Citigroup: Where Was Geithner?

The toughest question for Tim Geithner, at his confirmation hearing, will be something along these lines: "The single most important job of the president of the New York Fed is to prevent the collapse of a systemically-important bank. No bank is more systemically important than Citigroup, which you regulated both before and during the financial crisis. Today, Citigroup has (all but) collapsed. Are you looking to become Treasury Secretary only after failing to do your job as president of the New York Fed?"

I hope that question is asked, and I genuinely look forward to Geithner’s reply. And maybe lawmakers will be prompted to ask the question after reading Jeff Gerth’s 2500-word attempted indictment of Geithner over at ProPublica.

There is a problem with Gerth’s piece: he is altogether too specific, and tries to point to individual decisions that Geithner did or didn’t make, and that weakens his case. Consider this line of argument, for instance:

After the head of bank supervision for the NY Fed wrote Citigroup indicating the company had made "significant progress" in managing risk, the pause on acquisitions was lifted in April 2006…

Then the nation’s largest banking company, Citigroup also began buying other financial firms. "They became very aggressive on the acquisition front, with a whole flurry of deals," said Joseph Scott, a senior director at the credit agency Fitch Ratings.

These deals pumped up Citigroup’s balance sheet. Assets went from $1.2 trillion at the end of 2003 to $2.3 trillion by September 2007.

I can’t remember any Citigroup acquisitions between April 2006 and September 2007 which significantly "pumped up Citigroup’s balance sheet". It wasn’t the Fed taking its foot off the brakes which caused that big increase, it was Citigroup giving in to pressure from both the markets and regulators to take its off-balance-sheet SIV exposures onto its own balance sheet.

Gerth also implies that Geithner was being hypocritical when he called in public for banks to boost their capital in mid-2008, but didn’t force that action on Citigroup; he even hints that Geithner might have been particularly lenient on Citi because of the presence there of his former boss, Bob Rubin. But as Andrew Leonard points out, the charges of hypocrisy don’t really stand up to scrutiny.

None of this, however, should detract from the fact that Gerth really has put his finger on the most important issue surrounding the confirmation of Geithner as Treasury secretary. Geithner will be in charge of creating a new regulatory superstructure which is capable of stopping major collapses like that of Citigroup. If he can persuade Congress in a clear-eyed manner that he’s acutely aware of what his limitations were over the past few years, then he might indeed be the perfect person for the job. But if he vacillates or tries to duck responsibility, that will be an ominous sign.