As crisis loomed, Geithner ignored warning signs

Timothy Geithner, President Barack Obama’s embattled Treasury Secretary, ignored warning signs of the impending banking and economic crisis because he, as head of the Federal Reserve Bank of New York, was too close to the industry he was supposed to regulate.

Others saw it coming and the warning signs were there but Geithner missed the signs and ignored the warnings of others.

The collapse of the housing market sent out early warnings but they were lost in Geithner’s moves to streamline the banking system to allow Wall Street to make money faster and bypass safeguards that would spot problems.

As the house of cards began to fall apart, those still getting rich honored Geithner and the Fed as a "Dream Team" of financial wizards. In reality, the wizards accelerated America’s plunge into a national economic nightmare.

Then incoming President Obama picked Geithner as the man to get this nation out of the economic chaos he helped create.

Reports The Washington Post:

In September 2005, Timothy Geithner made one of his most visible moves as a supervisor of the U.S. banking system. He summoned the nation’s top financial firms and their regulators to streamline an antiquated system that threatened Wall Street’s boom.

Billions of dollars worth of financial instruments known as credit derivatives were being traded daily, as banks and investors worldwide tried to protect against losses on increasingly complex and risky financial bets. But the buying and selling of these exotic instruments was stuck in a pencil-and-paper era. Geithner, then head of the Federal Reserve Bank of New York, pressed 14 major financial firms to build an electronic network that would cut backlogs and make the market easier to monitor.

Geithner’s summit, held at the New York Fed’s fortress-like headquarters near Wall Street, was a success. By fall 2006, the new system had all but eliminated the logjam, helping derivatives trade more efficiently. One financial industry newsletter honored Geithner as part of a "Dream Team" for his leadership of the effort.

Yet as Geithner and the New York Fed worked to solve narrow mechanical issues in the derivatives market, they missed clear signs of a catastrophe in the making. When the housing market collapsed, derivatives stoked the fires that ignited inside some of the biggest banking companies. The firms’ failure to assess an array of risks they were taking has emerged as a key element in the multitrillion-dollar meltdown of the global financial system.

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.

A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office. The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews