Timothy Geithner Should Resign

"US Treasury Secretary Timothy Geithner said the Obama administration wouldn't allow Wall Street to return to such old habits as taking on excessive risk, and that plans to overhaul financial-market regulation were on track," The Wall Street Journal reported.

Mr. Geithner pushed back against criticism that Wall Street, which is returning to profitability, is also returning to business as usual, in an interview with the newspaper.

"I don't think the financial system is reverting to past practice, and we won't let that happen," Mr. Geithner said. "The big banks are running with much less leverage now, much more conservative liquidity cushions, there's been a significant shrinking of their balance sheets, getting rid of bad assets and cleaning up. And the weakest parts of the system don't exist anymore."

Some banks, including those that received government bailout money, are earning record profits, increasing pay and ramping up risk. Goldman Sachs Group Inc., for instance, recently recorded its most profitable quarter ever and boosted its degree of risk-taking as measured by how much money it could lose in a single day. Mr. Geithner said a functioning and profitable financial system was a "necessary precondition to a stronger economy."

I simply cannot believe this is the head of the United States Treasury. One of the two most important financial jobs on earth. I would rather have the local high school football coach running Treasury. At least we could appeal to some intuitive sense of reason instead of this incessant mindless babbling.

These statements are utterly without any fact at all. There are so many fallacies in Geithner's remarks that is shows he has no comprehension of what risk is. But then, why should that surprise us? He presided over the New York Federal Reserve as Wall Street's chief regulator with a haze and stupor unmatched in America's history.

Let's take a very simple and obvious example. Just one of dozens on a wide array of fallacies in his position. The top handful of major Wall Street firms have a cumulative total of $200 trillion in derivatives on their books. Do I really need to say anything else? Leverage is irrelevant. I mean seriously folks. That means the counterparty to risk for any single one of these firms can be defined by the four or five remaining firms. We know this because there are only a handful of players in the game.

If I am an automobile insurer, I have to achieve some critical mass of cars insured to be able to manage my risk at a price attractive to the market. In other words, I can't run a competitive and successful auto insurance company by insuring five cars. Similarly, Wall Street banks cannot manage its derivatives risk by trading with four other firms. It is preposterous. It is simply a matter of time until we have an auto accident and the insurance company collapses.

Similarly, it is simply a matter of time until we see more bad bets on Wall Street. It matters not if these bad bets are derivatives or commercial real estate or bond market trading or equity market trading or any other scams our banking system is now involved in. If derivatives were actually used as insurance, which was the rational for their existence, then we would need to see the global economy embrace them as a form of risk management. Not five or six firms. There is no counterparty. There is only a pool of risk. That pool is Wall Street. That the concentration of derivatives exists within a handful of firms simply proves that they are not being used to manage risk at all. They never were. That was a lie. We know it was a lie because were they to be used as insurance they would be regulated by the insurance industry or would be adopted for the meaningful production of capital in the economy. Not pushing paper. Instead they are simply used as a form of gambling to steal from counterparties. That's it. That's quite obvious. Wall Street lawyers wrote the legislation allowing this scam.

These banks are making huge bets capable of bringing down the entire financial system. And they surely don't measure any type of risk with any intelligence as Geithner would have us believe. All we need is to see one bet go bad and Wall Street will collapse. And I can assure you bets will go bad. Statistically, they must. All we do now is wait.

Timothy Geithner should resign so we can get someone into Treasury that has some modicum of competence to revamp the financial system.