of the ironies of this business is that Summers’s economics are quite close to Feldstein’s,” said William A. Niskanen, who was a member of the Feldstein council.

It’s ironic if you expected Summers to be a liberal Democrat — but par for the course in the context of Summers’s real record. Some fifteen years after Summers’s stint in the Reaganomics war room, he reappears as one of the key villains fighting to suppress the regulatory efforts of a top official, Brooksley Born, who was trying to call attention to the dangers of the unregulated derivatives, such as credit swap defaults, which today are considered the key to the current economic crisis.

But let’s return to the Summers timeline. After his stint in the Reaganomics brain trust, he returned to Harvard to serve as one of the university’s youngest professors. In 1988, he was Michael Dukakis’s chief economic advisor, but when that campaign failed to bring Summers to power, he turned to America’s great rival, the former Soviet Union, to try out his economic experiments. In 1990, Lithuania, a restive Soviet republic seeking independence, hired Summers to advise on that country’s economic transformation. Poor Lithuania had no idea what it got itself into. This was Summers’s first opportunity to tackle a country in economic crisis and put his wunderkind theories into practice. The results were literally suicidal: in 1990, when Summers first arrived, Lithuania’s suicide rate was 26.1 per 100,000 and falling. Just five years after Summers got his hands on Lithuania’s economy, life became so unbearable under the economic transition that the suicide rate nearly doubled to 45.6 per 100,000, worse than any other ex-Soviet republic in transition. In fact, it was the highest suicide rate in the world, suggesting something particularly harsh and brutal about the economic transition in that country as opposed to the others, where suffering and pain were common. Things got so bad that in 1992, after just two years of Summers-nomics, the traumatized Lithuanians voted the communist party back into power, the first East European nation to do so — even though just a year earlier Lithuanians actually died on the streets fighting communism.

Fresh off his success in Lithuania, Summers moved to the World Bank, where he was named the chief economist in 1991, the year he issued his famous let’s-pollute-Africa memo. It was also the year that Summers, and his Harvard protg Andrei Schleifer (who worked with Summers on the Lithuania economic transformation), began their catastrophic “rescue” of Russia’s crisis-ridden economy. It’s a complicated story involving corruption, cronyism and economic devastation. But by the end of the 1990s, Russia’s GDP had collapsed by more than 60 percent, its population was suffering the worst death-to-birth ratio of any industrialized nation in the twentieth century, and the financial markets that Summers and Schleifer helped create had collapsed in what was then the world’s biggest debt default ever. The result was the rise of Vladmir Putin and a national aversion to free markets and anything associated with Western liberalism.

But that’s not all. Summers, through Schleifer, was also tainted with some of that country’s corruption, which resulted in a US Justice Department lawsuit against Schleifer and others. While Schleifer was being paid by US taxpayers to advise the Russians on capital markets in the 1990s, his wife, Nancy Zimmerman, bought and traded Russian equities for a Boston hedge fund she ran — they even used Schleifer’s US taxpayer-funded offices to run Zimmerman’s Moscow-based hedge fund operations.

How close were Larry Summers and Andrei Schleifer? According to former Boston Globe economics correspondent David Warsh, Summers and Schleifer “were among each other’s best friends,” and Summers taught Schleifer “as an undergraduate, sent him on to MIT for his PhD, took him along on an advisory mission to Lithuania in 1990, and in 1991, shepherded his return to Harvard as full professor, where he was regarded, after Martin Feldstein and Summers, as the leader of the next generation.”

In 2000, the Justice Department sought $102 million in damages from Schleifer, one of Schleifer’s Harvard associates and Harvard University in a conflict-of-interest suit resulting from Schleifer’s role as the lead US adviser to Russia’s economic reforms — questioning the way Schleifer and his wife profited from his position. Schleifer’s Harvard team in Moscow was funded by USAID in a no-bid contract, and supported by Summers as soon as he moved into the Treasury Department in 1993. So Schleifer benefited from his relationship with Summers twice: first, by getting a choice contract as the US government’s man in Moscow in the 1990s when Summers was in power in the US government, one that benefited his wife’s hedge fund (earlier this year, Portfolio suggested that the Schleifers’ hedge fundsmade them billionaires ). Then after Schleifer returned to Harvard to face the lawsuit, Summers, now president of Harvard, presided over a controversial settlement that all but let his protg off the hook. Thanks to pressure by Summers, Schleifer kept his chair at Harvard, where he continues to teach today.

Summers’s other favorite man in Russia was Anatoly Chubais — who consistently ranks at the top of Russia’s “ most hated man” polls. Chubais was executor of the Russian government’s privatization program, in which state companies worth tens of billions of dollars were handed over to insiders for a fraction of their worth in blatantly rigged auctions. Summers praised Chubais as a “demigod” and called Chubais and his free-market cohorts “the dream team.” In September 1998, after Russia’s capital markets collapsed, along with billions in US-taxpayer-backed loans, Chubais boasted to a Russian newspaper, “We swindled them.” By “them,” he meant the Western and American aid institutions that funded his reforms.

In light of all of the corruption, cronyism and devastation that have marked his career, Summers’ statements about an under-polluted Africa or intellectually-inferior women no longer seem like provocative eccentricities but part and parcel of the Summers shtick. And now there’s talk that President-elect Obama may hand the keys to national treasury to Summers — meaning that he’ll be in charge of overseeing a trillion-dollar taxpayer bailout of the entire financial industry, a process already rife with conflicts of interest, cronyism and corruption — as detailed by Naomi Klein.

The bailout, as currently implemented, threatens to devastate America’s economy much as Russia’s and Lithuania’s were devastated before. The idea that this is exactly the right time and place to put Larry Summers in charge of our economy’s future is so frightening that it makes the Sarah Palin vice presidential choice seem almost quaint by comparison. Let’s hope the rumors are wrong.

Mark Ames is a contributor to eXiledonline.com. He is the author ofGoing Postal: Rage, Murder, and Rebellion: From Reagan’s Workplaces to Clinton¿s Columbine and Beyond.