Geithner: Ending Too Big to Fail Not Just ‘Quixotic,’ But Actually ‘Misguided’

by Patrick Brennan

The New York Times Magazine has a profile this weekend of Timothy Geithner, the former Obama Treasury secretary and former head of the New York Fed who just released his memoir. Geithner, at the Fed and Treasury, was a key figure in the implementation of the Wall Street bailouts of 2008, and then in the White House’s constructing the case for how they would prevent it from ever happening again.

So it’s interesting to hear him say . . . we shouldn’t be trying too hard to make sure the government never has to take over a huge part of the economy again in order to avoid bank runs and a deep global depression. And it’s even more interesting that he basically claimed the opposite when making the case for the Dodd-Frank financial-reform bill — he claimed it ended too-big-to-fail, he knows it didn’t, and he’s happy about that. Andrew Ross Sorkin writes:

For much of the past five years, Geithner has publicly been fighting with the idea of too-big-to-fail, which implies that executives at the top banks were willing to take on remarkable risks because they knew that the government would ultimately bail them out, given the devastation their collapse would bring. Geithner and Obama marketed the Dodd-Frank bill as a way to end future bailouts. In 2010, right before the bill passed, Geithner said, “The reforms will end too-big-to-fail.” Obama went further: “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts, period.”

But it is now clear that Geithner never believed his own talking points. To him, too-big-to-fail and the so-called moral hazard, or safety net, that it would create can’t really ever be fully taken away. During his lecture to Summers’s class, one student asked a question about “resolution authority,” a provision of the reform laws that is supposed to let the government wind down a complex financial institution without creating a domino effect. The question prompted Geithner onto a tangent about too-big-to-fail. “Does it still exist?” he said. “Yeah, of course it does.” Ending too-big-to-fail was “like Moby-Dick for economists or regulators. It’s not just quixotic, it’s misguided.”

Now, Geithner’s position isn’t indefensible: His argument is that the federal government should be a backstop for banks in the event of a 100-year flood, so to speak, and there’s not even any way to prevent it from being so. It’s interesting, though, that he was aware of this when he had to tell the American people something different.