Secretary, Heal Thyself: Geithner Fails His Own Philosophy Test
Stress Test details former Treasury Secretary Timothy Geithner’s self-described “accidental path to history,” from his early life abroad, to creating a “wall of money” while leading the New York Federal Reserve to dissuade panic during the financial crisis, to his time serving at the White House, where he “didn’t lose many policy battles.” The memoir is Geithner’s attempt to explain his guiding philosophy behind the financial rescue, and the myriad reasons he feels it was justified, a task he admits he “never found an effective way” to do during his time in public service—something consistent with the Obama Administration’s general view that it is uncompelling storytelling, rather than governing choices, that drive most of the public’s dissatisfaction with policy outcomes. And throughout the journey, we learn that despite each new elite position Geithner achieves, he continues to believe himself an outsider.
Geithner’s philosophies when it comes to crises are outlined early: a sort of financial version of “shock and awe.” When tackling the Asian financial crises during the Clinton Administration with Robert “Bob” Rubin and Larry Summers at the U.S. Treasury, Geithner says he was “usually on the aggressive side of our team when it came to intervention—and the permissive side when it came to conditionality.” Later, at the peak of the U.S. financial crisis, Geithner, now head of the New York Fed, recounts sleeping inside a “turret” at the Fed, and running along Manhattan’s Hudson River every morning because he “needed to keep moving.” Geithner explains that this was also his “basic philosophy about the crisis. Inertia was the enemy.” Most importantly, Geithner explains the key goal he had in mind while fighting to put out the “raging inferno” of the crisis: “protect the innocent, even if some of the arsonists escape their full measure of justice.”
Geithner’s philosophical leanings thus established—intervene aggressively with minimal conditionality, fight inertia, and protect the innocent even if the guilty escape justice—we watch Geithner’s praxis. Again and again, Geithner puts “money in the window” of banks (and non-banks) to “quell panic.” And when he’s not, Geithner is looking for “new ways to inject liquidity in times of stress.” Geithner hopes that the book’s namesake stress tests will provide “a measure of confidence” to bolster the market. Indeed, they were engineered to do so: rather than insisting the banks use the current value of their distressed assets, these so-called stress tests allowed firms to estimate the “long-term value” of their toxic products—essentially an institutionalized, government-directed version of “fake it ‘til ‘you make it.” And he fights viciously even against his own mentor, Larry Summers, against even considering the possibility of nationalizing any of the banks.
As aggressive as Geithner’s response to the financial crisis is, his response to the foreclosure crisis is lackluster. Geithner makes many policy arguments as to why more wasn’t done to help homeowners—that principal reduction had a “huge upfront expense,” that extending permanent loan modifications to homeowners with trial modifications “produce[d] too much opportunity for scandal,” and that “cramdown” (allowing mortgages to reduce mortgage principal during bankruptcy) wouldn’t work. Atif Mian, Amir Sufi, Sarah Binder and David Dayen have done important work debunking the inaccuracies and factual misstatements present in these policy arguments. But even if we disregard these compelling arguments and refer only to Geithner’s own self-described governing heuristics, Geithner fails his own test.
Geithner never meaningfully clarifies why his core philosophies for broad rescue of financial institutions, so carefully articulated in early chapters, do justify a broad rescue of homeowners. Instead of doing “whatever we could…even if it made us unpopular, even if it helped individuals and institutions that didn’t deserve help,” as they had done for financial firms, now the goal was “not to subsidize borrowers who splurged on overpriced McMansions”—a demographic whose size in the public imagination (in large part due to protestations like Geithner’s) far exceeded their actual share of the 10 million individuals ultimately displaced by the foreclosure crisis. Why the need for such caution? Because “a few outrageous stories of aid to reckless speculators and scam artists could cripple support for our entire housing program.” The caution stuck: only $11.6 billion has been spent of the $50 billion originally allocated to the Home Affordable Modification Program (HAMP), the Obama Administration’s signature program to encourage loan modifications. This is a program Geithner admits was so “universally reviled” that even Geithner himself treats it as a joke: he decides to prank Gene Sperling of the National Economic Council by pretending to tell a reporter he was “the secret architect of HAMP.”
Geithner had insisted after the failure of Lehman Brothers ignited financial contagion that he had no tolerance for “letting moral hazard or political considerations impede our efforts,” but now, he was preemptively cowing to politics. Previously, Geithner “took a perverse pride in the unpopularity” of his crisis work, but with the focus now on rescuing homeowners, he was now determined to ensure there were no “perverse incentives” for others.
When it comes to the financial crisis, Geithner does admit that in some cases, it’s important to let things fail. After meeting with the hedge fund Cerebus in February 2008 and denying their request for help, Geithner writes, “Just as a modest wildfire can get rid of some underbrush and improve the health of the forest, a modest crisis can clear out dry tinder in the system and make the financial system more resilient.” Judging by the Treasury Department’s tepid response to the housing crisis, it seems Geithner felt that homeowners, like the hedge fund Cerebus, were little more than dry tinder that a healthy fire would clear out.
Sheila Bair and Paul Krugman, among others, have pointed out Geithner’s double standard on housing and the destruction it caused. But where does this double standard come from? Though Stress Test makes no attempt to spotlight the answer, it shines through anyway: elite affinity.
When in Doubt, Trust the Elite
Geithner does not recount any time in his career that is spent outside the world of the financial and governmental elite. At the Treasury, post-crisis, Geithner tells us he hosted regular dinners with “a changing mix of CEOs from across the country.” To his credit, Geithner does admit that his proximity to bankers may have made him unduly deferent to them, writing, “My jobs mostly exposed me to talented senior bankers, and selection bias probably gave me an impression that the U.S. financial sector was more capable and ethical than it really was…And working for Secretary Rubin,” who spent twenty-six years at Goldman Sachs prior to serving as Treasury Secretary, “surely affected my view of Wall Street competence, because he was as competent as anyone I knew.”
Geithner also admits, in a half-apology to Brooskley Born (the CFTC chairman who attempted to explore regulating over-the-counter derivatives but was stymied by Summers, Rubin, and Geithner), that when he had “limited knowledge,” he trusted his friends. And while Geithner counts many, many friends in the elite—Henry Kissinger (whose dinner party he visits the day before the first TARP vote) and former CEO Citigroup Sandy Weill, to name two—at no point in the book does Geithner detail personally knowing anyone who experienced foreclosure. (Another official responsible for the government non-response to the housing crisis, Edward Demarco, the former head of the Federal Housing Finance Agency, made a similar admission to a group of Democratic lawmakers in 2011. Though a holdover from the Bush Administration, the Obama team made only half-hearted attempts to replace him, only succeeding in doing so in late 2013).
When Geithner is confronted with someone speaking on their behalf (an unnamed “advocate” speaking on “the human costs of the crisis”), he makes what he calls an “empathy mistake,” and interrupts her to ask her to skip the back story and move on to “what we can do.” But a lack of empathy is secondary to the problem of affinity. Geithner’s elite affinity means that, just as CNBC anchor Rick Santelli did in his “deadbeat homeowners” rant, Geithner assumes by default that those experiencing foreclosure are reflexively to be mistrusted.
Nowhere in the book does Geithner use the phrase “predatory loans,” and he never once details the story of a homeowner who got swindled. Instead, homeowner’s tales of economic destruction are viewed through the lens of their impact on banks’ balance sheets, with borrowers largely cast as either “scam artists,” people with “sketchy credit,” or those “who would lose their homes even with government help.” The first real-world interaction he has with the burgeoning subprime crisis still occurs in the context of an elite activity: he hears about “sketchy loans given to homeowners with sketchy credit” from his guide during a fly-fishing trip he takes while playing hooky from the Fed’s annual economic summit.
Image by Kasper Sorensen, Creative Commons
An Unqualified, Yet Meteoric, Rise
It is particularly disconcerting how little Geithner feels compelled to help homeowners given one lesson he ascribes to his youth: that he and his family were “separated by fortune from hideous deprivation.” Despite his protestations, he does not seem meaningfully introspective about his privilege. In describing one of his “most important experiences,” Geithner recounts, “over Christmas break of my freshman year, I got to photograph refugees in two massive camps along the Thai-Cambodian border for the Associated Press.” This is the first mention of photography in the book, and there is no explanation of how Geithner got this assignment (though one presumes it is through his father, who worked at both USAID and the Ford Foundation on “developing nations”). It is there, documenting Khmer Rouge refugees, that Geithner has an epiphany: “I did not want to spend my life as an observer. I wanted to do things, not just see things.” But Geithner does not detail any other takeaways from the experience—did it not occur to him that he could do more to help than take photographs, especially given the position of his father? Instead, the brief mention of this story in Geither’s memoir repurposes the suffering of others: an entitled white male from a well-to-do family, looks upon the not-so-white, not-so-privileged refugees as if they were placed in the universe as mere props to his self-awakening.
Image by Paul Reynolds, Creative Commons
Geithner’s entire, meteoric rise seems to come as easily as did his job photographing refugees. Geithner describes himself as a student who “wasn’t particularly ambitious or hardworking” yet he “somehow” gets elected president of his junior and senior classes in high school. He characterizes himself as “unexceptional and mostly uninspired” Dartmouth studentadmitted on a legacy (a fact he feels “guilty” about). He evolves into an economics graduate student who never read a single economics journal but “played a lot of pool.”
In his first job as an Asia analyst for Henry Kissinger, Geithner admits, “I was daunted by how little I knew about my supposed topic of expertise.” At the Treasury Department, after Larry Summers promotes Geithner “from noisy scribe all the way to deputy assistant secretary,” Treasury Secretary Bentsen calls to ask for advice after Haitian protestors turned back and American ship, Geithner admits that he “had no idea.” Worse still, Geithner recounts: “I didn’t know anything about Haiti, and this wasn’t about economic policy. I wanted to ask: Why are you calling me?”
Geithner takes great pains to repeatedly tell us that he was “an outsider,” even as he prepared to lead the New York Fed. This mischaracterization is perhaps be forgivable in a nation full of people who all fancy themselves nonconformists—Robert Frost’s “The Road Not Taken” is America’s favorite poem—but Geithner is no ordinary conforming non-conformist. Instead, success comes to him again and again, despite his lack of self-confidence. But Larry Summers was confident in him, and that seems to be enough. There are echoes of this in Geithner’s own treatment of the financial crisis—inspiring confidence in others, deserved or undeserved, is the key to ending the panic.
Stress Test shows us that in the end, Geithner firmly believes the bailout was justified, describing his actions often as the “least-bad option.” But as justified as he thinks the bailout was, he finds the media’s characterization of him as a Wall Street ally was not. He attempts to dispel it, but these attempts—to use a phrase Geithner applied to his decision to appointment even more financial elites to the Board of the New York Fed—make his “bad optics even worse.”
Geithner tells us he used to joke they could solve the problem of moral hazard if “financial executives had to put up their own homes as collateral” when using the Fed’s rescue programs. But Geithner makes this joke as he is walking along a beach in the affluent Martha’s Vineyard, and passes by a mansion. On this walk, Geithner is accompanied by the former Assistant Treasury Secretary Lee Sachs, a man who spent 13 years at Bear Stearns before his government work, and spun right through the revolving door to Wall Street after it. Even as Geithner jokes about the financial elites, he is walking right beside them.
House in Martha’s Vineyard. Image by Nick Sherman, Creative Commons.
Physician, Heal Thyself
Though he takes great pains to claim distance from financial elites, Geithner’s failing mimics theirs—even when he is the one diagnosing them. When detailing a meeting with Angelo Mozilo, then head of mortgage lender Countrywide, Geithner reports that “like many of the most desperate CEOs I would deal with during the crisis…he seemed more concerned about the critics pointing out Countrywide’s weaknesses than about those actual weaknesses.” But this is precisely Geithner’s own prescription for the banking industry. He was more interested in bolstering public confidence in the system as it existed at the time of the crisis, than he was in meaningfully reforming it.
In perhaps the book’s most unselfaware anecdote, Geithner notes of Bear Stearns’ CEO Alan Schwartz’s attempts to beat back rumors about Bear’s insolvency, “a banker forced to defend his credibility has already lost it.” Geithner is eager to diagnose others, but the reader is left with the impression that the physician in charge of the bank’s Emergency Room is incapable of healing himself.
