Sheila Bair Vs. Tim Geithner: Who Should Wind Down Failed Banks?
The rally stalled today as we tried to absorb how swine flu could be a major headline in a developed nation. As it turned out, bulls took a back seat to bears in general, and to one in particular -- Sheila Bair, chairman of the FDIC.
Bair delivered a speech to the Economic Club of New York where she argued that the FDIC should have expanded powers and authority to close big financial firms. Bair's idea is to impose the costs of failure on investors and creditors. Imagine that -- making the people who got the company into the mess pay the price, instead of putting taxpayers on the hook for the bill.
Bair's direct words and clear thinking have earned her praise throughout this crisis and stand in stark contrast to the mumbo-jumbo uttered by Treasury Secretary Tim Geithner. For months, those of us from within the industry have been scratching our heads, wondering how Geithner got the job in the first place. It wasn't the tax return fiasco, but as one friend asked, "Doesn't everyone know that Geithner is in bed with the industry?"
The first clue was the stock market rally on the day Geithner's name was released by President Obama. The second clue came today in an NYT article that highlighted Geithner's special relationship with the institutions that he was overseeing.
I'm not suggesting that Geithner reaped any monetary benefit from being pals with the brass at Citigroup and Goldman Sachs, but he sure did drink their Kool-Aid. Like Alan Greenspan and Ben Bernanke, Geithner really believed that that risk had been wrung out of the system by the miracle of derivatives. Although in hindsight that sentiment seems laughable and naive, it was often cited by many of the nation's top bankers.
One of my favorite Geithner quotes in the NYT article is from May 15, 2007, when he said that innovations like derivatives had "improved the capacity to measure and manage risk" and that "the larger global financial institutions are generally stronger in terms of capital relative to risk."
So ask yourself one final question before you buy your anti-swine flu masks and protective gear: who do you want to manage the process of winding down failed financial institutions, Sheila Bair or Tim Geithner? I bet you can guess where my vote is going.
