Over the past 30 years Wall Street captured the thinking of official Washington, persuading policymakers on both sides of the aisle not to regulate (
derivatives), to deregulate (
Gramm-Leach-Bliley), not enforce existing safety and soundness regulations (
VaR), and to stand idly by while millions of consumers were misled into life-ruining financial decisions (
Alan Greenspan).
This was pervasive cultural capture or, to be blunter, mind control. But when the crisis broke it was not enough. Having powerful people generally on your side is not what you need when all hell breaks loose in financial markets. Official decisions will be made fast, under great pressure, and by a small group of people standing up in the Oval Office.
If you run a big troubled bank, you need a man on the inside – someone who will take your calls late at night and rely on you for on the ground knowledge. Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed.
Goldman Sachs (GS), JPMorgan (JPM), and Citigroup (C), we learn today, have such a person: Tim Geithner, Secretary of the Treasury.
We already knew, from the NYT, that most of Geithner's contacts during 2007 and 2008 were with a limited subset of the financial sector – primarily the big Wall Street players who were close to the New York Fed (including on its board). And the announcement of his appointment was widely regarded as very good news for those specific firms.
