Has Tim Geithner Been Captured by Wall Street?

Gary Weiss has a long profile of Tim Geithner in the June issue of Portfolio, and although he does give Geithner's side of the story, he gives a lot of space to some very harsh criticisms of the New York Fed chief.

In a nutshell, Weiss accuses Geither of having been captured by those he would regulate, and of working for Wall Street rather than Main Street, especially when he helped to orchestrate the acquisition of Bear Stearns by JP Morgan:

It has become something of a Wall Street parlor game to try to figure out why Geithner got as involved as he did in the Bear mess and whether he was had by crafty bankers. Geithner insists that the Bear deal benefited the public and not just the other big banks, who stood to gain from their competitor's going out of business...
Questions linger as to whether Geithner, who's supposed to represent the public interest, ended up with the best possible deal. He's an experienced negotiator, having wrangled with foreign powers during his days at Treasury, but some critics contend that he may have been outmatched by Jamie Dimon, J.P. Morgan's chief executive, and Alan Schwartz, Bear's C.E.O.

"Misgivings about the deal," says Weiss, "are hard to ignore". Maybe so - but I think it's also easy to overstate the case that Geithner should have stood up more to Wall Street.

Weiss does a reasonably good job of laying out the first best defense against such accusations - that the risks of doing nothing were so enormous that Geithner was forced to act. Once you've accepted that, everything else is niggling: did the Fed use too much of its own balance sheet? Could Geithner have designed a different kind of bailout? The answers to those questions are unknowable, and in any case don't change the fact that Geithner averted something which could have been truly disastrous.

But the fact is that the accusations themselves are a little incoherent. In what way could Geithner have been "outmatched" by Alan Schwartz, when he forced Bear Stearns to be sold for a peppercorn, wiping out its executives' enormous equity holdings? If anybody was bailed out, it was Bear's bondholders and its counterparties, not its executives.

And I think it's simply false to say that Bear Stearns' competitors "stood to gain" from Bear going out of business: the collapse of one investment bank is bad news for all of the others, since it forces a 360-degree reevaluation of counterparty risk. Weiss makes great play of the fact that Geithner is heavily influenced by Goldman alumni such as Gerry Corrigan and John Thain (not to mention Hank Paulson) - but the biggest winner in the Bear Stearns deal was Jamie Dimon. And a victorious JP Morgan is a much bigger competitive threat to Goldman Sachs and Merrill Lynch than Bear Stearns ever was.

Weiss is right that the New York Fed is a creature of Wall Street, but that's what it's meant to be. If you want a sense of perspective, and you're worried that Wall Street has too much influence over the Fed, then you should be looking not to Geithner to rectify that state of affairs but rather to Ben Bernanke - a man whose name, tellingly, appears only in passing in Weiss's piece.