A Memoir From the Eye of a Financial Storm: In ‘Stress Test,’ Timothy F. Geithner Recalls Crisis Days

A Memoir From the Eye of a Financial Storm

In ‘Stress Test,’ Timothy F. Geithner Recalls Crisis Days

MAY 11, 2014

One afternoon in the summer of 2008, as the financial system was careening toward the abyss that would send the United States into the worst economic emergency  since the Great DepressionTimothy F. Geithner — then president of the Federal Reserve Bank of New York, and later, President Obama’sTreasury secretary — tried to lighten the mood in his office with “an impromptu contest for the best metaphor for what was happening.”

Among the phrases suggested that day were: the wheels are “coming off the bus,” the engines are “falling off the plane” and “the rivets are coming off the submarine.” There were comparisons to wildfires and earthquakes, “cancer and contagion, sweaters unraveling and boulders rolling down a hill.” (And this was before the collapse of Lehman Brothers in September accelerated fears into an extreme panic.)

It wasn’t until he saw “The Hurt Locker,” the Oscar-winning film about a bomb disposal unit in Iraq, Mr. Geithner writes in his new memoir, “Stress Test,” that he found something that really captured what “the terror of those days” felt like for insiders trying to contain the unspooling crisis. “What we went through on interminable conference calls in fancy office buildings obviously did not compare to the horrors of war,” he writes, but the emotions were similar: “the overwhelming burden of responsibility combined with the paralyzing risk of catastrophic failure; the frustration about the stuff out of your control; the uncertainty about what would help; the knowledge that even good decisions might turn out badly; the pain and guilt of neglecting your family; the loneliness and the numbness.”

“Stress Test” provides an intimate take on the financial crisis, and in this respect stands as a gripping, if subjective bookend to already published accounts, like the journalist David Wessel’s riveting chronicle “In Fed We Trust”and the economist Alan S. Blinder’s lucid “After the Music Stopped.” “Stress Test” conveys in visceral terms just how precarious things were during the crisis, just how frightened many first responders were, and just what an achievement it was to avert a major depression.

“Stress Test” does not provide any big new revelations, nor does it shed new light on the inside workings of the Obama White House. The book attempts, rather, to explain why Mr. Geithner and his colleagues made the choices they did — something Mr. Geithner acknowledges he “never found an effective way” of doing at the time (in much the same way that many say the Obama administration failed to communicate the goals and benefits ofhealth care reform). Mr. Geithner suggests that the administration’s failure to make a strong case for its economic plan in real time meant “we lost the country” while trying to steady the financial ship.

Some critics of the Obama administration would say that its economic policies — not its articulation of those policies — were the problem. And while Mr. Geithner clearly and patiently explains the reasoning behind pivotal decisions here, “Stress Test” is unlikely to change the minds of those, on both the left and right, who contend that he and his colleagues gave away too much to Wall Street, did too little for Main Street and carried out too few (or too cumbersome) reforms to prevent a future catastrophe.

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Mr. Geithner says he understands why the American public was outraged that some of the arsonists who had set the financial fire of 2008 were getting bailouts and bonuses, but argues that “a lot of firms that didn’t deserve saving still needed to be saved” because, in his view, their implosion could have set off another series of tumbling dominoes.

The former Obama economic policy adviser Lawrence H. Summers and other colleagues, Mr. Geithner writes, “would say I suffered from ‘Lehman Syndrome,’ a kind of financial post-traumatic stress disorder.” He says he pleads guilty to that charge: “Letting systemic firms fail, nationalizing them, haircutting their creditors — it all sounded alluring when you hadn’t lived through the consequences. I preferred to err on the side of avoiding another calamity.”

Of the collapse of Lehman Brothers, Mr. Geithner says he does not think the government could have rescued it “without violating the legal constraints placed on the Fed.” He also writes that “we hadn’t chosen to draw a line” with Lehman as a corrective to moral hazard, but instead “had been powerless” to prevent “a catastrophic default.”

He similarly tries to explicate or defend controversial decisions made as Mr. Obama’s Treasury secretary. Though outrage over the decision of American International Group (AIG) — the insurance conglomerate that received nearly $200 billion in federal bailout funds — to pay out $165 million in bonuses was understandable, Mr. Geithner says: “I did not believe I had any legal basis to stop contractually promised payments, and I thought the public relations value of trying to intervene would pale in comparison to the damaging specter of the U.S. government trying to break a private contract.”

In the same chapter, Mr. Geithner denies allegations made by the journalist Ron Suskind (in the 2011 book “Confidence Men”) that he ignored or slow-walked presidential instructions to develop a plan to restructure many of the large, troubled banks, starting with Citigroup. “The President understood the risks of lurching into a pre-emptive nationalization strategy,” Mr. Geithner writes, “and he never told me to pursue that path.”

Mr. Geithner has almost nothing but praise for Mr. Obama and counters charges that the president’s decision to pursue health care reform early in his first term distracted attention from fixing the economy. He has one small criticism of his former boss: “Sometimes I thought he wore his frustration too openly. He harbored the overly optimistic belief that since his motives and values were good, since his team was thoughtful and well-intentioned, we deserved to be perceived that way.”

As president of the New York Fed — where he warned as early as 2004 “that our tools for monitoring systemic risk weren’t keeping up” with financial innovation that was pushing risk and leverage into less-supervised corners — and later as Treasury secretary, Mr. Geithner says he was careful to speak in “understated, nuanced, deliberately dull language that wouldn’t move markets or depress confidence.” (Fed speak for “a doom loop” was “an adverse, self-reinforcing dynamic.”) He had long been a “backstage guy” — not as a banker, as popularly believed, but as a technocrat at Treasury and at the International Monetary Fund — and says he had “dreaded public speaking” since high school. His big debut speech as Treasury secretary in February 2009, he admits, was abysmal, causing markets to tumble nearly 5 percent by the end of the day and winning him lots of descriptions as a “deer in the headlights.”

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In this book, Mr. Geithner, with an assist from Michael Grunwald of Time magazine, demonstrates that he can discuss economics in an accessible fashion, making the situation the country faced in 2008 and 2009 tactile, comprehensible — and harrowing — to the lay reader. Along the way, he also gives us a telling portrait of himself as “the most worried person in the room” — the administration’s Eeyore, who in the early days of 2009 (when so many in the White House were still high on the idea of hope and change) felt “weary and dark,” explaining in meetings “why the awesome new ideas weren’t that awesome, and how the storm we were sailing into was even worse than we thought.”

Despite the nimble writing here, skeptical readers will argue that “Stress Test” skirts many questions raised by critics of the Obama administration’s handling of the economy and the financial crisis. The book tends to underplay the larger, unresolved problems in the American economy (from large deficits to long-term unemployment) while overstating the importance or efficacy of regulatory changes the administration oversaw. Although Mr. Geithner writes at some length about concerns with the 2010 Dodd-Frank Wall Street reform act, he does not grapple convincingly with issues like the problems posed by bigger-than-ever banks, untrustworthy credit-rating agencies and gaps in the Balkanized system of regulatory oversight.

Students of the causes of the cataclysm of 2008 may also question Mr. Geithner’s reluctance to examine the role played in the run-up to that crisis by the anti-regulatory policies of his former mentors Mr. Summers and Robert E. Rubin (both of whom he had worked under in the Treasury Department during the Clinton administration) and the low-interest, easy-money policies of the Fed under Alan Greenspan — policies that many economic historians believe fueled market excesses and out of control risk-taking.

Among Mr. Geithner’s regrets: he wishes that he “had persuaded Congress to create more authority for the Fed and the Treasury in the financial reform legislation” and that “we had expanded our housing programs earlier, to relieve more pain for homeowners.” He writes that he and his colleagues went into the Great Firestorm of 2008 with an inadequate toolbox (“at times it felt like we were fighting World War III with General Washington’s army”), and adds that he hopes lessons from the 2008 crash “won’t have to be rediscovered in the fires of the next crisis.”


Reflections on Financial Crises

By Timothy F. Geithner

Illustrated. 580 pages. Crown Publishers. $35.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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