Geithner Says New Financial Crisis Coming

Timothy Geithner


At a New York screening of the new HBO adaptation of Andrew Ross Sorkin’s Too Big to Fail, Treasury Secretary Timothy Geithner said that not only is our financial system not too large to go bust—but we’re headed for another crisis.The Wall Street meltdown of late 2008 was, in real life, a harrowing event, triggering a terrible recession from which we’re still recovering. In the HBO movie Too Big to Fail, it’s also a surprisingly gripping melodrama—a clash of greedheads and egomaniacs desperate to escape the consequences of their own bad behaviour.

At various moments of high tension, Treasury Secretary Hank Paulson (played by a bedraggled, unshaven William Hurt) flees an important meeting to stress-vomit in his private bathroom, and New York Federal Reserve President Timothy Geithner (a perfectly turned-out Billy Crudup) continually curses into his cell phone.

It’s an alarming entertainment (premiering May 23 at 9 p.m.), and an even more disturbing memory. So having the real Geithner predict the coming of another big crisis was the last thing the well-heeled screening crowd at the Time Warner centre wanted to hear Tuesday night.

“It will come again. There will be another storm,” warned Geithner, who in early 2009 succeeded Paulson as treasury secretary. “But it’s not going to come for a while.”

Under mostly gentle questioning from Pulitzer Prize-winning financial writer Liaquat Ahamed and New York Times business columnist Andrew Ross Sorkin, author of the book on which the film is based, Geithner said “I’m certain we will” experience another catastrophe—he just couldn’t say when or what kind.

“You will not know,” he answered when Sorkin tried to pin him down. “It’s not going to be possible for people to capture risk with perfect foresight and knowledge.”

The 49-year-old Geithner—looking sharp and fresh in his precisely creased suit, starched white shirt, and brilliantly shined Oxfords—favoured his audience with a grim history of the near-collapse of Bear Stearns and AIG, and the downfall of Lehman Brothers, events that pushed the markets into a panicked death spiral.

“Things were falling apart,” Geithner told an audience that included Time Warner CEO Jeffrey Bewkes and former Lehman Brothers chief executive Pete Peterson. “We had no playbook and no tools…Life’s about choices. We had no good choices…We allowed this huge financial system to emerge without any meaningful constraints…The size of the shock was larger than what precipitated the Great Depression.”

Geithner defended the $700 billion troubled asset relief program known as TARP, noting that the direct costs were a fraction of the Savings and Loan crisis of two decades earlier. “That cost 3 per cent of GDP,” Geithner said, while TARP’s cost ended up being “well under $100 billion.”

Ahamed noted that while TARP was effective, it barely passed Congress: “The politics stink.”

“I’ve been exposed to that view,” Geithner parried, to laughter. He added that timid elected officials were afraid of the consequences of voting for the unpopular measure, which Congress passed by a small margin. “They thought, ‘I can’t do that. They’re gonna kill me if I do that, so I’m gonna sit here and wait.'”

In the end, the taxpayers saved the Wall Street investment banks, with Geithner & Co. injecting enough capital to cushion them from bad bets. “People looked at the spectacle of a whole country rewarding them for their mistakes, and people said, ‘You’ve got to be kidding,'” Geithner acknowledged. But ordinary Americans were not without blame either. “Americans as a group borrowed a huge amount of debt,” he said. “There was indiscriminate pushing of credit into the fringes of the spectrum.”

He claimed, with limited credibility, not to have read Sorkin’s book, and he quibbled with the title, arguing that the financial system in the United States is far less concentrated than in Europe and thus not too big to fail. Geither said major financial institutions here comprise a much smaller fraction of the overall economy than in, say, Great Britain, where the banking industry is five times the percentage of gross domestic product as in the U.S. “Just because you said it in your book does not make it so,” Geithner chided with a smirk.

Ahamed asked about the nature of the personal relationships among Paulson, Fed Chairman Ben Bernanke (played by Paul Giamatti) and Geithner. “We were comfortable enough with each and confident enough with each that we could disagree and fight a lot and debate all the options,” Geithner answered, adding that Paulson “is a man of action—an incredibly strong person.”

A couple of times Geithner said the saga contained aspects of “Old Testament justice,” prompting Sorkin to ask, “Why hasn’t somebody gone to jail?”

“I’m not in the enforcement business,” Geithner dodged. But then he counseled patience. “That chapter’s not yet written. Don’t reach premature judgments on that.” He added: “You can’t prevent people from making mistakes…Taking too much risk and making stupid mistakes may not be a crime.”

Geither acknowledged the obvious—that economic recovery has been slow in coming. “It’s like a basketball game, and we’re in the second quarter.”

He defended President Obama’s nearly trillion-dollar stimulus package. “The stimulus package itself is a very modest contributor to the debt. It would be irresponsible and rash to try to bring the debt down in two years” and would result in a double dip recession. “People want to see that there’s a path to solving these problems.”

He also discussed the negotiations with congressional Republicans to raise the federal debt limit—something that must be done by Aug. 2 to prevent the government from defaulting—and agree on a plan for long-term deficit reduction.

“Americans are getting older and living longer, and health care’s expensive,” Geithner said. “It’s the next big debate, and will certainly dominate the policy discussion for the next two months.”

On the back and forth with Republicans, “there’s substantial overlap” on views where savings can be accomplished, Geithner said,”and ultimately people know they can’t put in doubt the credit-worthiness of the United States.”

Geithner said he wants to reach an agreement by July, well before the deadline. “Why would you want to experiment? In July, you’d want this done and clean.” If an overall deficit reduction agreement is close but not finished by then, he suggested passing the debt limit increase anyway while the parties work out the details of a compromise.

Afterward I asked Geithner if there was any possibility of a final agreement that didn’t include tax increases on the wealthy, something the Republicans are adamantly against.

“No!” Geithner fairly shouted at me. “It might take them some time to come to that realisation.”

At one point Sorkin asked if, on reflection, there might have been any way to save Lehman Brothers. “If you could do it again—” he began.

“I would never want to do any of this again,” Geithner said.

This post originally appeared at The Daily Beast.

Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.