Treasury Secretary Timothy Geithner’s admission on Wednesday that he failed to blow the whistle on the Libor scandal and former Citigroup chairman Sandy Weill’s call to break up the banking behemoths seem at first blush to have little in common.
But they are, in fact, two sides of the same coin.
Weill admitted on CNBC’s Squawkbox that the 1999 repeal of the depression-era ban on combining lending banks with investment banks failed by creating institutions that are too big to manage and too big to fail.
“What we should probably do is go and split up investment banking from banking,” Weill said in televised comments that ricocheted around financial markets and the Internet throughout the day. Weill was one of the original gravediggers for Glass-Steagall when he engineered the merger of Citibank and Traveler’s Insurance in 1998.
“Have banks be deposit takers, have banks make commercial loans and real estate loans,” he said. “And have banks do something that is not going to risk the taxpayer dollars, that’s not going to be too big to fail.”
As members of the House Financial Services committee were digesting that bombshell, they turned their attention togrilling Geithner on the same question that had been aimed at Federal Reserve Board chairman Ben Bernanke last week. What did he know at the New York Fed in 2008 and when did he know about the interest-rate rigging that took place among some of the 15 banks (including three from the U.S.) that self-report their interbank lending rates to the British Bankers Association.
Banks that had become too big to manage and too big to fail had also become too big to regulate at the micro-economic level.
Members from both political parties wanted to know why Geithner never demanded the Department of Justice launch an immediate investigation or cancel its own borrowings based on Libor, the acronym for the London Interbank Offered Rate. Geithner repeatedly answered: We told the BBA and we told the regulators on both sides of the Atlantic, including their investigative arms.
And then, he said, the Federal Reserve Board and Treasury went about their main business at the time – rescuing a banking system that was collapsing from lending and derivatives practices that had nothing to do with Libor.
In other words, regulating the banks – being the cop on the beat, so to speak – played second fiddle to the macro-economic need to preserve the financial system in the midst of a crisis. Banks that had become too big to manage and too big to fail had also become too big to regulate at the micro-economic level.
“I did not” inform the Department of Justice about possible criminal wrongdoing, Geithner said in response to a direct question from retiring Rep. Brad Miller, D-N.C. Instead, Geithner wrote a detailed memo to the British banking authorities on how to improve the reporting system to avoid rate-rigging.
“You used it as something akin to jaywalking rather than highway robbery,” fumed Rep. Jeb Hensarling, R-Tex. “Never once did you come before this committee during the Dodd-Frank discussions” to discuss the Libor issue, said Scott Garrett, R-N.J. “Now it comes out that it’s the crime of the century and you did nothing about it.”