Gary Karz, CFA
Host of InvestorHome
Timothy Geithner's book "Stress Test" was released in May of 2014 with a flurry of media publicity and book reviews (some critical and some complimentary) from many prominent crisis commentators. There had been more than 350 books written with substantive discussions about the crisis and Stress Test is one of more than 40 to qualify as a "best seller." Stress Test has the potential to become one of the primary historical accounts of the Global Financial Crisis because of Geithner's central role in the critical stages of the crisis. Geithner was president of the New York Fed before and during the initial phases of the crisis (though he initially was not as prominent as Hank Paulson and Ben Bernanke). Geithner became one of the lead players post Lehman bankruptcy and the presidential election when he took over from Paulson as Treasury Secretary in the Obama administration at the start of 2009. As Treasury Secretary he engineered the plan for the Stress Tests and the overall attempt to limit the damage from the crisis and guide the economy back to health.
Before his book was released, Geithner was being criticized, for instance Jennifer Taub (whose own book Other People's Houses was also release in May) wrote "What he got wrong was choosing banks over people" and David Dayen wrote "Geithner’s legacy will forever be haunted by accusations from Warren’s side of the fence—that the Obama economic team, in its eagerness to preserve the financial system, too often ignored the plight of ordinary Americans who still suffer from the carnage that system wrought." Following the book's release Robert Reich called Geithner delusional while a WSJ review was modestly critical. A relatively balanced NYTimes review suggests that 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," but "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."
Sheila Bair (former FDIC Chair and author of Bull by the Horns) had some "disagreements" with Geithner yet recommends his book given that she doesn't "mind listening to people whose views differ from mine." Bair agrees with "Tim that there will always be financial cycles and a need for government interventions" but argues "Tim’s justification of the bailouts is based on a false dilemma: that our only choices were either to do nothing or to pursue the over-the-top measures which we did." Michael Lewis (author of the best selling crisis book The Big Short) has a very thoughtful review and discusses many of the ongoing crisis debates in calling Stress Test "a really good book." Lewis writes "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."
Stress Test includes biographical information and background on Geithner's rapid rise as a "civil servant." We learn about Geithner's childhood, education, and experiences. Geithner writes that according to his mother "I was a wild and energetic baby" later adding "To this day, I have a hard time sitting still." He worked part-time throughout college (washing dishes, taking photos, and working as a drill instructor for other students taking Chinese) to help cover costs, and started to advance quickly after entering public service. He credits Larry Summers for helping to "promote him up in the ranks." Originally registered as a Republican "but without much conviction. I had no passion for politics", Geithner writes it was Larry's suggestion, that he switch party registration from Republican to unaffiliated, to make it easier to get the White House on Board (noting he had voted for President Clinton twice).
Additional tidbits about Geithner's political opinions are found later in the book, including the following excerpts.
- "I don't think I'm hawkish or dovish by nature. I've always been very pragmatic, suspicious of ideology in any form, and I took both halves of the Fed's dual mandate seriously."
- "I was not an austerian. I was an Augustinian."
- "The most important thing I learned about financial crisis is that they're awful."
- "I greatly admired Rubin, Summers, and Greenspan, and I shared their general approval of markets and financial innovation."
Geithner spent much of his "career dealing with financial crisis--in Mexico, Thailand, Korea--but this was the big one, the hundred-year storm." He notes that early in his career, "while we were firefighting in Asia I read Charles Kindelberger's classic history of financial crisis, Manias, Panics, and Crashes, and his explanation of the recurrence of crisis over centuries was the most consistent with what I had observed." He later cites American economist Hyman Minsky's work (which he read a decade later) and summarizes "stability can produce excessive confidence, which produces the seeds of future instability."
Geithner offers his intention for the book on the final page - "I hope this book will help cast a brighter light on what we did and why we did it, because that's really important--not just for me and my colleagues, but for the country. The lingering public revulsion for what we did, for bailouts and stimulus and government intervention to resolve financial crisis, is a serious problem for the policymakers who will stand in my shoes in the future."
Geithner comes off as defensive for much of the book and tries to explain how the government failed to foresee the systemic risks, while highlighting many of the difficult tradeoffs that policymakers faced.
- "Over the next few years, while financial markets and home prices and nationwide borrowing soared, my colleagues and I spent much of our time and energy trying to make the system more resilient, better prepared to withstand a crisis. Ultimately, of course, our efforts were insufficient. We failed to prevent the worst financial crisis and deepest recession in generations. I had the dubious distinction of being in charge of the New York Fed when Wall Street imploded."
- "We restored confidence in the financial system and the economy, even though the public lost confidence in their government."
One of the things I like about this book is Geithner is one of the few to mention the fact that there are so many theories about what caused the crisis. He writes "THERE WERE all sorts of other problems in the system, and they gave rise to a variety of theories purporting to explain the crisis. The problems were so many and so varied that the crisis became a kind of Rorschach test; you could find at least some evidence to support almost any theory that confirmed your prior ideological biases, no matter where you stood on the political or economic spectrum. Some of these problems did contribute to the crisis and did magnify the damage caused by the crisis, but they were not principal causes of the crisis. They would not have been so material without the more fundamental forces of the mania--the excessive belief that past would by prologue and the good times would continue to roll--that fed the excess borrowing.
I was particularly interested in Geithner's discussion of the many of the suggested causes of the crisis, including regulatory lapses and failures, monetary policy, credit rating failures, as well as various economic theories (I have been aggregating crisis opinions here). Geithner discusses various theories and his own opinions in depth. He summarizes "the root causes, as usual, were mania, leverage, and runable short-term financing. That's how our financial system became that scene from It's a Wonderful Life." Geithner also acknowledges many mistakes in the run-up to the crisis. Geithner discusses major lapses in government foresight, including the following excerpt (on pages 113-114)The prevailing assumption that housing prices would not slump nationwide, though widely shared and backed by seven decades of history, also turned out to be wrong. This is often seen as our worst misjudgement, since so many subsequent problems in the financial system would involve mortgages and mortgage-backed securities. But it was not our most important miss. Even though we did not expect a nationwide real estate bust, we did analyze scenarios where house prices fell sharply across the country. Unfortunately, we concluded that the impact on the financial system and the broader economy would be relatively modest. We didn't foresee that falling housing prices alone would trigger widespread mortgage defaults that could cause significant problems in the banking system, because we didn't examine the possibility that the initial fears associated with subprime mortgages and the general fall in house prices could trigger a classic financial panic, followed by a crash in household wealth and a collapse of the broader economy. This is the arc of crisis described in Kindelberger's book: manias, followed by panics, ending in crashes. And this was the death spiral I had seen so often at Treasury during the emerging-market crisis of the 1990s . . . we didn't appreciate the extent to which nonbanks were funding themselves in runable short-term ways, or how vulnerable the banking system would be to distress in the nonbanks. We knew we were vulnerable to a panic, and I spent years concerned about our vulnerabilities, but ultimately we were even more vulnerable than we realized. We also failed to anticipate the savage depth of the Great Recession, or the debilitating feedback loop between problems in the financial system and problems in the broader economy.Geithner continues "You could say our failures of foresight were primarily failures of imagination, like the failure to foresee terrorists flying planes into buildings before September 11. But severe financial crisis had happened for centuries in multiple countries, in many shapes and forms, always with pretty bad outcomes. For all my talk about tail risk, negative extremes, and stress scenarios, our visions of darkness still weren't dark enough."
Geithner makes extensive use of analogies and metaphors. I also started collecting crisis analogies that I had come across over the years which I posted shortly after the release of Stress Test. Now that I've read the book in full, I've added some excerpts from Geithner's book to the collection.
One ongoing debate is whether the government's failure to find a way to prevent Lehman's Bankruptcy was a primary cause of the broader crisis. Gethner's discussion of that topic is interesting and his opinion is similar to what I've seen argued by some others. Regarding the reaction to the bankruptcy, Geithner writes "On the left, the New York Times editorial page called it 'oddly reassuring,' while on the right, the Wall Street Journal declared 'the government had to draw a line somewhere.' I took no comfort from that nonsense. We hadn't chosen to draw a line. We had been powerless, not fearless. We had tried but failed to prevent a catastrophic default. That's still poorly understood, in part because Hank and Ben, who had the thankless job of explaining our actions, decided not to admit defeat in public. They thought the time for confessing we didn't have the firepower to save Lehman would intensify panic, which may have been right."
Many have suggested that given the rescue of AIG, the government could have first saved Lehman. Geithner responds "If we had done for Lehman what we did for AIG, we just would have financed a run on an unsalvageable institution. We didn't believe its core investment banking business was strong enough to generate the necessary resources to cover the losses in the rest of the firm. Today the world still believes we made a conscious choice to let Lehman go. That's the standard journalistic account, shared by many economists and financial players. It's understandable, considering what we did with AIG and others later, and considering the initial Washington comments; they were designed to avoid damaging (though accurate) perception that we had been powerless to save a large and interconnected institution, but they helped feed the myth that we had chosen failure. Even some of my former colleagues at the Fed and Treasury still think we could have rescued Lehman; Alan Greenspan said so publicly. But I do not believe we could have done it without violating the legal constraints placed on the Fed, and without damaging our ability to deal credibly and effectively with the terrible challenges still ahead of us. To save Lehman, we would have needed a private company willing and able to buy most if not all of it, and we didn't have one."
Stress Test often discusses the relative options that we faced, in justifying the actions that were taken. For instance, Geithner writes "As much as the public hated bailouts, we were pretty sure people would hate the consequences of uncontrolled default even more. And I had learned during the nineties that the kind of actions that solve financial crisis are never popular, that it wasn't worth trying too hard to make them popular." He also points out that "Ben warned that if we didn't act quickly, there wouldn't be an economy left to save."
In addition to discussing Lehman and the governments dealing with large financial firms, Geithner argues "Our inconsistency had multiple causes: the limits of our authority, which made us look like we were flailing; the balkanization of our authority, which put different tools in the hands of different officials with different strategies and different perceived responsibilities; and the inevitable messiness of fighting a crisis with limited time and incomplete information to make decisions. But whatever the cause, our unpredictability undermined the effectiveness of our response."
Geithner acknowledges suffering from "'Lehman Syndrome,' a kind of financial post-traumatic stress disorder. Sterling sometimes quipped that whenever anyone mentioned the words 'systemic risk,' everyone's IQ instantly dropped fifty points. I pleaded guilty to Lehman Syndrome. I thought that if you weren't traumatized by the fall of Lehman and terrified by the thought of another Lehman, you weren't paying attention."
Geithner discusses the crisis developments and the major firms and notes that "Of the twenty-five largest financial institutions at the start of 2008, thirteen either failed (Lehman, WaMu), received government help to avoid failure (Fannie, Freddie, AIG, Citi, BofA), merged to avoid failure (Countrywide, Bear, Merrill, Wachovia), or transformed their business structure to avoid failure (Morgan Stanley, Goldman).
One of the biggest criticisms of the crisis response was regarding the perceived weakness of efforts to help struggling homeowners, as opposed to the financial firms which were saved. Geithner discusses that extensively including the problems with attempts to help homeowners and the reasons so many of the programs were so ineffective (for instance he notes "Hope for Homeowners" attracted only 312 applicants). Geithner writes "Too many unemployed and underemployed workers were having trouble making mortgage payments. We could spend hundreds of billions of dollars paying down negative equity without changing that reality. It wouldn't matter how many mortgages we modified if the borrowers didn't have income. We couldn't fix the economy by fixing housing, but we could do the reverse." He also acknowledges the mistake of not being more sympathetic in listening to people's pain and suffering.
A key turning point for the crisis is described on page 352 - "Nearly two years into the financial crisis, I was an official punch line. But another funny thing happened after the stress test: The crisis started to subside." Whether or not (and when) the crisis in a broad sense ended remains a debated topic, but it is generally agreed that around the second quarter of 2009 (after the stock market bottomed) was a turning point and conditions generally stopped deteriorating.
Regarding the lack of high level prosecutions Geithner writes "It's also true that individual Wall Street CEOs haven't been marched off to jail en masse, as many Americans thought should be. But this was not a conspiracy of public corruption or ineptitute. Federal prosecutors and state attorneys general had all the right incentives to go after high-profile financial scalps, and they brought down some insider traders and Ponzi schemers. For the most part, they have simply concluded that the financial activities most responsible for the crisis weren't illegal, however unethical or dumb they may have been. There was an appalling amount of mortgage fraud during the credit boom; it caused a lot of pain, and it deserved a more forceful enforcement response than the government delivered. But the bulk of the huge boom in borrowing that caused the crisis was between consenting adults who took risks they believed would pay off, risks that did pay off for a long time, risks fueled by genuine but imprudent beliefs that rising real estate values would make future defaults extremely unlikely."
Some have criticized Geithner for his excessive use of the term "Old Testament" which he explains early in the book the following way - "The obvious objection to government help to troubled firms was that it rewarded the arsonists who set the system on fire. This objection took two forms. One was a moral argument about justice, what I called the 'Old Testament view.' The venal should be punished. The irresponsible shouldn't be bailed out." Geithner also arguably gives too much credit to the governments response regarding unemployment by pointing out that "Our unemployment rate rose to 10 percent, but not to 25 percent as in the Depression." October 2009 unemployment was originally reported at 10.2% and revised to 10.1%. But others have argued that changes in the unemployment statistics (the definition was changed in 1994), require an adjustment that includes long-term discouraged workers, which imply a much higher rate, more comparable to the great recession.
Many of Geithner's arguments are of course, debatable, but the book is clearly well written and edited, as would be expected - Geithner acknowledges his "collaborator" Michael Grunwald, plus he thanks a long list of colleagues for suggestions, comments and reviewing chapters, sections, and/or the entire draft of the book. Geithner also notes that "I tried to write the bulk of this book without reading any of the existing histories that covered portions of this crisis, so that my memory was not altered by these reports. But as I got further along, I checked my account against those of other participants, most importantly Hank Paulson's excellent book, On the Brink, and those based on extensive reporting at the time by journalists, most notably David Wessel's In Fed We Trust and Andrew Ross Sorkin's Too Big to Fail."
As we await Ben Bernanke's book about the crisis we can continue to contemplate the role of the major players. On page 257, Geithner discusses the need for emergency planning with Bernanke, who responds "I have a plan for catastrophe," Ben said with a smile. "My plan is to call you." There were a number of stories about "witty, serious and snarky title suggestions" for Bernanke's book including a hashtag at Twitter #BernankeBookTitles. The best serious bet for the title is "Before Asia Opens ..." which is suggested on page 1 of David Wessel's book In Fed We Trust: Ben Bernanke's War on the Great Panic. Bernanke and Wessel are both affiliated with The Brookings Institution's Hutchins Center on Fiscal and Monetary Policy and Wessel had commented “We’re looking forward to helping Mr. Bernanke with the book he plans to write.”
- Geithner's WSJ column titled The Paradox of Financial Crises (5/13/2014)
- Tim Geithner with Martin Wolf at the FT (5/15/2014)
- Daily Show interview (5/21/2014)
- Timothy Geithner with David Wessel at WSJ (6/4/2014)
- Geithner's WSJ column Financial Crisis Amnesia (3/1/2012)
- FCIC interview (audio)
- Geithner's testimony at Financial Crisis Inquiry Commission (5/6/2010) via CSPAN.
- Jennifer Taub (5/6/2014) pre-release
- David Dayen (5/7/2014) pre-release
- WSJ Review (5/11/2014)
- NYTimes (5/11/2014)
- William Black (5/12/2014)
- Robert Reich (5/15/2014) calls Geithner "delusional"
- Joe Nocera (5/19/2014)
- Sheila Bair (5/20/2014) why I recommend Tim Geithner's book
- Dean Baker (5/24/2014)
- David Bahnsen (5/25/2014)
- Michael Lewis (5/25/2014)
A few additional tidbits of note include the following. In describing the experience of the crisis Geithner writes "I never watched TV news, unless you count The Daily Show," which he later mentions as his favorite TV show. Geithner was interviewed on The Daily Show (5/21/2014) while promoting the book. It is interesting that Larry Summers, who mentored and worked closely with Geithner reviewed House of Debt (also released in May) by Atif Mian and Amir Sufi and wrote "it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession" although he also wrote "It seems to me that Mian and Sufi are naive on policy and contribute much less to the debate on this than they suppose." Also of note, on page 30 Geithner mentions running into Dartmouth Review writer Dinesh D'Souza "at a coffee shop and asked him how it felt to be such a dick." Ironically D'Souza's latest book America was released a few weeks after Geithner's and while both have been best sellers, America reached #1 (Stress Test peaked at #4), has been on the NYTimes list longer (Stress Test seems to have lasted on the list for five weeks), and remains a best seller.
Last update 9/8/2014. Copyright © 2014 Investor Home. All rights reserved. Disclaimer