Timothy F. Geithner - Stress Test: Reflections on Financial Crises

Copyright 2014 by Timothy F. Geithner

All rights reserved.
Published in the United States by Crown Publishers, an imprint of the Crown Publishing Group, a division of Random House LLC, a Penguin Random House Company, New York.
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ISBN 978-0-8041-3859-8
eBook ISBN 978-0-8041-3860-4

Jacket design: Christopher Brand
Jacket photograph: Brooks Kraft
Charts: Joe LeMonnier

v3.1

For the intrepid public servants at the Treasury and the Federal Reserve who worked with great skill and devotion to help guide their country through the crisis

CONTENTS

O n the morning of January 27, 2009, my first full day as secretary of the Treasury, I met with President Barack Obama in the Oval Office. The worst financial crisis since the Great Depression was still raging, and he wanted to put out the fire for good. The banking system was broken. The broader economy was contracting at a Depression-level rate. Consumer confidence had sunk to an all-time low, and millions more Americans were in danger of losing their jobs, their savings, even their homes. The President looked calm and reasonably comfortable after a week in the White House, despite all the bad news he was getting.

I was about to give him some more.

First, I thanked him for coming to my swearing-in the night before, a nice gesture of personal confidence in me. We had met just three months earlier, and I was in many ways an unorthodox choice to lead Treasury. I wasnt a banker, an economist, a politician, or even a Democrat. I was a registered independent without much of a public profileand the profile I had didnt exactly signal Obama-style hope and change. As head of the Federal Reserve Bank of New York, I had spent the past year working with a Republican Fed chairman, Ben Bernanke, and a Republican Treasury secretary, Henry Paulson, Jr., to design a series of spectacularly unpopular rescues of financial firms. I didnt look like a Treasury secretary, either. I was forty-seven. I lacked gray-haired gravitas. Barney Frank, one of my closest allies in Congress, later observed that when I spoke in public, I looked like I was at my own bar mitzvah.

And I was already politically damaged goods. I had been portrayed throughout my confirmation hearings as a tax cheat, a tool of Wall Street, an enemy of Main Street. Even though I had spent the previous two decades in public service, I was routinely described as a venal investment banker. Some thought I might be the first Treasury nominee rejected since before the Civil War, and I had considered withdrawing before the vote. I was eventually confirmed, by the narrowest margin since World War II; I already felt crushing guilt about the humiliation I was forcing on my family, and the political capital the President had to spend on me.

But now it was time to get to work. I took a seat on a sofa facing away from the Rose Garden, the seat I would take hundreds of times over the next four years. The President sat in his official chair to my right. On the couch across from me was the renowned economist Larry Summers, a former Treasury secretary who had met me when I was a junior civil servant in the department and had helped promote me up the ranks. Now Larry was running the Presidents National Economic Council, so we would fight the crisis together. It should have been an exciting moment for mea career technocrat entering the epicenter of power, alongside a brilliant former boss and an inspiring new president.

It didnt feel exciting. It felt dark and daunting.

I had spent much of my career dealing with financial crisesin Mexico, Thailand, Indonesia, Korea, and beyondbut this was the big one, the hundred-year storm. Bernanke, Paulson, and I had already engineered a series of emergency interventions for a variety of financial giants, culminating in the Troubled Asset Relief Program (TARP), a $700 billion intervention for the entire financial system. But we hadnt ended the crisis. The index measuring the risk of corporate defaults was even higher than it had been after the chaotic collapse of the Lehman Brothers investment bank in September 2008, when stock markets crashed, bond markets went haywire, and even supposedly safe money market funds were overwhelmed. Foreclosures were at an all-time high. The economy was shedding more than 750,000 jobs a month.

We had slowed the post-Lehman panic, but the financial system was still frozen. Banks that had overextended themselves during the boom were now in defensive retreats, hoarding cash, depriving businesses of financial oxygen. There was virtually no private credit available for ordinary borrowers who wanted to finance a new car or a college education, much less a new home. We had slipped into a vicious cycle, as the financial earthquake began to ripple through the broader economy. As laid-off workers and other nervous consumers spent less, businesses were laying off more workers and investing less, prompting families and businesses to cut back even more. The crippled financial system was making the recession worse, while the deepening recession was making the financial system worse. Wall Street and Main Street were going down together. I had recently started reading Liaquat Ahameds Lords of Finance, a history of the policymakers whose mistakes helped create and prolong the Great Depression, but I had put it down after a few chapters. It was too scary.

The President knew he couldnt fix the broader economy without fixing the financial system. Banks are like the economys circulatory system, as vital to its everyday functioning as the power grid. No economy can grow without a financial system that works, safeguarding the savings of individuals, moving money where its needed, helping families and businesses invest in their futures. And ours was still a mess.

Now that Im official, I can tell you how bad it really is, I said.

F OR STARTERS , I told the President, we still had five financial bombs to defuse.

By bombs, I meant huge, far-flung, overleveraged institutions whose failure could spark the kind of global panic the Lehman bankruptcy had sparked in the fall. I listed them: Fannie Mae, Freddie Mac, AIG, Citigroup, and Bank of America. They all were much larger than Lehman. All five had received major infusions of government cash to save them from failure; AIG had been rescued three times in four months. But they all were in trouble again, and we needed to make sure they didnt explodenot to protect them from the consequences of their mistakes, but to prevent another messy failure from ravaging the rest of the economy. The politics would be awful. People hated the idea of government bailouts for mismanaged financial behemoths. But if their creditors or the markets in general lost confidence that any of them could meet their obligations, wed be looking at a worldwide financial meltdown, and a much deeper economic crisis.

Fannie and Freddie, the Washington-based housing giants that backed most U.S. mortgages, needed the most help. They were quickly burning through nearly $200 billion in taxpayer aid, and without another $200 billion or sothe equivalent of more than three years worth of federal education department spendingthey risked catastrophic defaults. Even a modest increase in that risk would push mortgage rates higher and home prices lower, intensifying the recession.