Tim Geithner's Stress Test: the bankers' saviour meets America

Jon Stewart interviewed the former Treasury secretary about his book and the financial crisis, sparring around the issues dominating Americans' lives today

You could tell on Wednesday night that Jon Stewart, the host of the Daily Show, had been eager to get at former Treasury secretary Tim Geithner for a while. Geithner's new memoir Stress Test defends the bailout decisions he made during the financial crisis to help save the economy. Stewart, like many others, begged to differ.

“This is like an optical illusion,” Stewart said to Geithner. “One person looks at it and you see a pretty girl. And then you flip it and the other person looks at it and sees... America getting fucked.”

Geithner, despite a distance of six years, won't accept the premise. He seems convinced that the bailouts worked as they were meant to, and indeed, as they had to.

Geithner's bailout-defending tour is less about the bailouts, in fact - which everyone is sick of talking about - and more about himself. Yes, it's about saving his legacy. It's also demonstrating to us that a moment in history can take the shape of the personality of the person who directs it. Geithner's scorn for politics, lack of skepticism about bankers, and his tendency to preserve – rather than reform – systems all helped create the outcome of the financial rescues that still echo today. That outcome: banks helped by the government moved on and grew, and regular people ignored by policymakers stayed stuck.

From his rounds, it has been clear – as Stewart tried to emphasize – that Geithner fails to see that there is no such thing as a trickle-down bailout. The elaborate rescues he helped engineer worked for the financial system – the banks – but not for the economy of the rest of us, in which companies sit on piles of cash and obsess about overseas tax rates while Americans take millions of fleeting part-time jobs. He only has to look at the weak housing recovery and the plague of unemployment – with 10.2 million people out of work – as well as underemployment, with part-time jobs dominating what does exist.

Justice for whom?

The bottom line for Geithner's handling of the crisis is what he keeps missing in interview after interview: he saved the jobs and profits of big banks, but didn't do a thing for the other 300 million Americans. No teams of suited economists swarmed into White House conference rooms to save families from foreclosures. No crisis team gathered for late-night brainstorming sessions to save jobs and prevent the unemployment crisis. A normal American could have his home taken away from him due to a dishonest mortgage and no one in Washington blinked – but when a banker calls Treasury in a panic about losing out on some debt, a Swat team of Washington policymakers rushes to the scene. Asymmetry of wealth translates into an asymmetry of policy. This is not government for all.

This is a problem, a deep structural flaw at the core of our political and financial systems. Yet Geithner doesn't seem to see the ragged fault line at all. And, while he acknowledges his personal flaws and his discomfort with power, he doesn't yet seem to be at the place where he recognizes how influential his views were, and how his aversion to changing the financial system shaped the world that we all continue to live in.

Tim Geithner at Congress
Geithner at the US Capitol for meetings with congressional leaders, who often rejected his plans. Photograph: Benjamin Meyers/Reuters Photograph: BENJAMIN MYERS/REUTERS

This is what Stewart, in his satirical way, nailed during the long interview with Geithner: To enter this book's pages is to come away with the depressing conviction that policymakers have an unworkable idea of financial justice. Geithner acknowledges the absurdity of the bailouts but still has no concept that there is an alternative outcome, which many of us can picture, where absurdity did not have to prevail.

"The rescue itself at its core is unfair," Geithner acknowledged to Stewart, then persisting: "it did the essential thing."

It didn't. The essential thing was to save the economy, as Geithner should know. In the interview with Stewart, Geithner said he and other Federal Reserve and Treasury poobahs were worried about another Depression. In his book, too, Geithner rationalizes: "the financial system is the conduit between the Fed and the economy, and the financial system was broken.”

But trying to get to the economy by going through the financial system is like getting at the kitchen pipe by going through the garbage disposal. Things will get mangled.

What went wrong?

The hall monitor

It may come down to personality. Geithner was not the only architect of the post-crisis bank bailouts, but it becomes increasingly clear that he is among their last defenders. This is no coincidence. In his book, Geithner comes off as an order-loving technocrat (much as his Spock-like eyebrows suggest). He is excellent at following rules, and he has a talented hand with maintaining systems, as Neil Irwin has noted.

A love of order is not necessarily a bad thing. But Geithner sympathizes with others like him, those he thinks have mastered systems – like bankers, those veteran climbers of hierarchies – and apparently less so with people outside the elite treadmills of high education and status. Geithner, in Stress Test, proves excellent at following a map, but not as good at understanding how to tread the territory sans compass; the financial crisis, a strange new landscape, was some incredibly rocky land.

Then there is the man at the top of the hill, surveying it. What did he see? Sometimes it seems Geithner did not know what he was looking at.

I did not view Wall Street as a cabal of idiots or crooks … My job mostly exposed me to talented senior bankers, and selection bias probably gave me an impression that the US financial sector was more capable and ethical than it really was.

You can see the problem. These "talented senior bankers", while surely very bright, were also pretty greedy: they were the same people who didn't oversee their operations closely enough, who let traders take huge risks with subprime mortgages. Most of those bankers didn't even know how much in derivatives their banks held, as in the embarrassing cases of Merrill Lynch and Bank of America, who had to repeatedly redo their financial statements to fix mistakes in the billions of dollars.

Into this mess walks Geithner, a bright man who was nonetheless, it seems, wrong for the job. He feared this himself, perhaps, arguing with the President against his own nomination. With the fall of Lehman Brothers and the near-collapse of AIG and Washington Mutual, Wall Street became almost literally lawless. Where it needed bad-cop muscular enforcer, Geithner seemed more like an eager-to-please hall monitor. His ability to look the other way provides many of the greatest moments of frustration in the book.

Lehman Brothers
Lehman Brothers' fall sent Wall Street into panic. Photograph: Ben Stansall/AFP/Getty Photograph: Ben Stansall/AFP/Getty

It's not that Geithner is clueless. He seems to know the negative perception of him, and that his fumbles have spurred the genius of comedy writers for years. Geithner has tantalizing snippets of self-awareness – “I must have sounded like a bank lobbyist when opposing financial reform”. Yet he never follows through to acknowledge his opposition of financial reform was a bad idea, as shown by how Main Street continues to suffer through aggressive foreclosures, failed homeowner relief policies like Hamp, and unemployment.

Recalling a Saturday Night Live skit in which an actor playing Geithner is an ineffective teacher grading the banks on a "pass-pass system", Geithner the man writes, “I’m sure a lot of the public saw me as that hapless, cowed-by-the-banks caricature."

Well, yes.

But it's not personal, it's policy. Geithner seemed to fling himself bodily between Washington regulators and any idea of disciplining the banks. He still does, as demonstrated on the "inordinate amount of time" he spent on the Daily Show, affable and bright enough, willing to laugh at himself, but still completely impervious to Stewart's points about the failures of the bailout. Geithner appears unable to picture a different world in which banks survive the crisis but pay the price.

This is the Spock in him. He was insistent in 2008, and is still is, that he was devoted to preserving a sense of order about Wall Street; despite the widespread questioning of banks' stability – and indeed, the certainty that some were nearly insolvent – Geithner insisted that no contracts would be broken, no old rules would be contravened.

A case study in haircuts

One major sticking point, that is and should be in the Geithner canon, was the government rescue of AIG. Geithner, never a banker himself, showed that he didn't know how business is done.

Usually, in situation where a company falls on severe distress, creditors take what's called a "haircut": they know the company is running out of cash, so they agree to renegotiate their contracts to get, say, 25 or 50 cents on the dollar instead of 100 cents.

Yet, Geithner insisted the banks that did business with AIG be paid in full.

Geithner made sure every bank that did derivatives business with AIG was paid 100 cents on the dollar for those $60bn in derivatives contracts – with the government paying those bills. He wouldn't force the banks to take haircuts. AIG then paid out bonuses to its workers. Taxpayers footed the bill, prompting justified outrage.

AIG financial crisis
A security guard looks out a window at the offices of insurer AIG during the crisis. Photograph: Stan Honda/AFP/Getty Images Photograph: STAN HONDA/AFP/Getty Images

To be clear, if the government were not involved in the AIG situation, here's how it would have worked: the company's distress would have triggered standard clauses in its derivatives contracts that would force other banks to come to the table and renegotiate prices. Those banks would then agree to take haircuts. They'd grumble, but that's business, as it happens every day.

So why didn't Geithner force the banks to take haircuts? What kind of man refuses to even open a negotiation and insists his hands are tied by an arrangement already in place? A 2010 profile illustrates this side of Geithner's personality well. In Vogue, Rebecca Johnson shared this revealing anecdote:

On a recent business trip, Geithner and his entourage were trying to decide where to eat dinner. An aide suggested a popular restaurant, but Geithner nixed the idea, saying they'd never get a table. The aide laughs at the memory: 'I mean, he's the secretary of the Treasury! He could get a table.'

In Johnson's telling, the incident showed how Geithner didn't care for the trappings of fame. True. It also explains, though, why he never forced the banks to take a discount on AIG's debt to them. Geithner, so scornful of the trappings of power, didn't know his own power. A man who won't make a bid for a chic restaurant table won't lower the boom on sharp-looking bankers either. He doesn't think he has the standing.

This is probably a manifestation of one of Geithner's best, and also his worst, characteristics: his open disdain for the fussy political world he inhabited. A surfer at his core, he scorns naked careerism, boardroom machinations and Washington politics gone wrong.

But this disdain for pomp doesn't much help in the throes of a financial crisis, in which a new world is being written, and a Treasury secretary would be expected to shed his opposition and take on the mantle of history.

In the pall of power

In his book, Geithner seems put-upon by even being in that world. He recalls the Treasury’s “historic conference room”, with “Renaissance Revival furniture and gas-lit chandeliers” -- which had been, he adds somewhat gratuitously, “the dignified setting for some of our brainstorming clusterfucks”.

Similarly, here's his hiring policy: “no jerks, no peacocks, no whiners". For the US Treasury, that's quaintly provincial. Maybe that reduces stress levels, but sad to say, that leaves out a lot of expertise. Maybe a peacock or a whiner could have muscled the banks into taking haircuts on AIG contracts.

US Treasury Secretary Timothy Geithner takes a day off from the financial crisis to watch Barack Obama take the oath of office.
Timothy Geithner took a day off from the financial crisis to watch Barack Obama take the oath of office. Photograph: Saul Loeb/AFP/Getty Images Photograph: SAUL LOEB/AFP/Getty Images

The book shows that Geithner has lived the internal, strategic life of a courtier, focused mostly on palace intrigue. Stress Test, if it were turned into a play, could all take place indoors, like something from Pinter or Sartre.

Geithner remembers these indoor adventures in detail, recalling every visit to every boardroom of very important people. He faces Nicolas Sarkozy in the French president’s suite at The Carlyle, and talks with Henry Kissinger in his home overlooking the East River. He remembers Obama's incoming cabinet posing for portraits in the White House during the height of the crisis: “what a weird and preening thing for us to do while the world is burning”.

You get the gist. Geithner’s book is an interior one, and, looking over all 520 pages, gives the suffocating sense of being trapped in too little space with too many big egos. You, me, Main Street – we have no place here.

That desert of the soul was, by necessity, Geithner's life at Treasury. But the world is swimming in books about the financial bust, so why did Geithner write his memoir? He hints, perhaps: “I don’t think the public ever really got to know me.”

Why? Maybe Geithner, the veteran courtier, never made an effort to get to know the public.


Heidi Moore

The GuardianTramp

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