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Cramer: Geithner Deserves Better

Stocks in this article: JPMCAIGWFCGS

Suffice to say that everyone had a hand in blowing up Lehman and it was a disaster of many fathers, including the Securities and Exchange Commission, which checked off on ridiculously rosy books that Fuld personally generated.

As soon as Lehman went down it was "Katy, bar the door!" because of Lehman's collateral, and its packaged bonds were as worthless as they turned out to be everyone else's would be, too. That's why the next bailout -- of AIG -- was so important and so significant. Unlike Lehman, which now appears to have no worthy collateral that could be liquidated -- an important caveat -- AIG had substantial assets away from its financial services guarantee division. AIG was incredibly poorly run and management let its U.K. division do whatever it wanted, including guaranteeing every mortgage bond under the sun. Again, Geithner doesn't do justice to what happened at AIG, which is that the company relied on many outside experts, including business professors paid for by AIG who agreed that the waterfall protection built into the faulty bonds would stop the insurance from ever kicking in.

That was just plain wrong, as we increasingly realize that the 2006-07 vintages included a vast number of phony mortgages that the banking system keeps paying for.

Geithner correctly realized that the assets away from AIG's financial services division were bountiful, which is why he and the Fed were willing to take them on. The gist of the AIG bailout: You could always sell off the worthwhile pieces of AIG if you could just get the government to offer collateral guarantees so that the bad loans had a chance to turn good. This pretty much worked out, but it took a long view, one that didn't seem to come into play for any other entity because the banks were choking with bad loans.

Geithner spends too little time on the fools at Fannie Mae (FNMA) and Freddie Mac (FMCC) who blessed anything that came in the window over the transom. Those one-time safe arbiters of mortgages became greed-filled institutions that had the same faulty models as everyone else in the system.

But Geithner does make judgments about the other failing institutions. He puts the run on WAMU squarely on Sheila Bair, who seems to care more about the sanctity of the FDIC than about saving institutions so the depositors knew their money was safe. He similarly obliquely does the same for Wachovia. Bair's anything but heroic in the book, something no one seems to address in any critique that I have read.

How about Citigroup (C)? I like how Geithner subtly points the finger at Bob Rubin for lending his imprimatur to Citi's totally hideous portfolio. The subtext here is that Geithner blew it because he trusted Rubin, and he's been merciless toward himself for doing so, something he admitted freely without any provocation at the Barnes & Noble interview.

Still, though he had a good plan to save two birds with one stone in a heavily negotiated transaction to save Wachovia, which again had a Bair-inspired run by merging it with Citigroup. At the last minute Bair broke up the deal and allowed Wells Fargo (WFC) come in. Geithner's appalled because he gave his word that Citi and Wachovia would merge, but I think his anger seems misplaced because Dick Kovacevich bought Wachovia without a government guarantee. But Citigroup then had to become a ward of the state when the deal broke up. I personally think that Wachovia-Citi would have been a ward of the state anyway. Still, if Bair hadn't helped start a run on Wachovia it might have survived on its own. It's a complicated read to understand what Bair did wrong, chiefly involving haircuts to bond holders that were, again, Old Testament-like, but I think it is a convincing indictment.

Which brings me to the indictments. Where were they? A persistent undercurrent of almost every single negative critique of the books, and there are myriad critiques, has to do with how Geithner left everyone off the hook during this period.

That's just plain fatuous and does not survive a close or critical reading of the text. I think Geithner would have welcomed the prosecution of just about everyone he dealt with on the banking side. One of the less-noted undercurrents in the book is the absence of Justice Department interest in any of these matters. At the end of the Bush administration, the Justice Department was in total disarray, largely because of a scandal involving the completely inept Alberto Gonzales, who turned the Justice Department into a political hack arm of the president. When he resigned in 2007, the Justice Department turned lame duck and did nothing.

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