Geithnerism: Institutionalizing “Too Big To Fail” – A Favor To Mega-Banks


Treasury Secretary Tim Geithner testified before Congress yesterday on a new regulatory system for financial institutions. The immediate motivation for this was to capitalize on the uproar over the AIG bonuses. Since the government couldn’t legally claw back those “Stimulus Package approved” bonuses, the Obama administration wanted to assure voters they were “concerned” over their faux impotence so Geithner was trotted out with a this new regulatory scheme.

“Systemic Risk” – Geithner’s Fear Mongering Watch Word

Geithner’s use of the danger-filled word “systemic risk” is designed to scare the American public to institute the widest sweeping power shift to the same people and business sectors that started the financial meltdown in the first place.

Using fearful rhetoric like “Axis of Evil” lines the pockets of defense contractors in the foreign policy world. The same thing goes in the domestic policy world. Use words like “systemic risk” or “too big to fail” are rallying cries that line the pockets of the mega-banks and Wall Street firms.

With that said, let’s look at Geithner’s testimony, (emphasis added to show you what I mean)

“To ensure appropriate focus and accountability for financial stability we need to establish a single entity with responsibility for consolidated supervision of systemically important firms and for systemically important payment and settlement systems and activities.

. . . [W]e must create higher standards for all systemically important financial firms regardless of whether they own a depository institution, to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms, sets objectives and principles for their oversight, and assigns responsibility for regulating these firms.

In identifying systemically important firms, we believe that the characteristics to be considered should include: the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, and the importance of the firm as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.”

First we can see the over-riding points in this statement. Points we simply take as undeniable truths from Mr. Geithner.

1. There is systemic risk in the system now that must be addressed by regulators that have yet been created.

2. There are “systemically important firms” that need to be regulated.

I don’t disagree there are mega-banks and Wall Street firms that through unchecked expansion and stupid investments created a “systemic risk”. That part we know. We have all heard about how AIG, Fannie Mae, Freddie Mac, and about 9 of the largest banks got the bulk of the $750 Billion in TARP bailout funds. We also learned after the AIG bonus story broke that AIG passed on a lot of their bailout money to foreign investment banks and other investment firms. These other firms are called “counter-parties” and like it or not, AIG owed them.

It’s this “interconnectedness” that creates systemically important firms and brings system risk to the party.

This all seems to clear to me that the way to kill the “systemic risk” is to kill the “systemically important firms”…not institutionalize them with a regulator. I don’t care how good of a regulator it is. (Speaking of regulators…how good at spotting and stopping this crisis was the FDIC, the SEC, the OTS, OFHEO, or the FED just to name a few of the current regulators whose job it was to do just that? I could rest my argument right there! But you know I won’t…)

This country was built on entrepreneurship and on the backs of small businesses…not from creating small business crushing “too big to fail” businesses. If we want to turn this country and it’s banking system around we must not allow “Geithnerism” to take control of our country.

Today the President met with the top bankers and many of them wanted to give back their TARP money. They told the President, they were doing fine now. We learned in the markets this week, once mega-banks have decimated their competition (smaller, regional banks and mortgage brokers) they can rake in billions in profits in a single quarter. Plus I’m sure they don’t want their bonuses disrupted either.

Raising a rally call of fear then creating a smoke screen of “regulation” diverts our attention away from the real solution.

Entreprenurism – Not Geithnerism – Is The Solution

Entreprenuerism in the form of competition from a lot of smaller local banks taking in deposits and lending money in their own communities is the real solution. Let the smaller banks get back to banking. Let the “mom and pop” mortgage brokers go back to originating mortgages. If you want to invest money, you know where Wall Street is, but keep them and their stupid “innovative products” away from Main Street.

Paul Krugman, who I never quote until now, said it this way,

“Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.”

You want to take “systemic risk” out of banking?

We already know how. We’ve been there before.

We have current day examples too. Ask yourself,

“Where is the list of credit union failures?”

Okay, now I’m done.

See ya next week!

About Author

Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog,, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.

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