POLITICS JANUARY 25, 2013
What are we to make of Tim Geithner on his last day as Treasury Secretary? For my money, the story that best gets at his essential Geithner-ness took place in the second half of 2009, when the recently-bailed out banks were back to making staggering profits even though unemployment was 10 percent. The public was furious over this disparity, which naturally caught the attention of Rahm Emanuel, the White House chief of staff. And so Emanuel gathered the president’s top political and economic advisers to figure out what to do about it.
The conversation was not an especially amiable one. David Axelrod and Robert Gibbs, the political heavies, complained that voters were pissed off because the government had given the banks hundreds of billions of dollars with few strings attached. Since no one could go back and change that, it would be hard to defuse the anger. This got a reaction from Geithner. “We didn’t give the banks any money,” he shot back. “We forced them to go raise it.” He was alarmed that Axelrod and Gibbs were laboring under such misinformation.
The comment was vintage Geithner: mostly true when parsed narrowly, but highly misleading in any cosmic sense. The true part is that the U.S. Treasury did not, in fact, just cut the banks checks totaling hundreds of billions of dollars. It loaned them money with a five percent annual interest rate, while grabbing options to buy stock in them at low, crisis-level prices, an arrangement worth billions of dollars. The government also asked the country’s 19 biggest banks to go out and scare up some $75 billion from private investors so taxpayers could get out of the business of propping them up. (The impetus for this was Treasury’s “stress tests,” which assessed how much extra capital the banks would need to withstand a lousier-than-expected economy.)
Still, Axelrod and Gibbs weren’t exactly imagining things. You didn’t have to get very creative with your math to see that the banks had received trillions of dollars worth of subsidies and guarantees from the federal government between the onset of the financial crisis in 2007 and late 2009. The banks borrowed trillions from the Fed at below-market interest rates. Some banks, like Citigroup, received massively under-priced insurance policies for their toxic assets. Almost all of them were able to borrow cheaply from investors because the government backed the bonds they issued. In late February of 2009, Treasury and the Fed issued a statement pledging to “preserve the viability of systemically important financial institutions,” which many investors interpreted as a blanket guarantee of the biggest banks. That alone would have been worth hundreds of billions of dollars, if not more. (I catalogue these dispensations at length in my book on the Obama economic team, which is where the opening anecdote appears too.)
So was Geithner lying at that meeting in Rahm Emanuel’s office? I don’t think so. I suspect he honestly didn’t see these other policies as “money” for the banks. In his mind, they were about using whatever tools he and his colleagues had to keep the financial system from falling apart without asking for government money. It’s the narrowness bordering on obliviousness of this mindset that was both his strength as a bureaucrat and his biggest liability.
It was a strength because the public was going to hate pretty much any viable option for stopping the run on the banking system that broke out in 2008—even nationalization, the most progressive alternative to bailouts. If the government officials in charge of stopping the run had become paralyzed by the near-certain public backlash—as then-Treasury secretary Hank Paulson had when it came to Lehman Brothers’ fate, and as the House of Representatives had when it voted down TARP on the first go-round (the portion of the bailout that came from Treasury), the economic consequences would have been disastrous.
But Geithner was willing to ignore all that and focus single-mindedly on saving the financial system. When it came to AIG, for example, he initially asked the CEOs of JP Morgan and Goldman Sachs to hatch a private-sector plan for saving the company. But when they told him it was impossible—that the company needed close to $100 billion, much more than they could pull together from banks—he simply took the JP Morgan-Goldman plan, topped it off by tens of billions of dollars, and had the New York Fed step in to make it happen. (Andrew Ross Sorkin’s book Too Big to Fail is the definitive source on all the bailouts and arranged marriages Geithner orchestrated as president of the New York Fed in 2008.)
This was ugly stuff: Among the main beneficiaries of this bailout money was none other than Goldman, along with a handful of other big banks that were major AIG trading partners. Once AIG got its bailout money, it turned right around and made these trading partners whole. Could the AIG bailout could have been substantially less ugly and still worked? No question. A different New York Fed president than Geithner (arguably someone who had actually worked on Wall Street and knew when his former colleagues were shaking him down) could have bargained for so-called haircuts, offering the likes of Goldman only 60 or 70 cents on the dollar.
On the other hand, someone preoccupied with avoiding this ugliness at every turn and at all costs would probably have undershot with the bailout somewhere along the line. They would have given an AIG or a Citigroup or a Bank of America too little money to stop investors from fleeing en masse, and the consequences would have been catastrophic. Such was not Geithner’s vice—both as New York Fed president and then as Treasury secretary beginning in January 2009. Geithner told his aides that, having “stared into the abyss” that Paulson created when Lehman failed, he would never repeat the mistake. And he didn’t. He deserves real credit for bringing a horrific financial panic to an end.
But the drawbacks of Geithner’s technocratic approach—of his indifference to public opinion, and really to democracy—pretty quickly started to outweigh the benefits. The most obvious place was financial reform. With the big banks mostly stabilized in late spring 2009, it fell to Geithner to make sure there wouldn’t be a sequel. His way of going about it was entirely predictable: To devise a breathtakingly complicated set of rules to stop banks from taking on too much risk and then to give government regulators new powers to enforce the rules. It was, in other words, an exceedingly narrow reading of the word “reform,” one which essentially left the existing financial system intact and tried to rein in bankers’ behavior at the margins.
Geithner’s view was that we had a crisis because regulators didn’t have the tools to keep an eye on the banks and to step in when their risk-taking got too dangerous. “The failures in the financial system that made this crisis so devastating were largely failures … where the Fed had no authority” and no other regulator knew who was in charge, he once told me.
This was a strangely ahistorical interpretation. The reason we had a financial bubble that nearly brought down the economy was both simpler and deeper—something the average person on the street grasped from the get-go and was crying out to fix: A lot of banks were so big and complex they didn’t realize what species of toxic junk was buried in their balance sheets until it created billions of dollars in losses. Andrew Haldane, an official at the Bank of England (who once worked for Geithner at the International Monetary Fund) conducted an exhaustive study after the crisis which found that banks frequently become less efficient once their balance sheet exceeds $100 billion (which essentially means that have $100 billion worth of stuff—loans, mortgage securities, derivatives, etc.). Before the crisis, the biggest U.S. banks were ten to twenty times bigger than that. “Large banks grew to comprise several thousand distinct legal entities,” Haldane said. “Whatever the technology budget, it is questionable whether any man’s mind or memory could cope with such complexity.” Today, of course, they’re even bigger.
In the face of this problem, Geithner’s solution seemed almost comically quaint: What good does it do to give regulators more power when the banks themselves aren’t even aware of the time bombs they’re sitting on—and really can’t be expected to be aware of them given their sprawling tangle of assets? However smart and well-intentioned, a regulator is almost never going to be better-informed than the banks’ own executives. And so the financial system remains incredibly vulnerable.
To see this I'd direct you to JP Morgan, the one megabank that made it through the financial crisis relatively unscuffed owing to the risk-management prowess of its CEO, Jamie Dimon. Last spring, as the new Wall Street regulations were falling into place and the regulators were assuming their new authority, JP Morgan announced it had lost $2 billion in a derivatives trade gone bad. The loss has since grown to around $6 billion. Dimon has admitted he was unaware of the transaction before it was too late. And what about all those newly empowered regulators? It turns out they were almost entirely dependent on JP Morgan for information about whatever trouble might be lurking. Welcome to the new Wall Street, as re-imagined by Tim Geithner.
I don’t think Barack Obama was wrong to hire him in the end. Obama correctly saw that Geithner was the right guy to sort out the mess he inherited upon walking in the door. “If you don’t do that, nothing else is possible,” Geithner told the president-elect back then, and he was surely right. Where Obama erred is keeping Geithner too long. Three-and-a-half years too long.