Call it GARP: the Geithner Asset Relief Program.
Except this time, rather than Tim Geithner helping, as he did as US Treasury Secretary with the Troubled Asset Relief Program (TARP) to oversee a fund to help banks get out from under doubtful assets, this time a bank is helping him to make up for a career of modestly paying government work.
Geithner is taking out a loan from JP Morgan, a TARP recipient, to help back his investment in a fund managed by his firm, private equity house Warburg Pincus, according to a Bloomberg story and a filing with the New York State Department of State.
Terms and the size of the loan have not been disclosed.
Remind me, what was all that about regulators being captured by the financial services firms they are supposed to oversee?
This revolving door between Washington and Wall Street is really not how the system ought to work. Any sentient regulator or would-be regulator will look at this and know that perhaps they too could some day get such a job and such a loan. With this in prospect, and with this kind of life-changing money at stake, we get what we deserve: regulation of financial services by people anticipating its largess.
None if this is against the law. There is no evidence that Geithner did any service to Warburg Pincus while in office, and it seems very likely that the JP Morgan loan is on similar commercial terms to those offered to other private equity executives. Other banks, even ones which did not get TARP funds, quite possibly might have offered a similar loan. Yet, it is also a demonstration that something can be at once very legal and very wrong.
It is more than simply ironic that Geithner is now employing leverage to back his commitment to the US$12bn private equity fund, remedying a problem of too little capital with borrowed money. More broadly, it is the kind of arrangement which makes perfect sense inside Wall Street but offends the sensibilities of so many on its outside.
Skin in the game or a ticket to it?
Such loans are common in private equity, and are often presented as aligning the incentives of fund principals with their investors. That’s both true and very much beside the point.
The point isn’t how Geithner has got skin in the game, it is how he got a ticket to the game in the first place.
It might be that had Geithner not gone into public service, as it is sometimes, touchingly, called, his talents would have allowed him to shoot straight to the top of one our investment banks, making such a loan a rounding error on his net worth.
He’d then be less in need of a loan to back an investment like this. Who knows, maybe he, like his colleagues, would take one out anyway.
But that is not what happened. Geithner created the vast majority of his value to his private equity employers while serving a public trust. If we allow Geithner and those who come after him to then cash in on that value we are doing ourselves a huge disservice. And any industry that can’t be regulated by well paid public employees with no hopes of future riches is either too complicated, too powerful, or both.
So, future Treasury Secretaries and Federal Reserve officials should be prohibited from working for or benefiting from the industries they regulate. No consulting. No speeches. Just an excellent pension and the thanks of a grateful public.
Two side notes:
First, this is also a very useful story to read in order to understand the success of insurgency candidates like Bernie Sanders and Donald Trump.
Second, skin in the game is all well and good but investors should worry about this being done by piling leverage upon leverage. Just as an executive borrowing against his stock options is worrying, so can it be in a private equity or hedge fund manager, even one with modest assets due to a career of working for the government.
Shortly after JP Morgan repaid TARP in June 2009, JP Morgan chief Jamie Dimon read out a mock letter to Geithner at a conference:
“Dear Timmy, we are happy to be able to pay back the $25 billion you lent us,” Dimon said. “We hope you enjoyed the experience as much as we did.”
More than six years later it appears Geithner still is.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
