“From the bare facts of the American financial crisis, many different narratives have already been spun. They can be classified by whom they blame: Wall Street bankers, feckless American debtors, government incompetence, the Chinese. “The fundamental causes of this crisis were familiar and straightforward,” Geithner writes. “It began with a mania…
…the widespread belief that devastating financial crises were a thing of the past, that future recessions would be mild, that gravity-defying home prices would never crash to earth.” The causes of the crisis, in other words, were the same old-fashioned madness of crowds and extraordinary popular delusions responsible for every panic dating back to the Dutch mania for tulip bulbs. The entire society — including all the big banks and some nonbank financial firms, like the insurance company A.I.G. — simply ignored risk. The story Geithner goes on to tell blames everyone and no one. The crisis he describes might just as well have been an act of God. Basically no one noticed what was happening inside the financial system until after it happened…… Geithner seems genuinely to believe that the details of the behavior inside the financial industry are largely irrelevant — that investors who bought subprime mortgage bonds simply suffered from the same misconceptions as everyone else.”, Michael Lewis, New York Times, May 25, 2014
The Hot Seat
‘Stress Test,’ by Timothy F. Geithner
By MICHAEL LEWIS
He’s written a really good book — we might as well get that out of the way, as so much else about Timothy F. Geithner remains unsettled. Geithner served as president of the New York Federal Reserve from late 2003 to 2008 and secretary of the Treasury from 2009 to 2013, and so sat near the center of the American financial system as it prepared to self-destruct. He then had a courtside seat to the global catastrophe. He has rich material to work with, and he has contrived to preserve its freshness. His inability as Treasury secretary to explain himself, or his actions, or the financial crisis, or his beliefs about financial reform, to the wider public will leave many readers, I suspect, feeling they are hearing his voice on these subjects for the first time.
“I had always been a backstage guy,” Geithner writes by way of general explanation, but referring specifically to his first, spectacularly unsuccessful, public speech as Treasury secretary. “I had spent my career behind the scenes. Ever since high school, I had dreaded public speaking. . . . I swayed back and forth, like an unhappy passenger on an unsteady ship. I kept peering around the teleprompter to look directly at the audience, which apparently made me look shifty; one commentator said I looked like a shoplifter. My voice wavered. I tried to sound forceful, but I just sounded like someone trying to sound forceful.”
Geithner is clearly more at ease, and more himself, on the page than on the stage or the screen — which is, for an American public figure, both odd and charming. So much so that I finished his book half wishing he had just skipped all of the public performances required of him as Treasury secretary and instead written out what he had to say and handed it to an actor — say, Denzel Washington — to perform. “Stress Test” has surprising virtues — for instance, the skill with which Geithner draws his hard-to-describe main character. He thinks of himself — and on the evidence it’s hard to disagree with him — as a fairly ordinary person thrust into a great many extraordinary situations. His mother was a card-carrying liberal; his father a Republican who spent his career working in nonprofits in poor countries, and who voted for Mitt Romney in 2012 while his son was still in the Obama administration. The future Treasury secretary grew up everywhere and nowhere, a bit like a military brat, and came away from his childhood with a certain detachment from the American way of life: “At a local supermarket in suburban Virginia one summer, I was stunned to see an entire aisle stocked with pet food. It seemed bizarre in a world full of starving people.”
Politically, Geithner was more or less born a left-leaning Republican and appears to have become a right-leaning Democrat. But his upbringing obviously left him with a resistance to political labels, or the need for a tribe. As a student at Dartmouth in the early 1980s, he would have called himself a Republican, but “without much conviction.” He felt faintly hostile to the frenzy around him of right-wing student political activism. “After The Dartmouth Review . . . published a McCarthy-style list of gay students on campus, I ran into a Review writer named Dinesh D’Souza at a coffee shop and asked him how it felt to be such a [expletive].”
In general, Geithner comes across as the sort of young person who had no particular idea of himself until the world forced him to have one. His lack of a need for self-definition — hinting at an unusual capacity, perhaps, to live with uncertainty — extended to his career. He apparently didn’t feel much personal ambition, at least in the beginning. Oddly, for a Republican Ivy League graduate of the 1980s — and even more oddly for a future Treasury secretary — he found Wall Street pointless and the business world faintly ridiculous. He had no particular interest in money. “I did endure one job interview with a management consultant, whose first question was about how I would turn around a small failing beer company,” he writes. “I had no idea.”
After going to graduate school in international studies at Johns Hopkins, he hopscotched a path into the world of important people who float between the public and private sectors. His first square was Henry Kissinger, who gave him a job as an analyst at his consulting firm. The square that changed his life was Larry Summers, then a Treasury under secretary, who clearly saw in Geithner someone who would at least pretend not to be intimidated by him. But this part of the Timothy Geithner story — his rise in the world of important people — remains a bit vague. I found myself wishing he had spent more time exploring his magical transformation from charmingly bewildered young person to unsentimental pragmatist in a suit, who airdrops with great authority into other people’s financial catastrophes.
At any rate, the more or less perpetual global financial crisis that he helped deal with — the run on the Mexican peso, the run on Southeast Asian currencies, the Russian default and so on — obviously gave him his identity: crisis manager. He became one of the guys who kept their heads as others lost theirs, defined less by what he was than by what he was not: in trouble. Mervyn King, the former governor of the Bank of England, joked (and as Geithner quotes him joking): “Tim was present at all the crises. But he didn’t cause the crises. The crises caused him.”
From the bare facts of the American financial crisis, many different narratives have already been spun. They can be classified by whom they blame: Wall Street bankers, feckless American debtors, government incompetence, the Chinese. “The fundamental causes of this crisis were familiar and straightforward,” Geithner writes. “It began with a mania — the widespread belief that devastating financial crises were a thing of the past, that future recessions would be mild, that gravity-defying home prices would never crash to earth.” The causes of the crisis, in other words, were the same old-fashioned madness of crowds and extraordinary popular delusions responsible for every panic dating back to the Dutch mania for tulip bulbs. The entire society — including all the big banks and some nonbank financial firms, like the insurance company A.I.G. — simply ignored risk.
The story Geithner goes on to tell blames everyone and no one. The crisis he describes might just as well have been an act of God. Basically no one noticed what was happening inside the financial system until after it happened. A few of the important people with a privileged view expressed concerns about the risks being taken, but most said nothing. Geithner counts himself in the minority. “I began asking questions about capital: Do our banks really have enough?” he writes, adding, “I was more worried than many of my colleagues, but I was not nearly worried enough.” His role in the run-up to the crisis was a bit like that of first mate on the Titanic, after the ship has been put on irreversible autopilot, and the captain has gone off to drink with the rich guys in first class.
Once the ship hits the iceberg, Geithner becomes more central to the action. Home prices fall, the risk-takers are exposed as delusional and, in the ensuing panic, there’s a run on the entire financial system. His job, as he sees it, is to do what he can to plug the hole, and to cram as many people as possible into lifeboats, without worrying too much about appearances. But he is immediately faced with an appearance problem: Before he can save any women and children, he has to rescue the drunks in first class who owned all the lifeboats. “To solve a major financial crisis,” he writes, “you have to do things you would never do in normal times or even in a modest crisis. . . . What feels just and fair is often the opposite of what’s required for a just and fair outcome. It’s why policy makers generally tend to make crises worse, and why the politics of crisis management are always untenable.”
Interestingly, Geithner has little sympathy for those who wanted to see Wall Street bankers held accountable for whatever it was they had done. “Old Testament vengeance” is his pet phrase for such moralistic sentiments, and he argues persuasively that if he had indulged them, the crisis would only have caused more economic pain and suffering for ordinary people. He thinks it was a mistake, for example, to allow Lehman Brothers to fail in September 2008, and writes that he would have prevented it if he could have. (He claims the Treasury and Federal Reserve lacked the authority to save it.) He says President Obama very quickly grasped the merits of ignoring the desire for vengeance, and didn’t ask him to pursue some other, more punitive strategy. As if to ensure that no one leaves confused about his point of view on all this, Geithner argues at the end of his book that the only serious weakness of the Dodd-Frank financial reform measures is that they don’t give the federal government enough power to bail out banks in future crises.
Geithner sees the government’s response to the financial crisis mainly as a great success — though he of course understands that a lot of people don’t agree with him. (“We did save the economy, but we lost the country doing it.”) He clearly thinks people ignore the facts and judge with feeling rather than reason. He himself is careful with the facts. For example, he points out several times that most people seem to believe that the Treasury’s injection of capital into the financial sector cost the taxpayer a fortune when in reality the investments yielded a projected profit of $166 billion. (But he doesn’t mention that the jury is still out on the effects of the less overt but more expensive subsidies flowing from the Federal Reserve.) He finds it silly that many people believe Dodd-Frank changed nothing important. (Yet he never explains why the roughly 5 percent capital ratio it demands of the big banks is anything like a magic number for bank safety — and he does not mention the powerful case recently made by the economists Anat Admati and Martin Hellwig that the right number is at least 20 percent.)
Timothy F. Geithner, the former Treasury secretary, in 2012. “We did save the economy,” he writes in his new memoir, “but we lost the country doing it.” Credit Luke Sharrett for The New York Times
Geithner seems genuinely to believe that the details of the behavior inside the financial industry are largely irrelevant — that investors who bought subprime mortgage bonds simply suffered from the same misconceptions as everyone else. But he doesn’t begin to explain why, if investors were so numb to risk, Wall Street went to such lengths to disguise that risk. Why did our financiers stuff so many bad loans into incomprehensibly complex securities that even sophisticated investors were unlikely to understand, and then pressure deeply conflicted ratings agencies to declare them risk-free? Subprime mortgage bonds, credit default swaps, collateralized debt obligation synthesized from those credit default swaps, the gaming of the rating agencies, along with the screwed-up behavior of financial elites that seem to me to lie at the heart of the financial crisis, Geithner deems scarcely worth mentioning. His job as financial crisis manager was in part the psychological manipulation of financial markets. It’s odd how little interest he appears to have in the people who work in them.
Finally, he seems to believe that the American financial system is now more or less fully reformed. Those who think the root cause of the crisis was the bad incentives of financiers are unlikely to be persuaded. They made vast fortunes from their colossal failure. There’s no reason they couldn’t or wouldn’t try to fail so well all over again.
But that’s the wrong note to end on. There’s hardly a moment in Geithner’s story when the reader feels he is being anything but straightforward — a near-superhuman feat for someone who spent so much time in public life defending himself from careless and dishonest personal attacks. The decisions he made are easier to criticize than they are to improve upon. I doubt many readers will put his book down and think the man did anything but his best. On his feet he might have stammered and wavered. That in itself was always a sign he was unusually brave.
Reflections on Financial Crises
By Timothy F. Geithner
Illustrated. 580 pp. Crown Publishers. $35.