Tuesday, 24 April 2018

Is Geithner planning to hang his hat at 399 Park Ave?

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So Timothy Geithner has made up his mind to relinquish his position as US Treasury Secretary, thereby ducking out of what are going to be painful debt ceiling negotiations. In the circumstances, who can blame him? He’s been through it once; I can understand why he wouldn’t want to go through it a second time.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

The talk is that he’s wangled himself a spot as chairman of Citigroup, taking over from hard man Michael O’Neill. This does set any number of alarm bells ringing: Sheila Bair, Dick Parsons, decorum and conflict of interest are just some of the sensitive touch points.

But before I get there, I’ve got to say: O’Neill sure is an operator. He carried out his hits on Vikram Pandit and John Havens with patience, stealth and amazing dexterity (but with a degree of ruthlessness that has shocked many); engineered his man Mike Corbat into the corner office; and got his way on a huge cull of staff, branches and businesses – all neatly wrapped into the plan he got Corbat to deliver weeks after taking over as CEO.

To be clear, I reckon much of what O’Neill executed was probably along the right lines. Pandit had tripped up time after time again. The rejection by regulators of his dividend and share buyback plan; the US$4.7bn write-down from the sale of Morgan Stanley Smith Barney; the stress-test failure; and a truly dreadful share price performance had eroded his credibility with the board, some of whom had anyway always seen him as an investment banking/hedge fund guy without the skills to run Citigroup.

But if you buy the narrative, forcing Pandit to walk the plank had been O’Neill’s principal objective after taking over the chairmanship from Dick Parsons in April 2012, after which time friction between the two had become palpable.

It’s clear that O’Neill is pulling the strings at Citi. Now he’s achieved his objectives – including maybe getting his own high-profile successor – Geithner – in the frame he’ll perhaps be able to take on something less stressful. O’Neill famously quit as CEO of Barclays on his first day in office back in 1999 due to ill-health. Even though he’s only in his mid-60s, questions about his health have continued to follow him around.

Dream team?

And so to Geithner. With Pandit out of the way, the idea is that he joins Corbat in a dream partnership: Corbat with the strong operational skills and banking expertise; Geithner with intimate knowledge of the government and regulatory back-channels in Washington and an almost matchless contact book that contains heads of state, finance ministers, central bank governors and regulators the world over. Not only could this work well; it also speaks perfectly to the separation of CEO and chairman roles from the perspective of good governance and smart division of labour

But it’s not as simple as that – is it ever? Looked at from a different perspective, notions of good governance may – arguably should – nobble the plan. Why? Because ever since the onset of the financial crisis, Citigroup has been a major political football and Geithner one of the principal playmakers.

He’s actually been in Citigroup’s sights for years. Sandy Weill had apparently approached him to take over as CEO after Chuck Prince was fired in November 2007 following massive sub-prime mortgage write-downs. He declined Weill’s advances then, which was a good shout because within months – first from his vantage-point as president of the New York Fed and a year later as President Obama’s first Treasury Secretary – he was watching Citi collapse in critical meltdown as the financial crisis ravaged the world’s financial sector. The bank’s very future had been in doubt.

What happened at that time and since is why Geithner would be well advised to stay clear of Citigroup now. He worked very closely with Hank Paulson on the design of TARP and was instrumental in signing off on bailout allocations under the programme. Citigroup was a massive recipient – US$45bn – of state aid, which immediately creates conflicts of interest for Geithner.

And then there’s Sheila Bair. The head of the FDIC at the time of the financial crisis is scathing about Geithner’s close relationship with Citigroup and Vikram Pandit. She has lambasted him for refusing to oust Pandit in early 2009 as the wrong man to lead Citi through the crisis owing to his lack of commercial banking experience, and has accused him of failing in his duty to do what she thought was the right thing out of what she sees as ill-placed deference to his mentor Bob Rubin, who had been instrumental in putting Pandit into the CEO’s office.

Who knows, maybe the lure of a Wall Street salary – even in these compensation-strained times – may be a big enough pull… Over to you, Timmy.

In interviews around – ahem ahem – the launch of her book she said: “[Geithner] was in constant communication with Vikram Pandit throughout that whole process, and I felt like he and Vikram were figuring out what they were going to do and then trying to jam it on me … I do think that a lot of the policy decisions that were made were made through the prism of what Citigroup needed.” Bair added that most big banks did not need TARP money but the government forced it on them partly because Citigroup needed it.

She says in her book that Geithner wanted to shield the bank from the FDIC rather than protect taxpayers from potential losses at Citigroup and that he subordinated the interests of government and homeowners to those of private shareholders. Those are pretty toxic accusations. Whether or not they’re true, if Geithner were to join Citi, he’ll be savaged by cushy-jobs-for-bailout-favours and pro-Wall Street anti-PR.

Former Citigroup chairman Dick Parsons didn’t do Geithner any favours, either. In the fascinating and by-now famous profile of Parsons in Businessweek, Parsons refers to Geithner as Timmy:

“Timmy Geithner would say: ’Call me directly, because this is too important an institution to go down’” Parsons is quoted as saying in the article.

That chumminess seriously (but at the same time in so some ways hilariously) upset campaigning bank analyst Mike Mayo, who mentions the reference to Timmy in … err … his book and in interviews around its launch: ”He had the ability to call the Treasury Secretary any time he wanted to, flaunting any access that he might have. I thought that was an embarrassment to the industry,” the Credit Agricole analyst told Business Insider.

“What kind of signal does that send to a small bank that would like to have access to the Treasury Secretary? It sends a signal that the industry is rigged.”

Taken in the round, I’d advise Geithner to stay well clear of Citigroup. And of any other Wall Street shop for that matter certainly until sufficient time has elapsed. But who knows, maybe the lure of a Wall Street salary – even in these compensation-strained times – may be a big enough pull.

Over to you, Timmy.

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