Policy: Budgets & Deficits

Why cashing out to private equity was Timothy Geithner's best path

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Beltway Confidential,Timothy P. Carney,Treasury,Budgets and Deficits,Wall Street,Revolving Door

Tim Geithner, as a public servant, bent the rules to bail out the financial sector. Then he championed and helped implement a complex set of regulations that have been critiqued as too burdensome, as too weak and as picking winners and losers.

Friday, we learned that Geithner will get very rich at a private equity firm called Warburg Pincus.

How are we to feel about this?

I've spent much of the past five years writing on the revolving door between government and Wall Street or K Street. I think the revolving door is harmful to the economy and to politics. I think it corrupts both business and government. I also think it's the biggest example of President Obama not living up to his rhetoric.

But also, government officials have a right to earn a living, and applying their expertise to a new field is sensible.

So, what about Geithner’s cashout?

I see two main questions at play when we consider Geithner’s government work and his future private-sector work:

1. What sort of business is Warburg Pincus?

2. What sort of work will Geithner do there?

In this post, I'll just address the first question.

Warburg Pincus isn't as tied up with government as Wall Street banks are. “[T]he kind of private equity Warburg Pincus does has very few regulatory issues with the federal government,” Matt Yglesias at Slate writes in defense of Geithner.

But for Ryan Grim at HuffPo and Republican bank lobbyist Sam Geduldig, this fact indicts Geithner, who implemented Dodd-Frank, which “gave private equity a competitive advantage.”

Geduldig tells Grim: "The problem with Dodd-Frank is that it picked winners and losers. Geithner went with a winner."

Adding one more log onto the fire of how Geithner's policies affected his new employer, Noam Scheiber at The New Republic called Warburg Pincus “a highly-leveraged financial entity that benefited massively from the system-wide bailout Geithner engineered in 2008 and 2009.”

It’s upsetting, and it can hint towards impropriety when a public official (1) uses the law to benefit a private entity, and then (2) goes to work for that private entity.

Notably, this is how Obamacare passed: Democratic lawmakers with conservative constituencies were somehow convinced to support the law, which benefitted the drug companies, the insurance regulators and the hospitals. After losing their seats thanks to the "yes" vote (either by losing reelection or retiring in the face of certain defeat), Ben Nelson, Bart Stupak and Earl Pomeroy all got high-paying jobs working for those industries that supported and benefitted from the law.

Geithner probably could have implemented the bailout barrage in a less “protectionist” way — that is, in a way that would have pruned back the financial sector rather than enhancing its role in our economy. Also, maybe he could have shaped Dodd-Frank in a way that didn’t benefit private equity as much.

But on the whole, I don’t see these matters as much of an issue for Geithner. He didn’t push a bailout targeted at benefitting PE. I don’t think he had too much of a role in Dodd-Frank’s tendency to pinch banks and thus create more space for PE.

Finally, there’s a way in which the Grim/Geduldig point on Dodd-Frank — that it left private equity largely alone — actually exculpates Geithner. The rational self-interest of a policymaker hoping for a cashout is to increase government’s role in an industry but maintain that industry’s ability to profit greatly — thus maximizing the demand for a government insider.

That matches the path Stupak, Pomeroy and many others took. It doesn’t seem to match Geithner’s path.

Had Geithner gone to JP Morgan, you could fairly say he was pocketing the bailout dollars he had sent out the door in 2008-2010. You also could have said he was benefitting by helping to navigate a maze of regulations he helped create.

Could you lament that Geithner's cashout reflects the entrenchment of an elite class? Sure. But it seems to me Geithner has chosen a cashout path that steers clear of the most ethically rocky waters.

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