Will Geithner Face Tough Questions?


As former US Treasury Secretary Timothy Geithner takes a victory lap, placed on a pedestal without difficult questions being asked, former JPMorgan Chase & Co. (NYSE:JPM) executive turned whistleblowing author Larry Doyle says “Tim, lets cut the bull$hit.” The victory lap extends tomorrow as he does a CNBC interview that is billed as “no holds bar,” one can place low on the probability table that issues surrounding including the derivatives warning given by Hank Paulson to his time in the working group with Gary Gensler, who worked on the Brooksley Born project, are not above the table conversation points for business TV.

The debate over 2008 should not focus on the bailout but what matters to the future

Doyle, author on perhaps the most aggressive book on regulatory capture to date, In Bed With Wall Street, notes how Geithner likes to frame the debate from the standpoint of the bailout and not the lack of deterrence or management of the real issues. Framing the issue as a decision between either for or against the bailout focuses on the wrong issues. “I firmly believe that is a false premise and an incorrect reading of the American psyche.”

Bailout is not the issue, lack of reform is problem

The former big bank employee relishing in the feeling one gets from exercising vocal cords without restraint, Doyle supports the Wall Street bailouts, as many who understand market structure begrudgingly agree.

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The bailout was required, but the core issues remain un-addressed, including the big banks at the center of literally every market activity. The big banks have made themselves a cog in a machine – everything goes through the big banks.  If they were to shut down, markets would have shut down, capital flow would have frozen. Everyone knows that.  The issue is holding those responsible for destroying the economy – in a non-transparent environment with improper derivatives holding up a fragile market structure so that it never happens again.  Deterrence that was promised, but never delivered.

Get real Tim Geithner

“Come on, Tim, let’s get real,” Doyle continues.  “Let’s address the unanswered questions, concerns, and anxieties that continue to rile many people in our nation.” He says focusing on the bailout is a false flag.

Taking the issue on step further, there was a root cause of the derivatives implosion, people on the inside were aware of the problem and delivered warnings.  One such warning was documented to have been given by Hank Paulson to the Bush administration.  The warning on one of the most serious issues of the day – faulty derivatives ready to implode the world economy – delivered by a Treasury Secretary would have been issues significant credibility.  This was particularly coming from a Man who, while at Goldman Sachs Group Inc (NYSE:GS), was at the firm just after derivatives were created.  As CEO of Goldman, Paulson had just fought to rid the storied firm of a one Jon Corzine.  In other words, when Paulson delivered a warning on derivatives, let’s just say he was in a position to know.  The question is: what did Geithner do with this warning?

“America is a forgiving crowd,” Doyle noted in his recent blog post, “but only after meaningful accountability and truths are revealed. These virtues and the pursuit thereof are where you and your colleagues both in Washington and on Wall Street have failed America and continue to do so.”

Geithner – History of regulatory capture

Doyle notes Geithner’s tenure is dominated by six major themes.  “The massive regulatory capture of Washington by Wall Street that allowed for real scandal, corruption, and fraud to propagate like never before,” while the same people responsible for the 2008 crash are still in the same positions of power.

Degradation of rule of law

Following hedge fund legend Paul Singer’s on the record comments that Wall Street was “lawless,” Doyle notes “degradation of the rule of law, violation of property rights, and all consuming cronyism has now gained acceptance as ‘business as usual’ in America.”  But then the key is funding the monster.  Without fuel even the most sophisticated cartels can’t operate.  “The flow of funds from Washington that went into the front door of the Wall Street banks and seemingly right out the back door in the form of executive compensation with little to no impact on life on Main Street.”  This occurs on many levels.

The hardest issue to battle is the revolving door that “promotes a system of payoffs and kickbacks between our financial and political elites.”

Whoever created the revolving door strategy should be a hero in the big bank hall of fame, right next to the guy who figured out how to con Washington DC to backstop their risk without charge.  Wall Street’s great at getting welfare from government, they just don’t like to acknowledge their welfare status in public.  But then the most significant benefit of such audacious power is found in Doyle’s final point.  “The fact that not one individual of substance on Wall Street was ever held to account for the control fraud that will forever define this period.”

The $600 trillion problem only got worse after 2008

What Doyle didn’t add is this story isn’t over.  Remember the faulty derivatives structures that blew up in 2008?  The only thing that has really changed is the exposure is near $600 trillion and enough to wipe up the world’s economy seven times over.  Hedge fund household names such as Dalio, Singer, Icahn  Buffett have expressed concern.  People on the inside of the derivatives industry have been warning on the issue since 2010 – the CFTC has had serious discussions of a national security basis in regards to both derivatives and high frequency trading.

The lessons of 2008 have not been learned because those who were sophisticated enough to know broke long standing derivatives management principles.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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