Geithner, Obama, Audacity (defined?) by David Kotok

January 15, 2009

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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“Oh, what a tangled web we weave when first we practice to deceive.” – Sir Walter Scott

More revelations about Geithner. The US Senate postpones his hearing. President-elect Obama still defends him. The stock market sinks. Are these things connected?

Certainly the first three items are interrelated. Things for Geithner are getting much worse now that the IMF has stated they repeatedly warned people about paying the taxes that Geithner failed to pay. IMF affirmed that they gave this warning in writing.

A further revelation is the timing of Geithner’s decision to pay some of the back taxes. He reportedly paid 2003-4 after an IRS audit found that he owed them. How is it possible that he didn’t know about owing 2001-2 at that time? Why he failed to pay 2001-2 until after the presidential election and after he knew he was going to get a cabinet post is a devastating question. It goes to the heart of what kinds of judgments Geithner makes and when he makes them.

No one has stepped forward and accused Geithner of prevarication. But one must ask how this supposedly bright and skilled financial leader could pay 2003-4 and not realize he owed 2001-2. This triggers another issue: what is the governance standard at the NY Fed? Did Geithner breach the rules applicable to employees of the Federal Reserve Bank of New York when he was their president? Were any of the board members of the NY Fed aware that he settled back-tax claims with the IRS? Were there reporting requirements in their employee manual? If yes, did Geithner fail to comply? If no, why are these requirements not there?

We have confirmed that there are numerous reporting rules for officers of the Federal Reserve. Furthermore, we know that employees at the Fed who hold higher officer positions could face dismissal or discipline if they were found to have knowingly failed to pay taxes. Tax evasion is a criminal offense. Tax avoidance or innocent error is not. Had Geithner cleaned the whole thing up when the IRS audited him in 2006 his innocent error claim would stand up under scrutiny. But the 2001-2 payment reportedly occurred in November of 2008 and had no connection to the IRS audit. This sequence of behavior now seems to be confirmed in the Geithner affair. So the US Senate must also ask about Geithner’s role at the NY Fed and inquire about internal disciplines when Geithner was its president.

All this goes to the heart of the issue we raised yesterday. The world is thirsting for transparency and confidence in the United States. The world has been repeatedly burned by US institutions and has lost confidence in our government’s ability to manage oversight of the financial sector. We now live in the post-Lehman, post-Madoff environment. We need operative leadership without any signs of cover-up or hidden agenda or implied deception.

The Geithner revelations now violate this test. This is not politics as usual. Obama is injuring his new start as President by defending Geithner.

Let’s get to the markets. It is impossible to make the connection directly between the stock markets turning weak and the Geithner revelations unfolding. Stocks go up and down for many reasons. But it is possible to suggest that the Geithner revelations are shattering the fledgling confidence that the world was seeking in the Obama Administration.

Obama supporters and well wishers wanted change. Not in political sloganeering but real change that would seek to restore integrity and transparency to government. I was one of those Obama well wishers. The Geithner revelations were and are disturbing. The President-elect’s defense is even more disturbing. He is replacing his “audacity of hope” with the audacity of a Chicago politician. That prescription will end his presidential honeymoon period rapidly.

Every person I have talked to about this in the financial community in the last few days had the same reaction. That it is a sentiment shift of some type. And sentiment shifts change markets.

Geithner’s hearing is postponed until after Obama is officially President. That hearing must now examine his activities at the NY Fed in greater detail. There may be hearings about board members at the Fed and about how they handled these issues. As one former Fed official said to me: “Then it boils down to the old question for both Tim and his board, and that is ‘What did they know and when did they know it?’ If he knowingly hid it from them, then it would be doubly bad.”

Stay tuned. This will get hotter.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok -at- cumber.com

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Cumberland Advisors supervises approximately $1 billion in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 42 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC registered investment adviser. For further information about Cumberland Advisors, please visit our website at www.cumber.com.

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Category: Bailouts, BP Cafe, Federal Reserve, Markets, Taxes and Policy

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10 Responses to “Geithner, Obama, Audacity (defined?)”

  1. bdg123 says:

    Personally, I believe all of this hoopla on this particular item is a little like trying to deal with the kids throwing eggs at cars while Rome burns. What is relevant is that Geithner was the head of the NY Fed. The NY Fed has responsibility for regulating Wall Street. Geithner presided over Wall Street’s greatest criminal offenses and lack of regulatory control in American history. And, he has said or done nothing in an attempt to return the trust of citizens let alone during did he do anything substantive during his watch. That is, other than to create a strategy where the weak merge to create larger weak firms that require more of my money. He’s a crony, his experience is as a crony and we don’t need this type of nonthinking bureaucrat beholden to the existing apparatus as a Treasury Secretary in times of great crisis. Let him go run a library or a PAC or whatever.

  2. I wasn’t going to post this but it was brought up again. It seems this is the second stealth media missile fired into the hull of USS Obama and he is not even in office yet. The first one was, of course, the senate selling seat scandal. That one wasn’t his fault but it appeared more like a shot over the bow to me. Now I am wondering if this is a republican stealth campaign or a shadow government thing aimed at BA because he is not being too ‘co-operative’.

    The timing relative to the news cycle is what I am going to watch for. It seems these things are coming out just as the last one dies down in order to paint a picture in the public’s mind but that is just the way it looks to me. Seeing the democrats on the defensive already is…telling. They should learn how to shoot their own

    This reminds me of the Clinton. The difference being there is no ‘moral majority’ on the republican side pushing it per se because they have already forfeit the moral high ground. This is an entertaining mystery to say the least

  3. nweaver says:

    Actually, its because of a simple item: the statute of limitations.

    Except in cases of fraud, the IRS can only go back 3 years. So they went back to 2003 and said, “Hey, you owe these taxes”, and Geithner’s response is “OK, here you go”.

    He had no legal obligation to go back to 2002 and 2001 and go “Oh, BTW, I also owe the IRS this…”, and why should he bother even looking? Nobody has a legal obligation to do so.

    But there is no statute of limitations for purposes of placating congress when being appointed to a cabinet position. Thus in the background check, the obama administration auditors go “Oh, you also owe this for 2001 and 2002″, Geithner’s response is therefore “OK, here’s a check”…

  4. In politics you not only can’t be bad but you can’t have it look bad either. This looks bad. People don’t want to follow a leader who only does what it takes to get by the rules. They want someone who passes with flying colors on the easy tests. They don’t want someone who follows the letter of the law while at the same time violating the spirit of the law. Those are the type of leaders who will sacrifice soldiers to win wars because they only see them as statistics and not human beings who want to go back home some day just like the generals do.

    Actions like paying off only what is required and failing to ‘go the second mile’ demonstrates that he has no understanding ‘how this looks’ and thus has not only poor but very poor political judgment. That is a person that is ruled by greed on the short term only to lose a job that would more than make up for the loss of those tax payments on the long term

    If that is the best possible applicant America can get for a world class position then maybe it is time to scuttle the boat and start over

  5. capt dave says:

    So Geithner thinks there is nothing wrong in not paying taxes unless you are caught. Or maybe the Masters of the Universe dont think they should pay SS taxes. This kind of flexible ethics is not what we want in charge of the IRS. Everybody should fear the IRS becoming even more politicized in the coming economic unrest. How would you like to be audited for your comments here?

  6. Moss says:

    ‘Every person I have talked to about this in the financial community in the last few days had the same reaction. That it is a sentiment shift of some type. And sentiment shifts change markets.’

    The financial community is the most corrupt and self serving amalgamation of deceitful unethical individuals ever known to man. How could a rational individual put any faith in what they think. I don’t give a hoot what they think.

  7. Greg0658 says:

    excellent post and comments ..will be monitoring
    (and think’g about shots across the bow)

  8. JMH says:

    President-Elect Obama,

    Jim Cramer was right, Geithner is the wrong pick. Please find your inner Lincoln (Geithner is no Samuel P. Chase) and take advantage of the opportunity Congress has given you to appoint someone with a sterling reputation. Certainly Paul Volcker must know a qualified person.

    What would your predecessor President Washington say? Now would be a great time to find another Hamilton.

  9. nasruddin says:

    > What would your predecessor President Washington say? Now would be a great time to find another Hamilton.

    Hamilton? He would never make it thru the confirmation process we enjoy today.

    http://en.wikipedia.org/wiki/Alexander_Hamilton#Affair

  10. JMH says:

    nasruddin,

    >> What would your predecessor President Washington say? Now would be a great time to find another Hamilton.

    > Hamilton? He would never make it thru the confirmation process we enjoy today

    He would if Washington or Lincoln were backing him.

    Since it was clear there was no financial misconduct, the criticism of Hamilton would be for adultery. There are two types of misconduct Congressional representatives will tolerate to a greater degree than we might think at first: Adultery and excess travel expenses.

    No appointee will ever fail to be confirmed after having an affair with a first class cabin flight attendant.