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Market Commentary

Geithner and the NY Fed Code of Conduct
January 18, 2009   David Kotok, Chairman & Chief Investment Officer

We will start with two quotes.

“It is indispensable to the proper functioning of, and the maintenance of public confidence in, the Federal Reserve Bank of New York ("Bank") and the Federal Reserve System ("System") that every employee perform his or her duties with honesty, integrity and impartiality, and without improper preferential treatment of any person. Each employee has a responsibility to the Bank and to the System to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest, or which might result in a question being raised regarding the independence of the employee's judgment or the employee's ability to perform the duties of his or her position satisfactorily. Each employee should conduct his or her financial affairs with integrity and honesty. To ensure the foregoing, each employee, including all Bank officers, shall respect and comply with the principles and standards of conduct contained in this Code. An employee who needs assistance in interpreting the provisions of the Code or who desires additional information should contact the Bank's Ethics Officer.”

Source: Code of Conduct, Federal Reserve Bank of New York.

“There will be false starts and setbacks, frustrations and disappointments.  I will make some mistakes, and we will be called to show patience even as we act with fierce urgency.”

President-elect Obama, in Philadelphia, before he commenced his historic rail trip to Washington.

We thank our readers for the many emails regarding the nomination of Tim Geithner for Treasury Secretary.  His hearing is scheduled for January 21, one day after our newly elected President Obama officially takes office.  Remember that this is the new US Senate at work, too.  Many eyes around the world are watching to see how they handle this hearing, now that the facts around the Geithner tax scofflaw behavior have been disclosed.

Our email and conversations have revealed several things.  The email critical of Geithner and suggesting that his name should be withdrawn is consistent and in high volume.  He has no defenders.  Only two emailers responded that this is not a “big deal” and “what difference does it make,” since all the politicians are like that. 

Most emailers did not extend the error to Obama.  They noted that Obama’s staff people and vetting process were at fault for letting the nomination proceed, but they were not ready to extend Geithner’s apparent judgment error to the new President.  Obama enjoys the “honeymoon” status that most observers affirm.

One member of Congress I spoke with noted how appalling this Geithner revelation is and that “it is no wonder” the public holds “such a low opinion of politicians.”  Several political staffers said the same.  All of this was “off the record.”  After all, no one in Washington wants to publicly alienate the future Treasury Secretary in case Geithner gets confirmed.  

A former IMF employee noted how they were advised about these taxes repeatedly and in writing and that the IMF was very proactive in getting tax compliance from its staff.  They saw Geithner’s excuse as lame and they found his claim of innocence “inconceivable.”  The IMF has confirmed the story about the written documentation that they gave out.

Federal Reserve officials are silent on this matter, as they must be.  And the board of the New York Fed is silent as well, even as they conduct a search for Geithner’s replacement.  There are six names in play for the NY Fed presidency; they include prominent NY Fed senior officers.  The Fed’s Washington-based Board of Governors has its input into this replacement choice and is also publicly silent. 

The Geithner affair has become an embarrassment to the Federal Reserve.  We can expect the vetting process for new Fed presidents and governors to become more intense as a result.  In a way this is a good thing.  Obama will be appointing several more Fed governors and has the option to replace Bernanke as chairman within a year.  We will not see any more tax scofflaws holding Fed positions.

Several readers commented on the double standard that would prevail if Geithner is confirmed.  They recalled the facts around the “pulled” judicial appointments of Kimba Wood and Zoe Baird for the attorney general vacancies at that time.  In the case of Wood, she paid her taxes legally and on time and she violated no law.  She did employ a “nanny” who was an undocumented person (illegal alien status).  Perception alone was enough to end her consideration for the nation’s highest court.

The Geithner affair is now in the hands of the US Senate.  They have heard from the press (lots of critical editorials and letters to editors).  They are aware of the facts.  And they know that the world is seeking a new and trustworthy level of integrity and transparency in the post-Lehman, post-Madoff environment.  Senators know that the qualities of good character and sound judgment are needed by the Treasury Secretary.   Senators also know from the behaviors within their own ranks that the tests of character and judgment are most profound when they are determined by behavior that occurs when no one is watching.

The only open item is whether the Senate has heard from you.  Email is nice and easy but a phone call with a message to a Senator’s office carries a lot more weight.  Politicians know that emails are easily sent.  They have greater respect for constituents who pick up the phone.  The US Capitol switchboard number is (202) 224-3121.  If you do not know the name of your Senator, ask the operators; they will help you.  The same is true for your Congressman.  They can connect you to an office so that you may leave a message.

We close by remembering an interpretation of an ancient text. 

God was talking with Adam in the Garden of Eden.  He was describing all the trees that would be in the world since they were all there for Adam to see in that special garden.  The trees were the metaphor for all the decisions that men and women would be making in the future.  Adam asked God what he was going to do with the trees.  God replied, “I am going to give them to you.  What you do with them will be your decision.”

On January 21 a piece of a tree will gavel a Senate hearing to order.  Tim Geithner’s confirmation or rejection will be determined. And then newly inaugurated President Obama will see if his Philadelphia quote was prescient.

Readers who wish may find the full 15 page Code of Conduct of the NY Fed on the New York Fed website by searching under the words “code of conduct.”

David Kotok, Chairman & Chief Investment Officer