My Discussion with Treasury Secretary Timothy Geithner
January 12, 2010
By: Tom D.D. Graff, Managing Director

On November 2, I was invited to attend a round table at the U.S. Treasury Department. Attending were eight internet-based writers for websites not attached to traditional media outlets. I was invited in regards to my work on TheStreet.com. From the Treasury Department, several senior officials attended including Secretary Geithner. Like me, most of the attendees were bloggers or informal writers and not journalists. Most were investment professionals of one type or another.

The purpose of the meeting was to improve access to the Treasury for non-traditional writers. The meeting was held in a small conference room. There were no presentations or opening remarks. It was simply whatever topics the small group of writers wanted to bring up.

It’s not surprising then that a large number of topics were touched upon during the two hour meeting.

• On the bank stress tests formulated by Treasury and conducted by the Fed. Treasury stressed the strenuousness and completeness of the tests. Treasury also said they believed bank losses were not yet at their worst case scenario levels, although unemployment already is.
• On the TARP, Treasury reiterated several times their desire to get out of their investment in banks.
• Similarly, Treasury stated their desire to get out of the automobile business as soon as possible.
• Treasury is very focused on the “Too Big to Fail” problem, with an array of ideas on the matter. Primarily their plan is to increase capital requirements as well as force banks to become more transparent. Treasury is also seeking authority to wind down failing financial institutions. This is aimed at allowing a firm to fail without causing major damage to the overall financial system. Treasury seems to believe strongly that the moral hazard problem that came out of the wide-spread bailouts during the crisis needs to be reversed. Investors in any failed financial institution need to “feel pain” even if the government participates in some sort of wind-down procedure.
• Other possible proposals which are not currently in any official proposal were discussed, such as creating a special tax on financial firms that reach a certain size or complexity and forcing more derivatives onto exchanges. These ideas were couched as possibilities and/or things under discussion.
• On the subject of the growing U.S. debt, Treasury said we need to improve our fiscal balance, but little more was said on the subject. The reality is that the budget is the domain of Congress, and Treasury’s job is merely to finance the spending Congress approves.

While little was revealed that is not already public knowledge, the meeting was none the less quite informative. I came away from the meeting with a better sense of Treasury’s priorities in terms of financial regulation. For example, after the meeting it is clear that moral hazard is a primary concern of the Treasury Department, and will be central to any future financial regulatory proposal. This is notable for any investor in financial bonds. It is my interpretation that if the current Treasury had to re-do the Citigroup bailout, for example, senior bond holders would wind up taking losses. To date, senior bond holders in weaker banks have been protected by a “Too Big to Fail” policy. Based on this meeting, I would not presume this policy would continue.

Finally I was told after the meeting that Treasury wants a more consistent dialogue with members of the non-traditional media. I was given the contact information of some of the officials, and I expect to use those contacts in the future.