At NY Fed, Geithner Saw Risk, Didn't Act
Legacy of missing red flags trails onetime regulator to Treasury
By Kevin Spak,  Newser Staff
Posted Apr 3, 2009 10:35 AM CDT
US President Barack Obama, right, and US Treasury Secretary Timothy Geithner, react, during the Plenary Session at the G20 Summit at the ExCel centre in London, Thursday April 2, 2009.   (AP Photo/Anthony Devlin/PA)
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(Newser) – Timothy Geithner spent a lot of time thinking about the derivatives trade as president of the New York Federal Reserve—in 2005 he convinced banks to digitize the market, making it far more efficient. But he never convinced them to scale back risk and never exercised his powers to force them to, the Washington Post reports, after reviewing documents from Geithner’s term. Like other regulators, he relied on bank assurances that risks were reasonable.

Geithner used the diplomatic approach local Fed presidents typically take because they rely on the banks they supervise for information, and those banks pick six of the nine board members who appoint the Fed. Though he encouraged banks to stress test for worst-case scenarios, the banks dismissed that as unnecessary, and Geithner never brought a formal enforcement action against them.