5 Powerful Men Who Were Catastrophically Wrong About the Economy—But Reaped Rewards Anyway

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2. Tim Geithner. We all remember Geithner’s tenure as Treasury Secretary. He ignored repeated warnings about unemployment, and as a result he presided over the longest and deepest jobs depression in many decades. His stewardship of the TARP bailout program was so lax that, as the US Inspector General  reported, bankers were allowed to receive bonuses so large they were apparently illegal.

And who could forget his lordly pronouncements of Wall Street innocence, even as his own staff was hurriedly cutting deals to immunize bankers from criminal prosecution for their widespread fraud?

The long-term unemployed and impoverished Americans, whose numbers remain at record highs after four years of Secretary Geithner, need no help remembering his failure to revive the economy while in a position of power. Nor do the homeowners who were cruelly manipulated by fraudulent “extend and pretend” programs, thanks to Geithner’s HAMP program, which allowed banks to “pretend” they would modify a homeowner’s mortgage so they could collect payments for another year or two – that’s the “extend” part – before foreclosing on them anyway.

That process included numerous examples of bank fraud, both toward homeowners and local authorities, which was committed to permit bank foreclosures. Although that eventually led to a $25 billion fraud settlement, no bankers were indicted – or even lost their jobs—during the Geithner years or since.

But to understand how economics rewards the mistaken we need to go further back in history, to the time before Geithner became Secretary of the Treasury. Before taking that position, Geithner was head of the New York Federal Reserve Bank. Since Wall Street was in his region, that made Geithner the second-most important official in the entire Fed. How was his record there?

For starters, recent reports showed that Geithner was aware of the LIBOR scandal, in which bankers manipulated critical figures in order to rook borrowers such as municipalities, all the way back at the end of 2007. Banks routinely the figures they provided to the agency which uses them to set interbank lending rates, which affects roughly $350 trillion in derivatives. These numbers influence municipal bond rates, among many other things, costing cities as much as  $6 billion.

As finance professor Andrew Lo said, “This dwarfs by orders of magnitude any financial scam in the history of markets.” And yet when he learned of it, Geither did nothing more than send the agency a letter with some recommendations—a letter which had been written, not by his Fed staff, but  by the banks themselves. There’s no sign he followed up while he was Secretary of the Treasury. He certainly never told the American people about it.

Geithner’s role at the New York Fed makes his inaction on mortgage fraud especially inexcusable.  William K. Black Jr. has documented the overwhelming mass of warnings provided to the Fed, which included:

• A petition signed by 11,000 honest appraisers which warned the Fed that lenders were “blacklisting honest appraisers” and sending business to ones that would give them the inflated valuations they wanted;
• Public warnings from the FBI, back in 2004, that an “epidemic” of mortgage fraud was underway and could create a financial “crisis.” (The cop on the beat was a better economic forecaster than either Summers or Geithner.)
• Statements from state prosecutors warning of fraud.

Other warnings came from trade groups, borrower representatives and from within the mortgage industry itself. But then, anyone who understands basic finance should have seen that fraud was being lavishly rewarded and honesty was being financially punished.

Our future Treasury Secretary didn’t see it coming. From a Federal Reserve meeting transcript dated January 2007: “How strong does the economy look outside autos and housing? Pretty strong, it seems. We see no troubling signs of weakness …”