POLITICS MARCH 15, 2013
There was big news yesterday out of the financial-crisis book industry: Former Treasury Secretary Tim Geithner has inked a deal with the Crown imprint of Random House. According to a press release, the book “will chronicle how decisions were made during the most harrowing moments of the crisis, when policy makers faced a fog of uncertainty, risked catastrophic outcomes, and had no institutional memory or recent precedent to guide them.” Geithner’s take is due out next year. In the meantime, here are five subjects we should hope he sheds light on:
Lehman: The official story for why the government let Lehman Brothers collapse in September 2008, when the financial crisis entered its most terrifying phase, is that there was simply no alternative once Barclay’s pulled out of a possible acquisition. Even the Federal Reserve couldn’t step in to provide an emergency loan because Lehman’s assets weren’t valuable enough to serve as collateral.
The narrative that emerged not long after is that Geithner, then the New York Fed president, nonetheless wanted to save the company, warning of apocalyptic consequences to come, while Bush Treasury Secretary Hank Paulson was determined to let the market work its will. Having already taken guff over the bailouts of Fannie Mae and Freddie Mac several days earlier, Paulson wasn’t about to step in with another bloated intervention.
Is this really true? How adamant was Geithner about bailing out Lehman? How vigorously did he protest Paulson’s decision? And what about Fed Chairman Ben Bernanke? The Fed is officially independent of the administration. Even if Paulson disagreed, couldn’t Geithner have worked Bernanke over a little harder, given the hair-raising stakes of a Lehman collapse?
AIG: Beginning around the same time, the failing insurance giant received over $180 billion in emergency loans, cash infusions, and asset purchases from the federal government. Tens of billions then flowed right back out the door to AIG’s “counterparties”—major financial firms, like Goldman Sachs and Deutsche Bank, that had made bets with AIG on the direction of the housing market. Critics insisted that AIG (really the government at that point) had no obligation to make Goldman and the other banks whole. Had the insurance company collapsed, Goldman and its ilk might have received pennies on the dollar. But Geithner, who presided over the bailout, has argued that he had no choice: He couldn’t demand so-called haircuts—discounts on AIG’s payments to these firms—because the government had already committed to saving AIG. At that point, it would have been disingenuous to use its possible collapse as leverage.
To which many of us have responded: Hmmmmm…. Given Geithner’s apparent willingness to bend the rules when it came to Lehman, this doesn’t ring entirely true. Let’s see if he can come up with a more compelling explanation in his book. Or, better yet, a more damning one.
Citigroup: Geithner’s personal history with the disastrously run megabank is almost as convoluted (and questionable) as the government’s. When Geithner first took over as New York Fed chairman, he became friendly with Sandy Weill, the company’s founder (who was also a New York Fed board member). Later, he met frequently with Chuck Prince, Weill’s successor. It’s hard to argue that these relationships had a healthy effect on the Fed’s oversight of the bank. In 2005, the Fed barred Citi from acquiring new companies because of its dodgy stewardship of its existing subsidiaries, but then reversed the ban the following year amid what it called “significant progress” in the way the bank managed risk. As it happens, this was the period when Citi was gorging on the subprime mortgage securities that would have destroyed the company absent a $45 billion bailout and a $300 billion government insurance policy.
Citi was also chronically slow to sell new stock, which would have raised money to create a buffer against losses and made a bailout less necessary. Geithner’s New York Fed was much too timid about leaning on Citi to do this—something banks are often reluctant to do because it “dilutes” their existing shareholders.
There is, of course, one other Geithner acquaintance who may have colored his thinking on these matters: Bob Rubin, his former Treasury department mentor, who was a top Citigroup executive until early 2009. How often did Geithner and Rubin discuss the firm’s dealings in 2006 and 2007, when the firm was digging its own grave? What specifically did they discuss? What about late 2008 and early 2009, when the firm was hoovering up government cash? The journalist Ron Suskind has reported that Geithner essentially defied an order from Obama to restructure Citigroup in 2009. Geithner has denied this, and there’s some circumstantial evidence to support him. Still, his overall track record with Citi is sketchy and opaque.
Financial reform: Geithner was the architect of the financial reform bill the president signed in 2010. But he appeared to suffer two key defeats along the way. The first had to do with derivatives, the financial instruments that allowed companies like AIG to bet on the housing market. Geithner was resistant to forcing derivatives onto exchanges, where any slob could see the prices they traded for, and which would crimp profit margins for the big banks that made billions dealing in them. Thanks to some of his bureaucratic rivals, namely Commodity Futures Trading Commission Chairman Gary Gensler, the final bill did require a modicum of exchange-trading.
The second defeat had to do with proprietary trading, the practice by which banks act like hedge funds and trade securities to pad their own bottom line, not on behalf of their customers. Geithner didn’t think proprietary trading had much to do with the financial crisis. Others, most notably former Fed Chairman Paul Volcker, believed that allowing proprietary trading at banks backed by the government was disastrous policy, since it would encourage them to take massive risks and could leave taxpayers on the hook for losses. Geithner only saw the light after Obama sided with Volcker.
Curiously, though, in both cases the reforms ended up quite a bit weaker than Geithner’s high-profile reversals would suggest. A skeptic might say Geithner played his hand perfectly: He got on board with these policies when opposing them became pointless. But he worked behind the scenes to undermine them. Which is why Geithner’s treatment of these episodes will be worth scrutinizing. Does he claim credit for the reforms he initially opposed and by all accounts weakened? Does he attempt candor and claim they were substantively unnecessary concessions to critics and public opinion? Does he tip his hand about how much the big banks were leaning on him to oppose them? Stay tuned.
The F-bombs: In public, Geithner comes across as soft-spoken and understated. In private, he is a profanity-wielding fiend—pumping out curse words the way the U.S. mint pumps out greenbacks. When Geither met with a group of industry lobbyists to discuss financial reform in May 2009, they wanted to know what he thought of the FDIC’s proposal for a “council of regulators” to oversee the biggest banks. “There isn’t going to be any fucking council,” he told them. (In this case his prediction proved to be as crude as his language.) In August of that same year, he opened a meeting with the government’s top financial regulators with a litany of swearing. Geithner was upset that the regulators were angling for turf rather than presenting a unified front on reform. What informed readers want to know is: How much of this is shtick, intended for effect, and how much is authentic? Does Geithner address it, if only in passing, given his potty-mouth reputation among insiders? If and when Geithner recreates dialogue in his book, does he toss in a few F-bombs, or will he sanitize conversations in the interest of family friendliness?