Sunday, September 20, 2009

Banking On Geithner

Part 1 of 2

Last week marked one year after the fall of Lehman Brothers, pundits, newspapers, and financial news programs, both Cable and Network, felt compelled to weigh in on where the economy stands today, compared to where we were then. For whatever it’s worth, I believe we are on the path to recovery, though mixed indicators tell us that we should fasten our seat belts, because there will be bumps in the road. I was surprised to learn that the majority of Americans polled by CNBC believe that we are poised for another collapse. This is actually one of the questions Treasury Secretary, Geithner, was asked in the “ Banking On Geithner” special, among many other tough questions from the audience. After all that we’ve been through as a country, the American people have a need to know. The Treasury secretary was confident in his delivery when he stated that he did not see another collapse of the financial system. He added “It is in our power to prevent it. If we stick to it until we get this economy moving again”.

The past year felt as if the rug was pulled out from under us. With steep declines in pension and mutual funds, the loss of millions of jobs and housing values shifting below their underlying mortgages (often called upside-down mortgage), we have earned the right to be concerned about the future. Millions of hard working Americans believed in the American Dream, only to find that the country narrowly averted a nightmare, the likes of which we have never seen. To quote Timothy Geithner, “The financial system almost fell off a cliff.” I was relieved to hear the words that echoed my sentiments as it was unfolding last year. The “Banking on Geithner” special was aired on September 10th on CNBC, in a Town Hall-type setting, hosted by Erin Burnett and Steve Leisman. There were a litany of questions that were probably never asked but the ones that did make it to the floor were all about security, stability and taxes. They were all worded differently and maybe even sounded more eloquent, but in the underlying issues were the same; security, stability and taxes.

Geithner, who was referred to as the country’s chief financial officer, explained to a captive audience that the country went too long living beyond our means and built up too much leverage, so it will take a while to fix the economy. He went on to explain that we were behind the curve and did not move quickly enough, in response to the issues concerning the government’s over spending, and involvement in the private sector. In other words, the drastic measure that were taken, were necessary. He’s right. It was way too late to completely avoid the inevitable. At the time it was obvious to me and probably others in the financial industry, that the bail outs were desperate “last minute” measures to save the Country from a fate that we cannot even imagine. At this point last year, the country financial system was about to slip into a comma, the bail outs were efforts to keep the economy from flat-lining. The media coverage fostered panic and speculation, while the subsequent press conferences held by the Bush administration appeared to be strategies to improve global perception, and damage control.

Capitalism had spun out of control. Meanwhile, Investment Banks, Commercial Banks, Mortgage companies and Hedge Funds had to have known at least 18-months prior that their housing portfolios, loans, and mortgage backed securities represented high risk transactions. There were other high risk derivative positions that added to the losses. But like gambling addicts they irrationally thought that something, or some event would miraculously turn the losses around and no one would ever know. Further, knowing that they were sitting on billions in losses, how did they justify the distribution of bonuses - not just any bonuses, but multi-million dollar compensation packages to the folks who took excessive risks that amounted to massive losses, and in some cases, the downfall of companies. This is Capitalism at its worst. Greed has become the new four-letter-word. click for part 2

K. Reilly
Cohn-Reilly Report
WSJ:9/18/09, “Bankers Face Sweeping Curbs on Pay”

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