Financial Moral Hazard

If we believe this Houdini act then we have only ourselves to blame.

How Many Bank Bailouts Can America Withstand?

The architects of the 2008 rescues pretend they’ve been vindicated.

Ten years after the financial crisis of 2008, the architects of the bailouts are still describing their taxpayer-backed rescues of certain financial firms as great products which were poorly marketed to the American people. The American people still aren’t buying.

A decade ago, federal regulators were in the midst of a series of unpredictable and inconsistent interventions in the financial marketplace. After rescuing creditors of the investment bank Bear Stearns and providing a partial rescue of its shareholders in March of 2008, the feds then shocked markets six months later by allowing the larger Lehman Brothers to declare bankruptcy. Then regulators immediately swerved again to take over insurer AIG and use it as a vehicle to rescue other financial firms.

Within days legislative drafts were circulating for a new bailout fund that would become the $700 billion Troubled Asset Relief Program. Throughout that fall of 2008 and into 2009, the government continued to roll out novel inventions to support particular players in the financial industry and beyond. Some firms received assistance on better terms than others and of course many firms, especially small ones outside of banking, received no help at all.

In the fall of 2008, Ben Bernanke chaired the Federal Reserve, Timothy Geithner ran the New York Fed and Hank Paulson served as U.S. Treasury secretary. Looking back now, the three bailout buddies have lately been congratulating themselves for doing a dirty but important job. They recently wrote in the New York Times:

Many of the actions necessary to stem the crisis, including the provision of loans and capital to financial institutions, were controversial and unpopular. To us, as to the public, the responses often seemed unjust, helping some of the very people and firms who had caused the damage. Those reactions are completely understandable, particularly since the economic pain from the panic was devastating for many.

The paradox of any financial crisis is that the policies necessary to stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy become greater. We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration.

The authors say that their actions saved the United States and the world from catastrophe, but of course this claim cannot be tested. We’ll never get to run the alternative experiment in which investors and executives all have to live with the consequences of their investments. But Stanford economist John Taylor has made the case that massive ad hoc federal interventions were among the causes of the conflagration. On the fifth anniversary of the crisis he noted that in 2008 markets deteriorated as the government was taking a more active role in the financial economy, which may have contributed to a sense of panic:

…the S&P 500 was higher on September 19—following a week of trading after the Lehman Brothers bankruptcy—than it was on September 12, the Friday before the bankruptcy. This indicates that some policy steps taken after September 19 worsened the problem… Note that the stock market crash started at the time TARP was being rolled out… When former Treasury Secretary Hank Paulson appeared on CNBC on the fifth anniversary of the Lehman Brothers failure, he said that the markets tanked, and he came to the rescue; effectively, the TARP saved us. Appearing on the same show minutes later, former Wells Fargo chairman and CEO Dick Kovacevich—observing the same facts in the same time—said that the TARP… made things worse.

CNBC reported at the time on its Kovacevich interview:

TARP caused the crisis to get “much greater,” he added.

“Shortly after TARP, the stock market fell by 40 percent,” he continued. “And the banking industry stocks fell by 80 percent. How can anyone say that TARP increased the confidence level of an industry, when its stock market valuation fell by 80 percent.”

Perhaps the argument can never be resolved. What is known but is conveniently left out of the Times op-ed is an acknowledgment of the role that regulators played in creating the crisis by encouraging financial firms to invest in mortgage debt, to operate with high leverage and to expect help in a crisis. The Times piece includes no mention of Mr. Bernanke and his Fed colleagues holding interest rates too low for too long, or the massive risks at Citigroup overseen by Mr. Geithner’s New York Fed, or the mortgage bets at AIG approved by the Office of Thrift Supervision at Mr. Paulson’s Treasury Department.

Foolish regulators creating bad incentives was nothing new, though Beltway blunders had rarely if ever occurred on such a scale. What was of course most shocking for many Americans in 2008 was observing so many of their tax dollars flowing into the coffers of large financial institutions. For months both the financial economy and the real economy suffered as Washington continued its ad hoc experiments favoring one type of firm or another.

In 2009 markets began to recover and, thanks in no small part to years of monetary expansion by the Federal Reserve, stock investors enjoyed a long boom. But when it comes to economic growth and wages for the average worker there was no such boom, just an era of discouraged Americans leaving the labor force. And by keeping interest rates near zero for years, the Fed punished savers and enabled an historic binge of government borrowing.

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That federal borrowing binge was also enabled by the rescue programs. The basic problem was that once Washington said yes to bailing out large financial houses, politicians could hardly say no to anyone else. It was no coincidence that just months after enacting the $700 billion TARP, lawmakers enacted an $800 billion stimulus plan. So began the era of trillion-dollar annual deficits. Since the fall of 2008, federal debt has more than doubled and now stands at more than $21 trillion.

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The expansion of government also included record-setting levels of regulation, which limited economic growth. A financial economy heavily distorted by federal housing policy was cast as the free market that failed, and decision-making affecting every industry was further concentrated in Washington.

Messrs. Bernanke, Geithner and Paulson make the case that they saved the financial system but failed to sell the public on the value of their interventions. It’s a sale that can never be made. Even if the bailouts hadn’t led to an era of diminished opportunity and skyrocketing federal debt, Americans would have resisted the idea that our system requires occasional instant welfare programs for wealthy recipients chosen by un-elected wise men.

The bailout buddies are now urging the creation of more authorities for regulators to stage future bailouts. The Trump administration should do the opposite, so that bank investors finally understand they will get no help in a crisis.

This column isn’t sure how many bailouts of financiers the American political system can withstand but is certain that such efforts will never be welcomed by non-financiers.

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Bank Bailout 3.0

I’d have to agree with this. As we’ve said all along, saving the banking system was necessary, saving the bankers was not. Now we’re set up for the next bailout of the financial elite. What a great casino this is: heads they win, tails we lose.

The bank bailout of 2008 was unnecessary. Fed Chairman Ben Bernanke scared Congress into it

By Dean Baker

This week marked 10 years since the harrowing descent into the financial crisis — when the huge investment bank Lehman Bros. went into bankruptcy, with the country’s largest insurer, AIG, about to follow. No one was sure which financial institution might be next to fall.

 

The banking system started to freeze up. Banks typically extend short-term credit to one another for a few hundredths of a percentage point more than the cost of borrowing from the federal government. This gap exploded to 4 or 5 percentage points after Lehman collapsed. Federal Reserve Chair Ben Bernanke — along with Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner — rushed to Congress to get $700 billion to bail out the banks. “If we don’t do this today we won’t have an economy on Monday,” is the line famously attributed to Bernanke.

The trio argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression.

Neither part of that story was true.

Still, news reports on the crisis raised the prospect of empty ATMs and checks uncashed. There were stories in major media outlets about the bank runs of 1929.

No such scenario was in the cards in 2008.

Unlike 1929, we have the Federal Deposit Insurance Corporation. The FDIC was created precisely to prevent the sort of bank runs that were common during the Great Depression and earlier financial panics. The FDIC is very good at taking over a failed bank to ensure that checks are honored and ATMs keep working. In fact, the FDIC took over several major banks and many minor ones during the Great Recession. Business carried on as normal and most customers — unless they were following the news closely — remained unaware.

 

The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout.

Had bank collapses been more widespread, stretching the FDIC staff thin, it is certainly possible that there would be glitches. This could have led to some inability to access bank accounts immediately, but that inconvenience would most likely have lasted days, not weeks or months.

 

Following the collapse of Lehman Bros., however, the trio promoting the bank bailout pointed to a specific panic point: the commercial paper market. Commercial paper is short-term debt (30 to 90 days) that companies typically use to finance their operations. Without being able to borrow in this market even healthy companies not directly affected by the financial crisis such as Boeing or Verizon would have been unable to meet their payroll or pay their suppliers. That really would have been a disaster for the economy.

However, a $700-billion bank bailout wasn’t required to restore the commercial paper market. The country discovered this fact the weekend after Congress approved the bailout when the Fed announced a special lending facility to buy commercial paper ensuring the availability of credit for businesses.

 

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Without the bailout, yes, bank failures would have been more widespread and the initial downturn in 2008 and 2009 would have been worse. We were losing 700,000 jobs a month following the collapse of Lehman. Perhaps this would have been 800,000 or 900,000 a month. That is a very bad story, but still not the makings of an unavoidable depression with a decade of double-digit unemployment.

 

The Great Depression ended because of the massive government spending needed to fight World War II. But we don’t need a war to spend money. If the private sector is not creating enough demand for workers, the government can fill the gap by spending money on infrastructure, education, healthcare, childcare or many other needs.

There is no plausible story where a series of bank collapses in 2008-2009 would have prevented the federal government from spending the money needed to restore full employment. The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout to get the political support needed to save the Wall Street banks.

 

This kept the bloated financial structure that had developed over the last three decades in place. And it allowed the bankers who got rich off of the risky financial practices that led to the crisis to avoid the consequences of their actions.

 

While an orderly transition would have been best, if the market had been allowed to work its magic, we could have quickly eliminated bloat in the financial sector and sent the unscrupulous Wall Street banks into the dustbin of history. Instead, millions of Americans still suffered through the Great Recession, losing homes and jobs, and the big banks are bigger than ever. Saving the banks became the priority of the president and Congress. Saving people’s homes and jobs mattered much less or not at all.

 

Dean Baker is senior economist at the Center for Economic and Policy Research and the author of “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.”

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Are We Citizens Serious?

Lew2Jacob Lew

The definition of cronyism: Jack Lew.

Senator Chuck Grassley blasts incoming Treasury Secretary Jack Lew for cronyism and hypocrisy.

From the floor statement of Sen. Chuck Grassley (R., Iowa) regarding the nomination of Jack Lew as Treasury secretary, Feb. 27:

The problem we face with Mr. Lew’s nomination is that the Senate does not have answers to basic factual questions about Mr. Lew. How can we make an informed choice on his nomination? For example, when Mr. Lew worked at tax-exempt New York University, he was given a subsidized $1.4 million mortgage. Now, Mr. Lew claims that he cannot remember the interest rate he paid on his $1.4 million mortgage that tax-exempt New York University gave him. Does this pass the laugh test? . . .

When Mr. Lew was executive vice president of NYU, the school received kickbacks on student loans from Citigroup . Then, Mr. Lew went to work for Citigroup. When I asked Mr. Lew if he had any conversations with Citigroup about these kickbacks while he was at NYU, he once again “could not recall.” . . .

In the past, the President has railed against the “fat cats” on Wall Street. Today, the President nominates a man who took a bonus from a bailed-out financially insolvent bank. The President has constantly complained about the high cost of college tuition. While Mr. Lew was at NYU, the University increased tuition nearly 40 percent while he was getting paid more than NYU’s President. In the not so distant past, President Obama called the Ugland House “the biggest tax scam in the world.” Today he nominates a man who invested there. In fact, the President has repeatedly railed against the Cayman Islands and Cayman Islands investments. Mr. Lew is a serial Cayman Islands investor. On his watch, Citigroup invested money there, NYU invested money there, and he invested his own money there.

I believe it is essential to hold everyone to the same standard they set for others. For these reasons I will vote no on this nomination.

Plus ça change, plus c’est la même chose…again.

Wonderful. More on-the-job training? Another financial neophyte, but practiced political operative, running our nation’s finances as Treasury Secretary. Geithner was a front man for the big banks, but at least he understood the financial system and pushed back on Obama’s less insightful leadership. Don’t expect good things from Lew…

The Rookie

If there’s a crisis on Jack Lew’s Treasury watch, buy gold.

Introducing Jack Lew to the Senate Finance Committee on Wednesday, New York Democrat Chuck Schumer said the Treasury nominee has an “uncanny ability to delve into a subject” and “master it.” Americans can only hope, because you wouldn’t know it based on the little that Mr. Lew claims to have known about what happened during his tenure at Citigroup from 2006-2008.

Mr. Lew’s confirmation hearing was a substance-free zone, including his own job history. He was a senior executive at the giant failing bank before and during the financial crisis, but over several hours Wednesday he gave the impression he was there mostly to cash a paycheck.

And when Orrin Hatch (R., Utah) ticked off the problems that afflicted the two Citi divisions that Mr. Lew oversaw as chief operating officer, the nominee seemed to know less about them than Mr. Hatch. “I don’t recall specific conversations” about any of several Citi-run hedge funds that were imploding at the time, said Mr. Lew. “I was aware there were funds that were in trouble.”

Citigroup funds with high leverage crashed and burned, requiring a taxpayer bailout while sparking fierce debates at Citi over whether customers had been adequately informed. But the COO who oversaw legal affairs for some of these units says he formed no opinion.

Mr. Lew seems to have been equally disengaged about his own investments. He said he didn’t know why the venture-capital fund in which he had invested was based in the Cayman Islands or whether its location had resulted in any tax benefits. He did aver that Congress could always have banned such tax shelters before he had invested in one.

As for other lessons, Mr. Lew said that his experience at the bank and at New York University, where he was the highest paid administrator before joining Citi, had “proven to me that working collaboratively to solve problems is a universal challenge.” That’s good, because based on his knowledge of finance, he’s going to need a lot of collaboration.

Ohio Democrat Sherrod Brown tried to draw out Mr. Lew on one of the Senator’s favorite subjects: The fact that too-big-to-fail banks can borrow at lower rates than small banks because of the implied government backing. Mr. Lew rambled before saying that he was “not familiar with the specific issue.”

Mr. Brown then asked if the government should stop providing this subsidy to the giant banks. Mr. Lew avoided answering and then said that “I’m being a little hesitant” because he doesn’t believe in intervening in the markets “on a regular basis.” This is the man who will run the Financial Stability Oversight Council.

As for policy, Mr. Lew said that any tax reform must raise more net revenue and suggested that while the U.S. statutory corporate tax rate is high, the effective rate is “much lower.” Ohio’s Rob Portman had to instruct him that the U.S. effective rate is much higher than the developed country average.

The overall performance reinforced the view that Mr. Lew was chosen mainly for his experience as a political hammer for the White House. In his introduction of Mr. Lew, former Senator Pete Domenici recounted that former Treasury Secretary Robert Rubin had praised Mr. Lew as a quick study. Maybe Mr. Rubin can get an office at Treasury and help break the rookie in.

Plus ça change, plus c’est la même chose…

Let’s see, our current T-sec was at the center of the maelstrom as Chairman of the New York Fed that delivered the financial crisis of 2008. We see our next T-sec comes from the heart of the failure of Citigroup that was bailed out by the taxpayer at the behest of the Fed. How great is this financial industry where all the big players seem to fail up? Will we never learn?

Treasury Gets a Citibanker

From Wall Street failure to the pinnacle of finance in four short years. …Like the current Treasury secretary and fellow Rubin protégé Timothy Geithner, Mr. Lew knows bureaucratic power.

There was a time when you had to be successful on Wall Street to become secretary of the Treasury. Now along comes presidential nominee Jack Lew, whose only business credential is a stint at the most troubled too-big-to-fail bank.

During the darkest days of the financial crisis Mr. Lew served as the chief operating officer of Citigroup’s Alternative Investments unit (CAI). When Mr. Lew took this job in January 2008, the unit was already infamous for overseeing “structured investment vehicles” that hid mortgage risks outside Citi’s balance sheet. It also housed internal hedge funds that were in the process of imploding.

CAI no longer exists. At the end of Mr. Lew’s first quarter on the job, the unit reported a $358 million loss. Things got much worse after that but Citi stopped breaking out CAI results in its earnings releases. The unit was eventually shuttered and many of its assets were sold.

There probably weren’t many laughs at Citi during the market panic in 2008. But if someone had said that a CAI executive would be the secretary of the Treasury within five years, the line would have brought the house down. That year the house almost really did come down, thanks to horrendous mortgage bets at CAI and other parts of Citigroup. The bank survived only with a series of taxpayer bailouts that provided $45 billion in cash, taxpayer guarantees on more than $300 billion of risky assets, tens of billions more in federal guarantees on Citi debt, plus cheap loans from the Federal Reserve.

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Defenders of Mr. Lew say that by the time he showed up at CAI most of the bad decisions had already been made. But even if Mr. Lew didn’t create the mess, the taxpayers who ended up underwriting his seven-figure compensation might want to know what exactly he was doing to clean it up. All we can find is a list of things that Mr. Lew and his allies claim he was not responsible for.

It might also be instructive to learn what Mr. Lew was thinking as he took the Citi job. Did he understand that he was sailing into an iceberg, or did he believe that the unit was putting its problems of 2007 behind it? This is important because, thanks to the 2010 Dodd-Frank law, it is now the job of the Treasury secretary to spot financial icebergs.

If confirmed, Mr. Lew will chair the Financial Stability Oversight Council, responsible for identifying and addressing “systemic risks” to the financial system. It’s hard to believe he can competently perform this task if his only experience in a similar situation ended in failure.

There are other questions. In 2004 the student newspaper at New York University, where Mr. Lew was working at the time, reported on a discussion he held with students. According to NYU’s Washington Square News, Mr. Lew said he had turned down “attractive” banking jobs because he wanted to “do something bigger.” NYU “mattered a lot more to me than whether or not consumer loans are up or down,” he added.

Citi obviously made an offer attractive enough for Mr. Lew to get over the fact that he didn’t care about consumer credit markets. But a Treasury secretary should care.

Speaking of consumers, the toughest questions for Mr. Lew may relate to his previous gig at Citi. Before he took the top operating job at the CAI division, he held the same job at Citi’s Global Wealth Management division, beginning in July 2006. This means he likely oversaw, among other functions, the division’s legal affairs. And during that time his division was creating one very big legal headache for Citigroup, one that continues to this day.

You see, while Mr. Lew’s future colleagues at the CAI division were cooking up toxic investments, some of his Global Wealth Management colleagues were feeding them to investors. A lot of those investors later felt they’d been misled about the risks in Citi hedge funds and some Citi employees agreed, sparking an internal debate at Citi, according to reporting in this newspaper.

The funds invested in mortgage-backed securities and other instruments and in some cases borrowed more than $8 for every dollar invested, a risky way to seek high returns. In 2008 the bank decided to spend $250 million to compensate investors, but that didn’t begin to cover the losses.

According to a 2012 USA Today report, the bank has paid out at least $85 million in settlements and arbitration awards, not including dozens of confidential agreements. We’re told that the settlement dollars will keep flowing this year as more cases are resolved. Citigroup has maintained that its disclosures were adequate. What was Mr. Lew’s opinion in these internal debates?

A former colleague of Mr. Lew’s argues that since he had no role in sales, marketing or managing investments, this one isn’t his fault either. But that raises the question of whether Mr. Lew was merely holding down a non-job reserved for those with political juice. He was brought into Citi by his patron and Clinton Administration colleague, Robert Rubin.

When it comes to pay for non-performance and monetizing Beltway status, Mr. Rubin set Wall Street’s unofficial world records. Over roughly a decade Citigroup shareholders paid the former Treasury secretary more than $115 million, though Citi said he had “no line responsibilities.” Unaccountable for any business results, Mr. Rubin nevertheless advised those who were accountable to take on more risk. Citi managers tragically followed his advice.

Without a famous name, Jack Lew couldn’t make Rubin money. But after a career as a government official and then a university administrator, he probably enjoyed making more than $1 million a year. Not bad considering the bank was collapsing.

The fact that almost no one seems to know what exactly he did for that paycheck underlines the fact that Mr. Lew comes to this job not as an expert or practitioner in financial markets, but as a political actor. Like the current Treasury secretary and fellow Rubin protégé Timothy Geithner, Mr. Lew knows bureaucratic power.

Mr. Geithner succeeded in bailing out Citigroup and prevailed over Federal Deposit Insurance Corporation Chairman Sheila Bair. Like these columns, Ms. Bair wanted to clean out Citi’s management and asked her fellow regulators to consider putting it into receivership. In her recent memoir, Ms. Bair writes that when she suggested in early 2009 that Citi’s private investors should take losses before the company received additional government assistance, “that was a nonstarter for Tim.”

Now an alum from this most political of banks will chair the financial risk council and decide how failing firms are resolved. The next time Citi gets in trouble, who wants to bet against help from Washington?

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The greatest irony is that given Mr. Lew’s crisis-era resumé, he bears a remarkable resemblance to the bankers who President Obama says created the financial crisis and deserve federal investigation. But apparently there’s an exception as long as your liberal intentions are noble and you’re a loyal Democrat. Then you can get rich at one of Wall Street’s biggest failures and end up running the entire financial system.

The Legacy of Timothy Geithner

I had to reprint this article as I was completely taken by surprise that the NY Times could actually be objective enough to publish such an expose.

The Legacy of Timothy Geithner

As the problems escalated, Mr. Geithner came to stand for providing large amounts of unconditional support for very big banks – including Citigroup, where Robert Rubin, his mentor, had overseen the dubious hiring of a chief executive and more general mismanagement of risk.

By SIMON JOHNSON

“Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system.” Who said this and when?

The answer is Peggy Noonan, the prominent conservative commentator, writing recently in The Wall Street Journal.

As Timothy F. Geithner prepares to leave the Treasury Department, most assessments focus on how his policies affected the economy. But his lasting legacy may be more political, contributing to the creation of an issue that can now be seized either by the right or the left. What should be done about the too-big-to-fail category of financial institutions?

Mr. Geithner came to Treasury in the middle of a severe financial crisis, a set of problems that he helped to create and then worked hard to prevent from worsening. As president of the Federal Reserve Bank of New York, starting in 2003, he watched over – and failed to defuse – the buildup of systemic risk. In fact, the New York Fed was relatively on the side of allowing large, seemingly sophisticated financial institutions to fund themselves with more debt relative to their thin levels of equity.

This was a major conceptual mistake for which there still has not been a full accounting. In fact, blank denial continues to be the reaction from the relevant officials.

Mr. Geithner was also in the hot seat as more explicit government support for large financial institutions began in earnest in early 2008. The New York Fed brokered the sale of failing Bear Stearns to relatively healthy JPMorgan Chase, with the Fed providing substantial downside insurance to JPMorgan, against potential losses from assets they were acquiring.

Mr. Geithner also acquiesced to Jamie Dimon, the chief executive of JPMorgan Chase, allowing him to remain on the board of the New York Fed even as his bank was suddenly the recipient of very large additional subsidies (the insurance for his acquisition of Bear Stearns). This was the beginning of a deeper public realization that there had come to be too little distance between some parts of the Federal Reserve and the big banks.

For some senior officials within the Federal Reserve System, the appearance of this potential conflict of interest was a cause for grave concern. Unfortunately, their concerns were ignored by the New York Fed and by leadership at the Board of Governors in Washington. The result has been damage to the Fed’s reputation and an unnecessary slip toward undermining its political independence.

From March 2008, when Bear Stearns almost failed, through September 2008, very little was done to reduce the level of risk in the financial system. Again, Mr. Geithner must bear some responsibility.

In fall 2008, Mr. Geithner worked closely with Henry Paulson – Treasury secretary at the time – in an attempt to prevent the problems at Lehman Brothers from spreading. They were unsuccessful, in fairly spectacular fashion. The failure to anticipate the difficulties at American International Group must stand out as one of the biggest lapses ever of financial intelligence – again, a responsibility in part of the New York Fed (although surely other government officials share some blame).

As the problems escalated, Mr. Geithner came to stand for providing large amounts of unconditional support for very big banks – including Citigroup, where Robert Rubin, his mentor, had overseen the dubious hiring of a chief executive and more general mismanagement of risk. (While a director of Citigroup, Mr. Rubin denied responsibility for what went wrong.)

Rather than moving to change management, directors or anything about the big banks’ practices, Mr. Geithner favored more financial assistance – both from the budget (through various versions of the Troubled Asset Relief Program), from the Federal Reserve (through various kinds of cheap loans) and from all other available means, including insurance for private debt issues provided by the Federal Deposit Insurance Corporation.

In official discussions, Mr. Geithner consistently stood for more support with weaker (or no) conditions. (See “Bull by the Horns,” by Sheila Bair, former chairwoman of the F.D.I.C., for the most credible account of what happened.)

Mr. Geithner’s appointment as Treasury secretary in January 2009 allowed him to continue to scale up these efforts.

In retrospect, what helped stem the panic was the joint statement of Feb. 23, 2009, issued by the Treasury, the F.D.I.C., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve, that included this statement of principle:

The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

Mr. Geithner is often given credit for pushing bank stress tests in spring 2009 as a way to back up this statement, so officials could assess the extent to which particular financial institutions needed more loss-absorbing equity. But such stress tests are standard practice in any financial crisis.

Much less standard is unconditional government support for troubled banks. Usually such banks are “cleaned up” as a condition of official assistance, either by being forced to make management changes or being forced to deal with their bad assets. (This was the approach favored by Ms. Bair when she was at the F.D.I.C.; her book lays out realistic alternatives that were on the table at critical moments. The idea that there was no alternative to Mr. Geithner’s approach simply does not hold water.)

Any fiscally solvent government can stand behind its banks, but providing such guarantees is a recipe for repeated trouble. When Mr. Geithner was at Treasury in the 1990s and Mr. Rubin was Treasury secretary, the advice conveyed to troubled Asian countries – both directly and through American influence at the International Monetary Fund – was quite different: clean up the banks and rein in the powerful people who overborrowed and brought the corporate sector to the brink of financial meltdown.

In Mr. Geithner’s view of the world, the 2010 Dodd-Frank financial reform legislation fixed the problem of too-big-to-fail banks. Outside of Treasury, it’s hard to find informed observers who share this position. Both Daniel Tarullo (the lead Fed governor for financial regulation) and William Dudley (the current president of the New York Fed) said in recent speeches that the problems of distorted incentives associated with too big to fail were unfortunately alive and well.

Ironically, despite the fact that the Obama administration failed to rein in the megabanks and allowed them to become larger and arguably more powerful, this has not helped the Republicans in electoral terms.

As Ms. Noonan puts it bluntly: “People think the G.O.P. is for the bankers. The G.O.P. should upend this assumption.”

This is a significant opportunity for anyone with clear thinking on the right – someone looking for a Teddy Roosevelt trustbusting or Nixon-goes-to-China moment. Again, Ms. Noonan gets it right: “In this case good policy is good politics. If you are a conservative you’re supposed to be for just treatment of the individual over the demands of concentrated elites.”

Recall that some grass roots conservatives are already there: House Republicans initially voted down TARP, the former presidential candidate Jon Huntsman’s plan to end too big to fail received widespread applause from many Republicans and a number of influential commentators, including George Will and Ms. Noonan, have advocated ending too big to fail.

This would play well in the Republican presidential primaries – and even better in the general election. Watch PBS “Frontline” on Jan. 22 for an articulate presentation of why serious potential financial crimes were not prosecuted during the first Obama administration, and think about how to turn these facts into political messages.

A smart candidate could even mobilize plenty of financial-sector support in favor of breaking up or otherwise restricting the too-big-to-fail financial entities. The megabanks have very few genuine friends.

The lasting legacy of Timothy Geithner is to create the perfect electoral issue for Republicans. Will they seize it?