Crisis Management

Former Treasury Secretary Timothy Geithner ’83 talks to Matthew Mosk ’92 about fixing a financial mess that arose from too much optimism and a system operating “with no cops and no rules.”

The headline on a recent business blog—“Massive Wall Street Bonuses Are Back”—aptly sums up the kind of good news-bad news paradox that has left Timothy Geithner perpetually trying to explain himself. Yes, by most measures, the nation’s 75th U.S. Treasury secretary, who served from 2009 to 2013, succeeded in navigating the country out of the worst economic crisis since the Great Depression. But even as the path he championed reinvigorated Wall Street, it yielded rich rewards for many of the same people who were considered responsible for the crisis in the first place. It was this messy reality Geithner was again trying to explain when he sat down with DAM contributing editor Matthew Mosk in March for one of his first interviews since leaving the Obama administration in January of 2013. “To protect the country from the financial crisis,” he said, “we had to do a bunch of things that looked like we were aiding the arsonists.”

Mosk met Geithner at Café Centro, a noisy breakfast spot just outside Grand Central Station, and barely recognized him when he walked in alone, looking tan and relaxed. It was almost exactly four years since his predecessor, Henry M. “Hank” Paulson ’68, told DAM about his white-knuckle ride through the economic storm. Like Paulson, Geithner disappeared for a year of polite silence after leaving the Cabinet, so as not to upstage or publicly second-guess his successor. And, like Paulson, he had used that time not only to rest and recharge but also to write a book about his tenure. He told Mosk that Stress Test: Reflections on Financial Crises [Crown], is less of a typical Washington, D.C., score-settling tome than a thoughtful look back at the most perilous economic stretch in recent history. Although Geithner repeatedly bemoans congressional dysfunction and showboating for political purposes, the book is generally balanced when it comes to criticism of individuals.

Geithner refers to Paulson as a friend and mentor, but the two are very different people: Paulson struck many as a bull-headed former Dartmouth offensive lineman. Geithner is a soft-spoken former Asian studies major. Paulson amassed a fortune as CEO of the investment powerhouse Goldman Sachs before taking on the role of secretary. Geithner spent a good portion of his tenure in Washington trying futilely to correct the misimpression that he, too, had come to the job from The Street, where he has only recently taken a job as president of the private equity firm Warburg Pincus. Contrary to the belief even of some in the Obama administration that he had forged a career almost entirely in the private sector, Geithner had spent his career working in the bowels of the Treasury Department to set international monetary and financial policy for the Clinton administration before taking over the New York Federal Reserve Bank at age 42.

Geithner hopes his book will answer his critics. (There remain plenty of those from both sides of the aisle: Matt Taibbi in Rolling Stone magazine derided him for being “the architect of too big to fail,” and Sheila Bair, who was the George W. Bush appointee to head the FDIC, accused him of being “primarily concerned with shoring up Citigroup and other banks…rather than holding those banks accountable.”)

Here, Geithner tells Mosk he has moved past the rumors that he was gunning to take over as president of Dartmouth and opens up about his tenure.

“You know what? I didn’t study economics in college. I took one course. It wasn’t for me.”

Whom do you blame for the financial crisis?

Well, there’s a huge amount of blame to go around.

That’s exactly what Henry Paulson told DAM about four years ago under similar circumstances [“After the Crash,” Mar/Apr 2010].

There is. And there’s massive regulatory failure, although not the type people usually think. There was a lot of bad fraud, predation, abuse. There was a bunch of stuff that involved monetary policy here and around the world that made the conditions for a bubble powerful. There’s some classic moral hazard in parts of the financial system-—GSEs [government-sponsored entities], for example—and some bad incentive problems, as economists would say, in a bunch of those markets. All that stuff contributed.

But what causes really severe financial crises, the ones that end in panic—like ours—is usually bigger than that. It’s mostly about the conditions that lead to long periods of rapid-rising borrowing relative to income, like a huge boom in credit. What produces that is not really regulatory failure or fraud or abuse or predation; it’s a more basic thing. It’s sort of a combination of optimism and hope about the future. And that only comes when you’ve had long periods of relative stability because people sort of get used to the possibility that income’s going to rise, house prices are going to rise, recessions will be short and shallow, no crisis to fear, no recession really deep.

Then they are more confident. They can lend more and borrow more and that’s what creates the conditions for a classic financial failure. In our case that basic core thing was magnified by the fact that our financial systems dramatically outgrew, through time, all the safeguards of the Great Depression.

In the minds of average Americans who may not be steeped in economic policy, this looked like the work of bad guys. There were a lot of people saying they should go to jail.

Well, you have to acknowledge first that there were a lot of bad guys. And one thing that bubbles do, or big booms do, is they
create this impression of really high returns. They attract a lot of people at the ethical edge, the margins. And it is really important in any financial system that you have good rules that end abuse and predation—and strong enforcement of those rules. We didn’t have that, or strong enough. We probably had the best framework in the world for it, and still do, but not good enough—probably because, as I said, we allowed our system to really outgrow all the protections that were put in place after the Great
Depression.

So we had large parts of the financial system operating with no cops and no rules. That’s just one thing we try to fix in the financial reforms. It’s like the book about the Afghanistan [and Iraq] wars by Dexter Filkins called The Forever War. It’s a relentless thing. You have to be always on it, because the markets will always try to find their way around those constraints, and you’ve just got to keep at it. Our framework wasn’t strong enough before the crisis; it’s much better now. And the enforcement deterrent is much better now. But you should always operate with the premise it’s never good enough.

Do you remember your reaction when word came out in 2009 that, right after the government bailed them out, AIG gave its executives huge bonuses?

Well, it was much worse than that, because what happened was across the American financial system in that period, January to March, people pay bonuses. And this was in the first quarter of 2009. Across the system firms that had been on the edge of failure and had been the beneficiaries of massive support went and paid—for largely contractual commitments—what to most humans were outrageous amounts of compensation. It was devastatingly damaging to the people’s faith and public confidence in what we were trying to do, which was to protect the economy from the failing financial system. Instead it fed a wave of revulsion and antipathy to not just the financial system and the people running those institutions, but to those of us who were charged with protecting a country from it. It was terribly damaging.

Did you hear from the president about it?

Oh, we talked about it all the time. And you know, we were trying to figure out, okay, what could we do that would be responsive to this deep, understandable sense of public outrage that was in our power to do? Most people rush in and say, “Okay, well this is easy, let’s restrict future [compensation] of financial institutions.” That’s hard to do; we have no legal authority to do that.

So we tried to do two other things we could do that would curb excessive payments at the institutions that required exceptional amounts of government assistance. We did it through regulation.

We set up pretty substantial changes to how the senior executives and their firms were paid during the period of time when they were still benefiting from [the U.S. government’s] investments.

And we put in place a set of reforms—and they’re not perfect—designed to substantially change the way people are paid in the financial industry.

Did they achieve that, do you think?

Well, they achieved significant change, but people are still getting paid what to normal humans looks like a lot of money. You know, maybe not if you think about the best athletes in the world or the best film stars or Silicon Valley. But to normal people it seems like a lot of money. We tried to simplify it by doing two things: One is to force much more transparency about compensation packages. To give shareholders a chance to vote on them seems like a reasonable thing. And then we tried, through other regulatory channels, to make sure executives were paid more in equity—and that equity was at risk and paid gradually over time. If a firm fails you can pull it back. Those are good reforms. They’re not hugely satisfying to people, and they’re not going to prevent people in the future from being dumb or taking too much risk, but they reduce that risk at the margin. And it’s not clear you can do much beyond that.

You were viewed as a friend of Wall Street, as coming from Wall Street, a creature of Wall Street.

It’s sort of interesting. I spent my life as a public servant. I never had a job in the private sector, really, except a brief stint, a three-year time working for [Henry] Kissinger when he was at a consulting firm. Most of my formative time in public life was watching how financial markets fail and the damage financial crises caused. That gave me a pretty healthy skepticism about markets and what you need to prevent them from doing a lot of damage.

But when I came into office there was this perception, partly fueled by people writing in the press inaccurately, that I spent my life at Goldman Sachs, probably fueled, I think, by a misperception about the New York Fed. It’s called the Federal Reserve Bank of New York. People think it’s a bank. It does exist blocks away from Wall Street. And that perception, to my amazed surprise, once it hardened, it was really hard to shake. People could write a correction that I didn’t really work at Goldman Sachs, but the impression was lasting. And, of course, to protect the country from the financial crisis we had to do a bunch of things that looked like we were aiding the arsonists. People would say, “Why would you do that?”

The combination of that initial myth that I’d come from the market, combined with the huge unpopularity of the things necessary to put out a financial fire, made it pretty hard to overcome.

Did you initially want the job of treasury secretary?

I did not want the job, did not seek the job, tried to talk the president out of it. I did.

Why?

Well, I had told my family I wouldn’t move them again, and I thought there were better candidates. We were in an existential financial crisis. I thought that the country needed somebody familiar. And I told the president, “We’re the United States. We’ll solve this financial crisis at some point, and we’ll change the rules of the game. At that point you’re going to be left with a whole bunch of other challenges that are not my life’s work.” I explained to him that if he asked me to do this, he was going to have a harder time separating from the deep unpopularity of all those things that Paulson and Bush had done—and I’d been part of doing—to help break the initial stage of the panic. It would be harder for him to change course if he chose me in that context. So, for those reasons, I tried to talk him out of it. But I decided that if he really understood what my limitations were but still asked me to do it, it was something I couldn’t say no to.

Did you know President Obama prior to being approached?

I hadn’t met him before October of 2008.

Did you know that your father [Peter Geithner ’54] and Obama’s mother both worked for the same grant-making organization in Indonesia?

My father worked for the Ford Foundation for 30 years, most of that time doing developing-country programs in Asia. And [the president’s] mother was a grantee of the Ford Foundation at a time when my father was involved in those things. So, yeah, we talked about that when we first met.

Do you remember the October conversation at all?

Yeah, we had a great initial conversation. He was in Manhattan in the late stage of the campaign and he asked me to come see him. I met him in a hotel and we talked—mostly we talked biography for a while and then we talked a little bit about the crisis and then we talked about the future.

I grew up overseas most of my life and he spent a pretty significant chunk of time in Indonesia as a kid. I remember I told him I’d spent this time growing up overseas and that it had a big effect on me and mostly it made me want to work for my country because you get to see the big effect the United States has on the world.

Let’s turn to the 2012 campaign. Obviously a big part of it became about financial institutions, tax inequity, fees paid to fund managers, Mitt Romney’s work—how did that rub you?

Well, of course I was centrally involved in this stuff. We decided, as part of the president’s initial strategy in the economy, that we were going to support an early push for pretty substantial reforms to the financial system, targeting the causes of the crisis—and that we were going to try to push a set of long-term fiscal reforms that would include restoring some of the lost progressivity in the tax system.

The financial reform fight was a very divisive fight, and it’s sort of interesting because there are a lot of people on the left who felt like we weren’t ambitious enough, didn’t push hard enough for systematic change. But I would say a lot of people in the financial community, in the—let’s call it banking, investment banking part of the financial community, money market funds and those things—felt it was not an existential threat but a very dramatic threat to the economics of their business. I felt those were just and necessary reforms and I was a strong supporter of pushing them early when the people still felt the pain of the crisis and the memory of the crisis before it abated.

In light of your current job, there’s a lot of interest to know where you were on carried interest—those fees paid to fund managers—and where you might be now?

You can look to where the president was on carried interest, and of course I was part of that. But generally my view on any policy questions, they don’t get to be my choice. I leave them to my successors. I’m going to be very careful and have been careful since I’ve been out not to be commenting publicly on public policy choices. I made that decision early when I left. There’s a long tradition—well, a bit of a tradition—in public life that when you leave you leave those choices to your successors, and I’m going to do that.

Dealing with Congress: When you were appointed, Sen. Jim Bunning (R-KY) said he hoped you would not sell your home in Larchmont, New York, and that he expected you to move back there quickly.

Oh [the criticism came from] both the left and the right. It wasn’t just from the right. Again, this stuff—that I deeply believe was in the interest of the country, in the interest of the average person—was just deeply unpopular on the right and the left. And that criticism came early and often from both sides. It’s understandable.

How would you rate the financial IQ of members of Congress?

The average member of Congress? I’d  say that there are definitely members of Congress who spend a lot of time thinking about the financial system. It’s not like appropriations, or defense, or healthcare, where every year you’re deeply focused on the policy or education—it’s just not like that. Crises occur so infrequently that Congress had rarely been asked to re-examine the rules or to try to fix the system. So you don’t see built up in Congress a deep expertise in those topics—there are some pockets of deepness but not a broad expertise in those things. It’s sort of understandable because the severe crisis is very rare.

But the end of your tenure, after Congress had beaten up on you pretty good, you were trusted to go and negotiate with members on behalf of the administration on the fiscal cliff discussions.

Well, I had that role from the beginning. It’s just that that stuff got eclipsed by the financial stuff that was the source of so much public outrage and political heat. Generally in life, and certainly at work, I just try to focus on stuff you can control. There’s stuff you can try to control, to do the right thing, regardless of its political consequences. And if you do that consistently and you’re open with people about that, it can be painful at times but it’s the only way I know to govern.

Around the time you were leaving your job, “Page Six” [of The New York Post] reported that your father-in-law had told friends President Obama had selected Dartmouth President Jim Kim to head the World Bank to free up the College presidency for you. How do you deal with something like that?

I remember it was a report, if I’m not mistaken, based on a conversation overhead in a restaurant. That’s my recollection. How do I deal with it? It just sort of is what it is.

Was it accurate? Did Obama hire the Dartmouth president to make room for you at Dartmouth College?

Ridiculous. It’s ridiculous. First of all, I led the search for the World Bank president. [Kim’s hiring] was my suggestion, and I had no intention, had no interest, in going to run a university.

So from the beginning the idea of you as president of Dartmouth College was a non-starter for you?

It was not my idea. And I wouldn’t have considered it. I honor that profession, I think it’s noble, important work, and certainly challenging work, but I didn’t really think it was the right kind of thing for me, the right kind of challenge for me. I didn’t think I’d be good enough at it.

I know you’ve been trying to give your son [Benjamin ’16] some space in Hanover. Do you have plans to go back to Dartmouth to speak, to talk about your book, to teach, anything like that?

I did speak at Dartmouth before my son became a freshman, but I told both my kids when they were in college [daughter Elise graduated from Stanford last year] I wouldn’t speak at their universities while they were there, just as a way to give them a little more privacy.

Do you have a sense of how your son’s experience at Hanover and yours are different?

Oh, of course they’re different. We’re different people, it’s different times. But Dartmouth’s really a tremendously rich place with much more diversity in its communities than many people appreciate. So you can find your place there. And he’s very high on it.

How did you find your place at Dartmouth?

I studied government and Asian studies. I went to high school in Thailand and went to Dartmouth almost straight from Thailand without a winter coat. It was a bit of a culture shock. I hadn’t been living in the United States for three years or four years. But I had a great experience. I think my first day, when I was walking from my dorm to wherever you register for classes, I heard this professor—or someone who looked like a professor—swearing at somebody in Thai, which caught my attention. So I went up to him. He was a professor of Chinese and talked me into taking Chinese, and I had a great experience. Then I got to go to study in China in the summers of 1981 and 1982 at a very early stage in the Chinese opening to the West. It was a tremendous experience. But I also studied government, and that became my life’s work.

Were there any professors or classes that you particularly remember as having prepared you for what you ended up finding yourself in the middle of as treasury secretary?

You know what? I didn’t study economics in college. I took one course. It wasn’t really for me. I did study it in graduate school, but when I went to Dartmouth I didn’t know what I wanted to do. What good universities encourage you to do—and what I chose to do—is just do a lot of different jobs: I washed dishes, I cooked, I worked in a political consulting firm, I took a corporate job. I did lots of different things, which was good in terms of mostly helping me realize what I didn’t want to do.

But Dartmouth, as any great school does, teaches you to be curious and helps you learn how to think, how to think through problems. I had a wonderful Chinese professor, Susan Blader. In government I would say the most lasting influence on me was [professor Vincent] Starzinger. Starzinger taught what was called “Government 5”—I don’t know what it’s called now. And although I was a major I didn’t take that until my senior year, that introductory course. He was a wonderful teacher in terms of helping you think about things. So it’s not like I went to college  and learned a craft that was central to what I chose to do later in life. I learned a more important thing, which is the beginnings of how to think critically.

Your book talks about the stress placed on the financial system by the crisis of 2008. What about on you personally?

Me, personally? People say there are lots of different kinds of stress. And of course I had a remarkably stressful eight years or nine years over that period of time. But I love my work. It was consequential, which made it scary, but it was terrifically interesting, and I had amazing people around me. And I worked for a president who was completely supportive in the way you want, meaning he would expect you to carry the burden of coming up with strategy and recommendations but subject that to a fair amount of debate, and check and balance, and care and deliberation. When we chose, he gave me complete support and always said, “You figure out what the right thing to do is and I’ll worry about the politics.” Not that he could protect me from the politics, he couldn’t do that. But that’s what you would want in public life, or any boss, really, is just somebody who says, “Your job is to figure out what the right thing to do is.” That made it a much more powerful and satisfying experience.

Did you feel the pressure of how the politics were affecting him, some obligation to protect him from the political damage that was being done?

I did, and I did try that, but of course I couldn’t, because he’d chosen me, and he’d taken a fair amount of risk in that, and he was going to be tied to the policies that I was responsible for recommending. But I’d try to take as much on as I could. I did take a few arrows but couldn’t protect him from that.

I’ve read that at a certain point your family moved back to New York. What was that like for you?

As I told you, I promised my family I wouldn’t move them, but then the president asked me to take this job and we moved. So my son went to his sophomore and his junior years in high school in Maryland, in Bethesda. But we wanted to give him the choice to go back [to Larchmont] his senior year with his classmates and his friends, and he wanted to do that, and I wanted to give him that option.

Is it true you asked the president to let you step down?

When I was very confident the financial crisis was over and we had passed financial reform, I thought that was a natural time for me to find some private life. I tried to talk him into letting me go, but he wanted me to stay until the end. And I’m glad I stayed, actually.

How did that conversation go?

We had many, many conversations. But even after we were all confident we were going to prevent a Great Depression, we were left with a pretty weak and scarred economy, and a really consequential, pretty divisive fight about long-term fiscal reforms. And we had a challenging crisis in Europe to deal with. I think the president felt—I won’t put words into his mouth—that there was more to do than I expected. The aftershocks of the crisis were pretty challenging.

Is the country safe from a future Great Depression right now? Or is there still more that needs to be done?

The country is, I think, in a much stronger position economically than it was before the crisis, and in a much stronger position in terms of the financial system than it was before the crisis. We are now—and will be for some time, not forever—much less likely to face the type of classic panic felt by a major financial crash like we faced in 2008. The system is much more conservatively leveraged, the new rules in risk-taking are much more broadly applied, more conservative.

It’s true that over time the water will find its way around those constraints, the way markets work. But I think the system is much more resilient, and I think it’s the strongest in the world, strongest among the major economies, because we did a lot of hard, tough things early in restructuring the system, forcing out the weakest parts of it, then forcing a very dramatic early recapitalization of the system.

If you look at how countries have managed these crises over time, what we did was really exceptional. Most countries drag it out over long, long periods of time or really never get to it, just limp along for a long time. Because we did it very forcefully, very aggressively, our system is a much stronger system.

Most countries were strongly resistant to your approach, is that right? 

Yeah, we had some strengths other countries didn’t have, so we had some better choices than they had, but the typical instinct of the politician in a crisis is not what’s really in the interest of the long-term strength of the economy. Typical instinct is either to let the fire burn too hot, too long, because there is such deep political aversion to rescues—then typically to limp along with a set of guarantees and protections without forcing restructuring and capital.

It’s sort of interesting: A lot of Americans looked at the response we designed and said it was too generous to the system, but in fact what we did is a much more aggressive restructuring of the system than I think you’ve seen in the last 100 years of financial crises. Because we did the kind of protections you have to do against a financial panic causing a Great Depression, we were able to crush the weakest parts of the system and we were able to make it possible for private capital to come in and recapitalize the financial system and repay the government really quickly.

On net, the financial system did not just pay the taxpayers back for the assistance, but it paid them a positive return that on total is going to exceed $100 billion. People thought we were going to lose $2 trillion. Because we were so aggressive, we didn’t just get  growth coming back much more quickly and the economy recovering much more quickly, but we gave the taxpayer a completely unanticipated, completely unprecedented positive return from the financial rescue.

Anything else you can tell us about yourself, other interests outside of working 24/7

I really did try, as much as I could, to spend my free time with my family when I wasn’t working.

Do you still play tennis?

I do still play tennis, generally play any sport and do as much of that as I can. I read a lot.

What are you reading now?

Right now I’m reading this new book by Olen Steinhauer [The Cairo Affair], which is a classic espionage novel. Before that I read a great book called Travels with Herodotus by a Polish journalist named Ryszard Kapuscinski. He’s an amazing writer. He writes about Asia and Africa, sort of in parallel, by recounting the history of the world that the famous Greek historian wrote. It’s a really cool, amazing book.

You were on vacation when the financial crisis hit. Have you been able to get away since then?

The weird thing about financial crises is that they have this rhythm. In the 20 years that I was involved in these kinds of things, every August and every December there was usually some new cliff in the crisis. So it sort of happened that way. I decided that I would take a year—I’d never taken time between jobs—before I decided to commit to a new thing, and I tried to use that year well. I took 10 trips with my wife [Carole Sonnenfeld Geithner ’83]. It was pretty good.

Your signature is on the U.S. currency. Did you have to do some practicing to get that down as you wanted it? Or does it really look like your signature?

It’s worse than that. My signature is completely unintelligible, illegible. So I decided to write something people could read. I didn’t have to practice it very much, though. As you know, you don’t have to sign every dollar bill, you just have to sign one.

You’ve used that line before.

Have I? [Laughing.]                                                             

Matthew Mosk is a Washington, D.C.-based investigative jounalist with ABC News. A regular contributor to DAM, he lives in Annapolis, Maryland.

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