01/15/2009 09:29 am ET Updated May 25, 2011

Forget Social Security Taxes: Timothy Geithner, Robert Rubin and Citigroup

The traditional press has ample capacity to obsess about stupid things but very little capacity to dig deep (yes, I know, I'm stating the obvious). Today's example: Timothy Geithner. Yes, the guy messed up and, I'm going to take his word for it, forgot to pay some social security taxes. But, the real question is: what role did he play in the mess that we now know as Citigroup?

Yesterday, ProPublica had a piece written by Jeff Gerth entitled "How Citigroup Unraveled Under Geithner's Watch", which I think asks some very important questions (and has, as far as I can tell, been virtually ignored by the traditional media):

As president of the New York Federal Reserve Bank, Timothy Geithner often preached that gargantuan financial firms like Citigroup should be held to the highest regulatory standards to make sure they couldn't take on too much risk.

But when it came to supervising Citigroup in recent years, the record shows that the New York Fed eased the reins as the company blew billions on subprime mortgages and other risky deals that ultimately forced the biggest bank rescue in U.S. history. [emphasis added]


The New York Fed's supervisory unit reports directly to the bank president, Geithner. The unit's job is to ensure that firms manage risk and have enough capital to cushion against losses. Large companies tend to be held to more stringent capital standards.

Yet poor risk management and weak capital levels were central to Citigroup's undoing. One enforcement agreement in place before Geithner took office in 2003 - an order requiring quarterly risk reports - was lifted during his watch. A ban on major acquisitions also was eliminated a year after it had been imposed in 2005.

Afterward, in 2006 and 2007, Citigroup aggressively expanded into the subprime mortgage business and bought a hedge fund and Japanese brokerage, among other assets.

A year later, as the global financial crisis took hold, Citigroup took losses and writedowns of more than $50 billion. The New York Fed brought no public enforcement case, although examiners privately sent a critical letter to the company in the first half of 2008.

Compared with its peers, Citigroup had a thinner capital cushion and relied more heavily on less-desirable types of capital, records show. The New York Fed knew - in 2007 it allowed Citigroup to count as capital securities that some regulators and credit agencies frown upon or discount.

One reason we, the taxpayers, are on the hook for tens of billions of dollars to rescue CitiGroup and one reason the bank's shareholders may now take a bath as Citigroup seeks to split into two parts (the bank's shares sank $1.37 yesterday, to $4.53, dropping below $5 for the first time since the late Fall) is that people like Geithner may have been asleep at the wheel and, worse, may have exacerbated the situation.

Not surprisingly, Geithner is a protege of Robert Rubin, having worked under Rubin at the Treasury Department in the 1990s. Rubin was a central advocate for debt-driven growth and de-regulation that got us into the mess we are in. For many years, you may recall, Rubin walked around Washington and the financial world like a god, his every word taken as the gospel. Almost the same words that were used about Rubin are now being used about Geithner: calm, intelligent, low ego, a team player.

All that is fine and good: I'm not questioning those characteristics.

But, what we need is SOUND JUDGMENT. Rubin judgment was dead wrong--and, rather than take responsibility as a leading architect in the mess we find ourselves in, he has either lied or simply been too cowardly to admit he was dead wrong, choosing instead to slip quietly (or, perhaps, he was pushed) from Citigroup at the very moment of crisis for the bank (how would you like to have Rubin in a foxhole in the heat of battle?).

Part of the problem is not venality (though greed is a strong motivating force). It's about group think and being part of the elite financial club. It's the conversations and requests that happen in private that contradict the grand public statements. The conversations that go something like: "look, cut us a little slack, we're in good shape, what we're doing will work out okay even if it's not totally up to regulatory standards".

The questions I think we need asked and answered are partly about the past but, more important, about the future. Can Geithner admit that he erred as head of the New York Fed in failing to exercise proper oversight over Citigroup? And, more important, what will happen in the future as we grapple with the effects of the financial crisis that will likely stretch well into a second Obama term and even beyond? How tough will Geithner be on the financial leaders and institutions? Beyond the grand public statements of a new toughness, what will Geithner do when confronted with the next new wave--and, believe me, it will happen as sure as the savings and loan crisis exploded in the 1980s--of madness driven by a group of people who are sure they can ride a bubble and defy the laws of sane economics. What will he do when asked to look the other way or cut a major financial institutions some slack?

I guess I have to say that, if you were trained at the school of the Robert Rubin way of doing things, there is a legitimate cause for worry.