Timothy Geithner was president of the New York Federal Reserve when the Wall Street bank Lehman Brothers collapsed in 2008. A few months later, he became Treasury secretary as the crisis deepened on his watch.
Geithner received mixed reviews of his performance during that time. Wall Street types take him for a champion of excessive government intervention and regulation, while Occupy Wall Street types consider him a tool of the banks. Geithner, however, says he was just trying to get the financial system out of a multifaceted crisis with the threat of a Great Depression looming.
In his book, Stress Test, Geithner details the events leading up to the crisis and how regulators responded by unwinding the financial institutions Bear Stearns, Lehman Brothers, AIG and Washington Mutual, among others. He tells NPR's Robert Siegel that at the time, he didn't have much choice in how to respond to the crisis.
"The paradox of this is, the only way to reduce damage to the innocent victims of a crisis is to make sure you keep the lights on," he says. "Because if you don't keep the lights on in the financial system, then you're going to face Depression-level unemployment."
You can read highlights from the conversation below.
On struggling to communicate with the public
I wasn't hired to be the communications guy and I wasn't good at it. I don't think anybody found a way to — in that moment — describe it. That's because, at its core, the things we had to do were going to look like we were rewarding the arsonists. And it is, I think, impossible to expect a normal human to explain to them that the only way to protect them from that risk was to reward the people who had taken a lot of risk with their money. And I think at its core, that's why governments typically do a terrible job in financial crises.
On what handling the financial crisis felt like
It's like you're in the cockpit of the plane — your engine's burning, smoke's filling the cabin, it's filled with a bunch of people that are fighting with each other about who's responsible, you have terrorists on the plane and people want you to come out of the cockpit and put them in jail. And you have to land the plane. That terrifying core objective in a crisis is to make sure you first put out the fire.
On the difference between helping banks and auto companies
It's just that this is a core, hard thing we don't like to admit, and it seems unfair, but banks are different. They're different because their existence depends on — in a way that's different from any other industry — their ability to convince people to keep their money in the bank. And when they lose that ability, then they cannot function. And when they can't function, as you saw in the wake of Lehman [Brothers] and Washington Mutual, what they have to do is liquidate assets at a terrible loss and that adds fuel to the fire.
On when President Obama asked him to take the job
When I first met him [then-Sen. Obama] and he told me he might have to ask me to come to Washington, I tried very hard to talk him out of it. Because I felt at that time that there were better choices and that I was already so up to my neck in the choices we had already made — that I was very proud of, that I wouldn't distance myself from — [that] would complicate his capacity to try to rebuild confidence. ... When your president asks you to do that in a moment of crisis, then you say, "Yes."
MELISSA BLOCK, HOST:
This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block. Timothy Geithner was president of the New York Federal Reserve when the Wall Street bank Lehman Brothers collapsed in 2008. A few months later, he'd become President Obama's Treasury secretary, the crisis deepening on his watch.
He takes it all on in a new book out today called "Stress Test." He details one crisis after another, helping to engineer the unwinding of Lehman, Bear Stearns and the nation's biggest thrift, Washington Mutual to name a few. Geithner sat down to talk about his thought process during that time with my colleague, Robert Siegel.
ROBERT SIEGEL, BYLINE: Timothy Geithner acknowledges the deeply mixed reviews he got as Treasury secretary. Wall Street types take him for a crypto socialist champion of excessive government intervention and regulation. Occupy Wall Street types take him for a tool of the banks. Geithner sees himself as a guy who was trying to get the financial system out of multifaceted crisis with the threat of a Great Depression looming.
TIMOTHY GEITHNER: You know, it's like you're in the cockpit of the plane, your engine's burning, smoke's filling the cabin, it's filled with a bunch of people that are fighting with each other about who's responsible, you have terrorists on the plane and people want you to come out of the cockpit and put them in jail. And you have to land the plane. That terrifying core objective in a crisis is to make sure you first put out the fire.
SIEGEL: There's a moment in the book when you give vent to a sentiment that you more typically dismiss as an Old Testament urge to punish. You write this: I used to joke that there would be less moral hazard if financial executives had to put up their own homes as collateral, the head of assets of their firms. And you describe walking past an oceanfront mansion of a former head of Bear Stearns, the bankrupt Wall Street firm, and saying that one should have been the first loss.
Isn't that exactly what your critics on the left felt and still feel?
GEITHNER: Well, people on the right and the left both believe that there was a way to save the country from disaster and still let the system all apart, impose losses on creditors. But in a financial panic, as we saw in '08, it's the opposite of what makes sense to protect people. In some sense, the paradox of this is the only way to reduce damage to the innocent victims of a crisis is to make sure you keep the lights on.
Because if you don't keep the lights on in a financial system, then you're going to face depression level unemployment. That's the paradox of it.
SIEGEL: You describe the collapse of Washington Mutual, the nation's biggest thrift at the time, as, and I quote, one of the least appreciated episodes of the crisis and one in which you write the U.S. government made things worse. Your antagonist in that case was the head of the Federal Deposit Insurance Corporation, Sheila Bair. What did she do that struck you as so wrong?
GEITHNER: Well, I want to do this in the fairest way. And that was a terrible mistake and it was a completely avoidable mistake because in that moment, even though the crisis was at its most - the country was at its most perilous state and that panic was gaining momentum, in that context, what the FDIC did is use the normal playbook and they gave that bank to another bank for a very cheap price and imposed losses or haircuts on the creditors of Washington Mutual.
And what that happened - and it happened within a matter of minutes, it was like adding fuel to the fire. And that fire that was already burning bright and hot, spread to imperil, in a matter of days, some of the much stronger banks across the country.
SIEGEL: You're saying because the creditors of Washington Mutual were forced to settle for a lot less than 100 cents on the dollar, what they...
GEITHNER: Yeah, just to be fair. And to Sheila Bair's credit and the credit of her colleagues at the FDIC, they reversed course very quickly.
SIEGEL: But you were very critical of her at the time. You are in the book. In Andrew Ross Sorkin's article in the New York Times Sunday magazine, Sheila Bair returns the favor. Sorkin quotes her as saying of your policies, putting up walls of money to restore faith in the banks, Tim had no idea whether the government's money would be lost. Taxpayers will never be adequately compensated for the tremendous risks he took with their money.
Did you actually have an idea that the government's money would not be lost and that this was safe?
GEITHNER: You know, we didn't do this with the expectation we would make money for the taxpayer. We did it with the knowledge that only by taking risks the market wouldn't take would we be in a position to prevent mass unemployment on the global scale. And that knowledge was informed by the judgment and the record of history.
Now, the fact that we earned a return on the rescue, well over $100 billion, of course, does not compensate people for the damage caused by the crisis. Of course, it couldn't and it couldn't -- there's no way it could. But if we hadn't designed the rescue as forcedly - and, of course, what Sheila Bair did at the FDIC was part of that rescue - we would have left people with much more damage and much more damage to the country.
SIEGEL: But these haircuts for Washington Mutual's creditors, which you describe as adding fuel to the fire, annoyed you so much, later on, the government bailed out the auto companies and I remember Chrysler bondholders, I believe it was, claiming that their rights were being trampled when they took haircuts in the accelerated bankruptcy.
They lost. It worked. Life went on. It didn't fuel any greater fire.
GEITHNER: Excellent question. And you know, it's just that this is a core, hard thing we don't like to admit, and it seems unfair, but, you know, banks are different. They're different because their existence depends on, in a way that's different from any other industry, their ability to convince people to keep their money in the bank. And when they lose that ability, then they cannot function.
And when they can't function, as you saw in the wake of Lehman and Washington Mutual, what they have to do is liquidate assets at a terrible loss and that adds fuel to the fire.
SIEGEL: But when you speak of the unique thing about banks, I'm reminded of the Wall Street veteran Felix Rohatyn once telling me that he came from the times when banks were in the business of conserving wealth, protecting wealth, not creating wealth. It seems that the banking sector that was there before you became head of the New York Fed, the banking sector as it now exists, puts its credibility on the line all the time by creating things like synthetic collateral debt obligations, exotic instruments that sometimes the banks themselves don't even understand.
So they've increased the risk of loss of credibility by that standard.
GEITHNER: I think you should think about this slightly differently. This was not a crisis caused by financial innovation on a massive scale. It wasn't a crisis caused fundamentally by a set of new fancy things that, in retrospect seem very risky. It was a crisis caused because we had a long period of confidence that it was safe to lend a lot of money, safe to borrow a lot of money relative to income, that your house prices would never fall, that recessions would be short and shallow.
No memory of panic, no memory of depression. And what happened in that environment was that people ended up taking too much risk.
SIEGEL: Now you argue that in the book, that these were old fashioned causes behind the collapse. I just...
GEITHNER: In fancy new forms.
SIEGEL: But, you know, my reaction was it's like saying I got robbed because I forgot to lock the door in my house. It's a simple, old fashioned reason. But if the lock, you know, on my house is some kind of a combination lock where you have to solve three quadratic equations to lock the door, I've hugely increased the risk of leaving my door unlocked.
And it seemed to me that the complexity and what passed for innovation, I just can't, in my own mind, eliminate it from responsibility either way.
GEITHNER: Let me try it this way and see if this is more convincing. What happened in our financial system before the crisis was over a period of decades the system outgrew, found a way around all the safeguards we put in place after the Great Depression. And we allowed this whole new set of risky institutions to grow and build and become massive and huge. And to prevent that risk, all you need to do, and I'm saying, you know, I'm trying to reach for a simple thing, maybe I'm making your point, is force that set of core institutions to hold sticker shock absorbers against the risk of loss. Because you cannot know what the future brings.
SIEGEL: (unintelligible) when you say we did this, we made the securities that way, would say actually they did. The people who were issuing the securities managed to get all the regulations changed in their favor, to make the financial sector exactly what it was at the beginning of the...
GEITHNER: But to understand the perception, given the scale of innovation, but the vital, critical decisive problem was a more simple problem, which is people did not anticipate the risk that house prices might fall, we could face a bad recession and that might induce a financial panic.
SIEGEL: One of the first things you write about was your maiden speech as Treasury secretary. And you write that your own judgment, quote, "it sucked," unquote.
SIEGEL: I've spoken with Henry Paulson who preceded you as Treasury secretary. And he recalls, he says his greatest regret is having been unable to persuade people that what Washington did wasn't to help banks, it was to help people. Why such poor communication?
GEITHNER: Well, you know, I wasn't hired to be the communications guy and I wasn't good at it. I don't think anybody found a way to, in that moment, to explain and describe it. And I think that's because at its core the things we have to do the work going to look like we were rewarding the arsonists. And it is, I think, impossible to expect a normal human to explain to them that the only way to protect them from that risk was to reward the people who had taken a lot of risk with their money.
And I think at its core, that's why governments typically do a terrible job in financial crises.
SIEGEL: You were the most unlikely of Treasury secretaries by resume, not a banker, not a politician or a corporate CEO, not an economist, what makes a good Treasury secretary?
GEITHNER: It sort of depends on the moment, I think. And I tell the story the book about when I first met him, and he told me that he might have asked me to come to Washington. I...
SIEGEL: President Obama, we're talking about.
GEITHNER: President Obama, then-Senator Obama. I tried very hard to talk him out of it because I felt at that time that there were better choices. And that I was already so up to my neck in the choices we'd already made, that I was very proud of, I would distance myself from, would complicate his capacity to try to rebuild confidence.
SIEGEL: Things that you had part of at the New York Fed.
GEITHNER: Yeah, because we'd already at that point, you know, done a set of necessary things to try to break the panic that were what fed this deep sense of unfairness. And my view was if he, understanding my weaknesses and my experience, asked me to do it, when your president asks you to do that in a moment of crisis then you say yes to that.
SIEGEL: Well, what did he say in response to your eloquent explanation of...
SIEGEL: ...why you weren't the man for the job?
GEITHNER: He seemed unmoved.
GEITHNER: He seemed unmoved by the (unintelligible), you know...
SIEGEL: You fail to communicate again.
GEITHNER: I failed to communicate again. It was just a failure of communication, typical thing for me.
GEITHNER: But I am kind of lucky. I feel so lucky he asked me to do it and I so admire him.
SIEGEL: Well, Timothy Geithner, former secretary of the Treasury and author now of "Stressed Test: Reflections Of Financial Crises," thanks a lot for talking with us again.
GEITHNER: Thank you, Robert.
BLOCK: And you can read an excerpt of Geithner's new memoir at NPR.board.
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