That Tim Geithner is either incomponent or a pathological liar is by now irrelevant: anything that comes out of his mouth traditionally ends up being completely wrong, either on purpose or otherwise. What is always entertaining is putting Tiny Tim through a lie detector test of some sort (especially without it blowing up), which is what the former spies from Behavioral Intelligence Research (for previous iterations of their work see here) have done with their just released report "Tim Geithner at II/Delivering Alpha Conference." While hardly telling us anything new, BIA's "body language" interpretation of what was said, and unsaid, is quite interesting now that the Treasury Secretary has decided to put upon himself to become more cryptic than the maestro and less credible than Baron Munchausen. To wit: "[Geithner's] responses to questions on the U.S. economy frequently reflect efforts to aggressively garner bipartisan support. From a behavioral perspective, however, his responses to questions about the European crisis are more significant. Mr. Geithner is asked a number of questions aimed at gaining insight into the situation and how the crisis will impact the United States. However, he consistently sidesteps specific questions and attempts to minimize the severity of certain factors suggesting he has more significant concerns than he implies about the depth of the risk in the region and the potential impact it has for the U.S. Below are our observations."

Full report:

Potential impact of the European crisis on the U.S is likely more significant than Mr. Geithner implies and could involve Federal Reserve support for European central banks.

When asked to discuss what he will say to European ministers during his visit to the region, Mr. Geithner does not provide any insight into what his message will be. Instead, he states, “They invited me to come. It would be polite to accept that.” This reflects an effort to downplay the significance of his visit and cast it more as a diplomatic event rather than one that is driven by extenuating circumstances. However, Mr. Geithner goes on to acknowledge that the U.S. has a “huge” interest in helping European leaders as they work with countries “in terrible crisis” – language that belies the urgency of the situation and the reasons for his trip. He also makes considerable efforts to assure investors that European leaders are absolutely committed to “do what it takes” to “hold this thing together” and that they recognize “it’s going to take force behind their commitments” to make sure countries have the financial support they need. But despite his efforts to convince investors that leaders, particularly in Germany, know they “have to do more to earn the confidence of the world” that they have the political will to do this, Mr. Geithner’s language signals that the disarray among political and financial leaders in Europe is severe and may not be readily resolved.

Further, Mr. Geithner consistently sends a mixed message to both assure investors that the situation is “overwhelmingly a European challenge,” but also that the rest of the world has a “big stake in helping Europe.” This, in conjunction with his failure to provide insight into the potential impact on the U.S., suggests he has greater concerns than he implies. Specifically, when asked to discuss U.S. exposure to French banks, Mr. Geithner does not address the topic. Instead, he launches into a lengthy effort to downplay the nature of the impact of the overall situation in Europe, stating that it matters to the U.S. because it “adds to lack of confidence” and it makes everyone “more tentative.” He then goes on to assure investors that the U.S. financial system is in a “much stronger position to deal with these new risks” than it was before the crisis and that the U.S. is “way ahead of the rest of the world” in its ability to handle any type of shock. This compulsion to preemptively minimize concern about the impact in the U.S. of the risks in Europe suggests that he anticipates that the impact could be much more significant than merely adding to “caution” in the market.

Also, when asked if there will be a need for worldwide aid for Europe, including from the U.S., Mr. Geithner says that “of course the Federal Reserve appropriately is willing” to be as supportive as possible to help with dollar funding needs. But he also simultaneously makes assertive attempts to convince investors that European central banks have the economic and financial capacity to meet challenges on their own. This effort to downplay the magnitude of any support that would be needed suggests that the U.S. likely anticipates it will provide aid to European central banks in some form and raises the possibility that it could be substantial.

Financial risk at European institutions is likely more significant than Mr. Geithner would like to admit.

When asked if European leaders have plans to help financial institutions avoid another “Lehman,” Mr. Geithner tries to convince investors that there is “no chance” that major countries in Europe will let their institutions be at risk. However, he qualifies his statement, saying that leaders will not let their institutions be at risk “in the eyes of the market.” This focus on the public perception about risk versus the more challenging goal of real stability suggests that problems within these institutions run much deeper than portrayed. This also suggests that even if they manage through this near-term crisis, significant underlying issues could persist. Additionally, Mr. Geithner emphasizes that the Chancellor of Germany has repeatedly said in public and in private that the European leaders “are not going to have a Lehman Brothers. We are not going to do it.” While he says this to lend credibility to his premise that those institutions will not be allowed to fail, he also states that the Chancellor recognizes they have to do more to make that commitment “credible to the world.” This again is a tacit acknowledgement that political dysfunction is extreme and far from resolved, thus raising questions as to how effectively risk at financial institutions will be mitigated.

Finally, when asked if European banks could pass the U.S. stress test, Mr. Geithner avoids offering any insight, responding that “I think that is a question you should ask the broader investment community.” He goes on to emphasize the transparency and rigor of the stress tests in the U.S. – stating that U.S. officials lay out enough detailed information with a “very tough set or assumptions” so “the world could decide” if the test was tough enough. These remarks could be interpreted as a subtle attack on the approach in Europe, suggesting that Mr. Geithner does not believe European stress tests are as rigorous as they should be, raising the possibility that financial institutions may be at greater risk than he would like to admit.