Former Treasury Secretary Tim Geithner was one of the more controversial figures of both the financial crisis, and the subsequent first years of the Obama administration, having been perceived as too close to Wall Street. Many also said he failed to do enough to provide relief to homeowners hit by the crash.
In his new book “Stress Test”, Geithner addresses all these issues. He makes a compelling case that the first accusation was definitely not true, and that Treasury did all it reasonably could to address the latter the situation. The main lesson Geithner teaches provides is the nature of decision making in Washington — which will leave you even more depressed about how things get done there.
With that in mind, here are the nine related things we learned in our reading.
1) Everyone gets Geithner’s background wrong
The principal criticism of Geithner during his term at Treasury was that he was too close to the banks. Many pointed to his term as head of the New York Fed. But some would point to a non-existent stint at Goldman Sachs as the most firm evidence.
In fact, Geithner has only spent a few years of his entire career in the private sector, and they were right at the beginning of his career: As an Asia specialist at Henry Kissinger’s consulting firm. This was followed by getting asked by Larry Summers to come on as a Treasury functionary, then a stint at the IMF, then the New York Fed, and finally back to Treasury.
Geithner says the idea of an eight-figure salary never inspired him, and that he preferred the career of a problem solver. He asserts he found much of what Wall Street did before and during the crisis, like AIG’s decision to pay out bonuses, totally amoral. But he remains furious at the accusations of conflicts of interest.
“I was sick of the insinuations, so prevalent in Washington, that any advocates of using emergency authorities to quell the panic must be acting at the behest of big banks,” he writes. “The stability of the entire banking system was at risk. The economy was already hurting badly.”
2) There are some behind-the-scenes mandarins you should set up Google Alerts for.
Geithner is effusive with praising his team both at the New York Fed and at Treasury. There are a few people in particular who he says were indispensable:
Current: Senior Vice President and Director of the Office of Financial Stability & Regulatory Policy at the New York Fed.
Anecdote: “Meg has a feel for the dark side of any situation.”
Current: Senior Managing Director, Centerbridge Partners
“The stress test would end up having many other virtues I didn’t foresee at the time. Kabaker later dubbed it “the gift that keeps on giving.”
Current: CEO of Alliance Partners
Anecdote: “Lee kept saying he could feel the markets tremble with every exploratory call to New York from a White House staffer.”
Current: Unknown (most recently Acting Treasury Secretary)
“After Oxford and Yale Law School, Neal had worked for Bob Gates at the CIA; he had been Treasury’s general counsel during the Clinton administration; he had run a major insurance business; and how he was a deputy White House counsel. Rahm immediately told him to get the fuck over to Treasury to help me, without even specifying a job.”
3) There are others who weren’t part of Geithner’s team that we get keen insight into.
Obama’s former chief is staff (he now works at a law firm) is described as the man responsible for getting Elizabeth Warren to run for senate instead of heading up the Consumer Financial Protection Bureau.
Cohen, the chairman of megafirm Sullivan & Cromwell, is described as “Wall Street’s trauma surgeon,” having represented basically every firm that went critical during the crisis.
Geithner found many of the Senate Minority leader’s beliefs and methods offensive, but appreciated his unusual candor, and willingness to recognise un-winnable battles.
Geithner reserves special praise for John Boehner, whom he says did the best he could to keep the House wolves calling for a U.S. default at bay. “I kind of liked Boehner,” Geithner writes. “He had an easygoing manner, and he seemed lonely in his new position as a pragmatic conservative surrounded by extremists.”
4) Geithner swears as much as Rahm Emanuel.
Maybe it’s the height thing — but Geithner humorously (and also occasionally ragefully) — drops a fair amount of obscenities. Here’s the count according to an Amazon search (which may undercount):
*Also includes “NFW”, abbreviation of “no fucking way.”
An example: “I’m the fucking Treasury secretary and I can’t see these numbers?” Geithner screams — at New York Fed employees — his former colleagues, no less — over their unwillingness to show him very preliminary stress test data (he concedes the numbers were prone to shifting at that point).
5) Your worst fears about Congress are true
Geithner provides multiple examples of just how craven, idiotic and generally pathetic elected officials can be. The most memorable is anecdote about Mark Kirk, the Senator from Illinois who ultimately took over the seat Gov. Rod Blagojevich was convicted of trying to sell. While in Beijing on his first trip as secretary, Geithner heard that Kirk had told Chinese officials not to buy U.S. Treasuries because runaway government spending was driving us towards default and that the Fed was creating hyperinflation.
“I couldn’t believe it,” Geithner writes. “Not only were those fears delusional, but he was undermining American interests on foreign soil.”
In debating the financial reform bill, he encountered freshly elected Sen. Scott Brown. “When the conversation finally turned to substance, he said he liked the idea of financial reform and expected to be with us,” Geithner writes. “But without any irony or self-consciousness, he said he needed to protect two financial institutions in Massachusetts from the Volcker Rule’s restrictions. Then he furrowed his brow and turned to his aide. ‘Which ones are they, again?’ he asked.”
6) And there are some officials who Geithner thinks exacerbated the crisis, or deserve total scorn.
The most consequential is Sheila Bair, the head of the FDIC during the crisis. Geithner says Bair dropped the ball on numerous occasions: By not taking advantage of the emergency powers Congress extended to the FDIC to guarantee Washington Mutual ‘s, sending the cost of insuring against corporate defaults skyward and, Geithner says, dooming Wachovia to a shotgun marriage-buyout by Citi. She is ultimately given a reprieve in the acknowledgments section — and Bair herself said she was fine with Geithner’s characterizations of their disagreements. But it’s clear Geithner believes she made some serious tactical errors, including ones that remain a of the financial system today.
The same privilege was not bestowed on Neil Barofksy, the former prosecutor appointed by Hank Paulson as the special inspector general for the troubled asset relief fund. In July of 2009, Barofsky released a report saying TARP had exposed taxpayers to $US23.7 trillion in potential losses. This was merely the size of the market the government had backstopped. But for losses ever to mount that high would require every mortgage backed by Fannie and Freddie to default, and home prices to collapse to zero. Despite the absurdity of this claim, it got picked up in most media outlets.
Geithner obliterates Barofsky for this claim, and his overall attitude in his role. “Barofsky’s desire to prevent perfidy was untainted by financial knowledge or experience. He assumed our motives were self-evidently sinister, as if we had helped banks for fun and profit rather than to cure a metastasizing financial crisis.” Geithner adds: “Hank Paulson apologized to me twice during our work together — once for initially failing to persuade the House to pass TARP, and once for bequeathing me Barofksy.” Oh my god.
7) About the housing programs
Geithner admits that the numbers he put out for how many homeowners could be helped by the HAMP and HARP relief programs were wildly off the mark. At one point they did consider granting permanent loan modifications to anyone with a trial mod, but decided against it as it would create too much opportunity for fraud, given everything that was coming out at the time about “no-doc loans” and “liar loans.” The programs were also overly reliant on the same mortgage servicing industry that had caused the crisis — but there was no way Treasury would be able to create and hire for an agency to do it for them, Geithner said. Still, he argues Treasury successfully put a floor under home prices by ending the broader crisis, and that allowing values to start rising again did provide major relief.
8) Geithner left some figurative policy-men behind that he urges the administration to pick up.
Mainly, Dodd-Frank actually eliminated the FDIC’s debt guarantee authority, as well as the Fed’s ability to intervene with specific firms, as it did with Bear Stearns, AIG, Citi and BofA. “That power wouldn’t be necessary if the FDIC still had broad guarantee authority, but losing both could be disastrous.” For anyone who would say that such powers create moral hazard, Geithner quotes Stanley Fischer that “condoms don’t cause sex.”
9) Reviewers of “Stress Test” are still hammering Geithner for not doing enough, and it’s not clear they’re fair
Geithner also makes some demonstrably false statements about the public debate over stimulus. “At the time,” he declares, “$800 billion over two years was considered extraordinarily aggressive, twice as much as a group of 387 mostly left-leaning economists had just recommended in a public letter.” Um, no. A number of economists, including Columbia’s Joseph Stiglitz and myself, were warning that the package was too small; so was Romer, internally.
I think the Geithner world view is heavily skewed by his having been surrounded by self-interested elites in New York and Washington who were understandably pleading their case, a case that was banking-centric and less focused on the competing interests of homeowners, wage earners and the voting public.
It’s true that Geithner moved mountains to rescue the banks, and you can thus ague that he did not demonstrate the same force in getting a larger economic stimulus through Congress. But the crisis had the misfortune of occurring soon after an election. Geithner argues that “Politics ultimately determine what gets done” on fiscal policy, “and you can’t afford to get bogged down in a protracted fight.” Given what we see out of Congress these days, you’re inclined to say it’s amazing he got through anything at all.