“The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole,” he wrote. “This is not theoretical risk, and it is not something that the market can solve on its own.” He continued refining those ideas, using the tray table to take notes until just before the plane landed.
Over the course of the weekend of March 15, it had been Geithner—not his boss, Ben Bernanke, as the press had reported—who’d kept Bear from folding, constructing the $29 billion government backstop that finally persuaded a reluctant Jamie Dimon at JP Morgan to assume the firm’s obligations. The guarantee protected Bear’s debtholders and counterparties—the thousands of investors who traded with the firm—averting a crippling blow to the global financial system, at least that’s what Geithner planned to tell the senators.
Members of the Banking Committee wouldn’t necessarily see it that way and were likely to be skeptical, if not openly scornful, of Geithner at the hearing. They regarded the Bear deal as representative of a major and not necessarily welcome policy shift. He’d already been the target of stinging criticism, but given the scale of the intervention, it was only to be expected. That, however, didn’t make having to listen to politicians throw around the term “moral hazard” any less galling, as if they hadn’t just learned it the day before.
Unfortunately, it wasn’t just a chorus of the ignorant and the uninformed who had been critical of the deal. Even friends and colleagues, like former Fed chairman Paul Volcker, were comparing the Bear rescue unfavorably to the federal government’s infamous refusal to come to the assistance of a financially desperate New York City in the 1970s (enshrined in the classic New York Daily News headline: “Ford to City: Drop Dead”). The more knowing assessments ran along the following lines: The Federal Reserve had never before made such an enormous loan to the private sector. Why, exactly, had it been necessary to intervene in this case? After all, these weren’t innocent blue-collar workers on the line; they were highly paid bankers who had taken heedless risks. Had Geithner, and by extension the American people, been taken for suckers?
Geithner did have his supporters, but they tended to be people who already had reason to be familiar with the financial industry’s parlous state. Richard Fisher, Geithner’s counterpart at the Dallas Fed, had sent him an e-mail: “Illegitimi non carborundum—Don’t let the bastards get you down.”
Much as he would have liked to, Geithner had no intention of announcing to the U.S. Senate that he had been surprised by the crisis. From his office atop the stone fortress that is the Federal Reserve Bank of New York, Geithner had for years warned that the explosive growth in credit derivatives—various forms of insurance that investors could buy to protect themselves against the default of a trading partner—could actually make them ultimately more vulnerable, not less, because of the potential for a domino effect of defaults. The boom on Wall Street could not last, he repeatedly insisted, and the necessary precautions should be taken. He had stressed these ideas time and again in speeches he had delivered, but had anyone listened? The truth was, no one outside the financial world was particularly concerned with what the president of the New York Fed had to say. It was all Greenspan, Greenspan, Greenspan before it became Bernanke, Bernanke, Bernanke.
Standing at the airport, Geithner certainly felt deflated, but for now it was mostly because his driver hadn’t appeared. “You want to just take a taxi?” Mitchell asked.
Geithner, arguably the second most powerful central banker in the nation after Bernanke, stepped into the twenty-person-deep taxi line.
Patting his pockets, he looked sheepishly at Mitchell. “Do you have cash on you?”
If Tim Geithner’s life had taken just a slightly different turn only months earlier, he might well have been CEO of Citigroup, rather than its regulator.
On November 6, 2007, as the credit crisis was first beginning to hit, Sanford “Sandy” Weill, the architect of the Citigroup empire and one of its biggest individual shareholders, scheduled a 3:30 p.m. call with Geithner. Two days earlier, after announcing a record loss, Citi’s CEO, Charles O. Prince III, had been forced to resign. Weill, an old-school glad-hander who had famously recognized and cultivated the raw talent of a young Jamie Dimon, wanted to talk to Geithner about bringing him on board: “What would you think of running Citi?” Weill asked.
Geithner, four years into his tenure at the New York Federal Reserve, was intrigued but immediately sensitive to the appearance of a conflict of interest. “I’m not the right choice,” he said almost reflexively.
For the following week, however, the prospect was practically all he could think about—the job, the money, the responsibilities. He talked it over with his wife, Carole, and pondered the offer as he walked their dog, Adobe, around Larchmont, a wealthy suburb about an hour from New York City. They already lived a comfortable life—he was making $398,200 a year, an enormous sum for a regulator—but compared with their neighbors along Maple Hill Drive, they were decidedly middle-of-the-pack. His tastes weren’t that expensive, save for his monthly $80 haircut at Gjoko Spa & Salon, but with college coming up for his daughter, Elise, a junior in high school, and his son, Benjamin, an eighth-grader behind her, he could certainly use the money.
He finally placed a call to his old pal Robert Rubin, the former Treasury secretary and Citigroup’s lead director, to make sure he hadn’t made a mistake. Rubin, a longtime Geithner mentor, politely told him that he was backing Vikram Pandit for the position, and encouraged him to stay in his current job. But the fact that he had been considered for a post of this magnitude was an important measure of Geithner’s newly earned prominence in the financial-world firmament and a reflection of the trust he had earned within it.
For much of his time at the Fed, he had detected a certain lack of respect from Wall Street. Part of the problem was that he was not out of the central banker mold with which financial types traditionally felt comfortable. In the ninety-five-year history of the Federal Reserve, eight men had served as president of the Federal Reserve Bank of New York—and every one of them had worked on Wall Street as either a banker, a lawyer, or an economist. Geithner, in contrast, had been a career Treasury technocrat, a protégé of former secretaries Lawrence Summers and Robert Rubin. His authority was also somewhat compromised by the fact that, at forty-six, he still looked like a teenager and was known to enjoy an occasional day of snowboarding—and that he was given to punctuating his sentences with “fuck.”
Some Washington officials, journalists, and even a few bankers were charmed by Geithner, whose wiry intensity and dry, self-deprecating wit helped create the image of him as something of a policy-making savant: Although he often appeared distracted and inattentive during meetings, he would, after everyone had said his piece, give a penetrating analysis of the entire discussion, in coherent, flowing paragraphs.
Others, however, regarded these performances as what they saw as a form of controlling shtick. Every month the New York Fed would host a lunch for Wall Street chieftains, the very people his office oversaw, and every month Geithner would slouch in his seat, shuffling his feet, sipping a Diet Coke, and saying precisely nothing. He was as Delphic as Greenspan, one of his heroes, but he didn’t have the gravitas to pull it off, certainly not to an audience of major Wall Street players.
“He’s twelve years old!”
Such was the reaction of a nonplussed Peter G. Peterson, the former Lehman Brothers chief executive and co-founder of the private-equity firm Blackstone Group, upon first meeting Geithner in January 2003. Peterson had been leading the search for a replacement for William McDonough, who was retiring after a decade at the helm of the New York Fed. McDonough, a prepossessing former banker with First National Bank of Chicago, had become best known for summoning the chief executives of fourteen investment and commercial banks in September 1998 to arrange a $3.65 billion private-sector
bailout of the imploding hedge fund Long-Term Capital Management.
Peterson had been having trouble with the search; none of his top choices was interested. Making his way down the candidates list, he came upon the unfamiliar name of Timothy Geithner and arranged to see him. At the interview, however, he was put off by Geithner’s soft-spokenness, which can border on mumbling, as well as by his slight, youthful appearance.
Larry Summers, who had recommended Geithner, tried to assuage Peterson’s concerns. He told him that Geithner was much tougher than he appeared and “was the only person who ever worked with me who’d walk into my office and say to me, ‘Larry, on this one, you’re full of shit.’”
That directness was the product of a childhood spent constantly adapting to new people and new circumstances. Geithner had had an army brat childhood, moving from country to country as his father, Peter Geithner, a specialist in international development, took on a series of wide-ranging assignments, first for the United States Agency for International Development and then for the Ford Foundation. By the time Tim was in high school, he had lived in Rhodesia (now Zimbabwe), India, and Thailand. The Geithner family was steeped in public service. His mother’s father, Charles Moore, was a speechwriter and adviser to President Eisenhower, while his uncle, Jonathan Moore, worked in the State Department.
Following in the steps of his father, grandfather, and uncle, Tim Geithner went to Dartmouth College, where he majored in government and Asian studies. In the early 1980s, the Dartmouth campus was a major battleground of the culture wars, which were inflamed by the emergence of a right-wing campus newspaper, The Dartmouth Review. The paper, which produced prominent conservative writers such as Dinesh D’Souza and Laura Ingraham, published a number of incendiary stories, including one that featured a list of the members of the college’s Gay Students Association, and another a column against affirmative action written in what was purported to be “black English.” Taking the bait, liberal Dartmouth students waged protests against the paper. Geithner played conciliator, persuading the protesters to channel their outrage by starting a rival publication.
After college, Geithner attended the Johns Hopkins School of Advanced International Studies, where he graduated with a master’s degree in 1985. That same year he married his Dartmouth sweetheart, Carole Sonnenfeld. His father was best man at the wedding at his parents’ summer home in Cape Cod.
With the help of a recommendation from the dean at Johns Hopkins, Geithner landed a job at Henry Kissinger’s consulting firm, researching a book for Kissinger and making a very favorable impression on the former secretary of State. Geithner learned quickly how to operate effectively within the realm of powerful men while not becoming a mere sycophant; he intuitively understood how to reflect back to them an acknowledgment of their own importance. With Kissinger’s support, he then joined the Treasury Department and became an assistant financial attaché at the U.S. Embassy in Tokyo, where he ruled the compound’s tennis courts with his fierce competitiveness. The courts were also a place he could hold informal discussions with Tokyo correspondents from major publications, diplomats, and his Japanese counterparts.
During his tour in Japan, Geithner witnessed firsthand the spectacular inflation and crushing deflation of his host’s great bubble economy. It was through his work there that he came to the attention of Larry Summers, then the Treasury under secretary, who began promoting him to bigger and bigger responsibilities. During the Asian financial and Russian ruble crises of 1997 and 1998, Geithner played a behind-the-scenes role as part of what Time magazine called “The Committee to Save the World,” helping to arrange more than $100 billion of bailouts for developing countries. When aid packages were proposed, Geithner was automatically summoned into Summers’s office. In this respect Geithner was lucky; he happened to be a specialist in a part of the world that had suddenly become critical. He had also honed the diplomatic skills he had first displayed at Dartmouth, often mediating disputes between Summers, who tended to advocate aggressive intervention, and Rubin, who was more cautious.
When the South Korean economy almost collapsed in the fall of 1997, Geithner helped shape the U.S. response. On Thanksgiving Day, Geithner called Summers at his home and calmly laid out the reasons the United States had to help stabilize the situation. After much debate within the Clinton administration, the plan that emerged—to supply Seoul with billions of dollars on top of a $35 billion package from the International Monetary Fund and other international institutions—bore a close resemblance to Geithner’s original proposal. The following year, Geithner was promoted to Treasury under secretary for international affairs.
Geithner remained close to Summers, whom he used to play elaborate practical jokes on. More than once, when Summers was out giving a speech, Geithner would rewite the wire news article about the presentation, purposely misquoting him. When Summers would return to the Treasury building after his speech, Geithner would present Summers with the doctored news report as if it was real thing, and then just watch Summers blow up, threatening to call the reporter and demand a correction until Geithner let him in on the joke. The two men became so close that for years they, and other Treasury colleagues, went to a tennis academy in Florida run by Nick Bollettieri, who coached Andre Agassi and Boris Becker. Geithner, with his six-pack abs, had a game that matched his policy-making prowess. “Tim’s controlled, consistent, with very good ground strokes,” Lee Sachs, a former Treasury official, said.
When Clinton left office, Geithner joined the International Monetary Fund, and it was from there that he was recruited to the New York Fed. Despite having served a Democratic administration, Geithner was sold on the job by Peterson, a well-connected Republican.
The presidency of the New York Fed is the second most prominent job in the nation’s central banking system, and it carries enormous responsibilities. The New York bank is the government’s eyes and ears in the nation’s financial capital, in addition to being responsible for managing much of the Treasury’s debt. Of the twelve district banks in the Federal Reserve System, the New York Fed is the only one whose president is a permanent member of the committee that sets interest rates. Owing to the relatively high cost of living in New York, the annual salary of the New York Fed president is double that of the Federal Reserve chairman.
His idiosyncrasies notwithstanding, Geithner gradually grew into his job at the New York Fed, distinguishing himself as a thoughtful consensus builder. He also worked diligently to fill in gaps in his own knowledge, educating himself on the derivatives markets and eventually becoming something of a skeptic on the notion of risk dispersion. To his way of thinking, the spreading of risk could actually exacerbate the consequences of otherwise isolated problems—a view not shared by his original boss at the Fed, Alan Greenspan.
“These changes appear to have made the financial system able to absorb more easily a broader array of shocks, but they have not eliminated risk,” he said in a speech in 2006. “They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure.”
Geithner understood that the Wall Street boom would eventually falter, and he knew from his experience in Japan that it was not likely to end well. Of course, he had no way of knowing precisely how or when that would happen, and no amount of studying or preparation could have equipped him to deal with the events that began in early March 2008.
Matthew Scogin poked his head into Robert Steel’s corner office at the Treasury Department. “Are you ready for another round of Murder Board?”
Steel sighed as he looked at his senior adviser but knew it was for the best. “Okay. Yeah, let’s do it.”
Hank Paulson had been scheduled to testify before the Banking Committee with Geithner, Bernanke, and Cox, chairman of the Securities and Exchange Commission, that morning of April 3, with Alan Schwartz of Bear
Stearns and Jamie Dimon of JP Morgan to appear later. But Paulson was on an official trip to China that could not be postponed, so his deputy, Steel, would be there in his place.
Like Geithner, Steel was largely unknown outside the financial world, and he viewed his testimony before the Senate Banking Committee as presenting an opportunity, of sorts. His staff had been trying to help him prepare the traditional Washington way: by playing round after round of “Murder Board.” The game involved staff members taking on the roles of particular lawmakers and then grilling Steel with the questions the politicians were likely to ask. The exercise was also designed to help make certain that Steel would be as lucid and articulate under fire as he could be.
A seasoned and assured public speaker, Steel had appeared before congressional committees, but the stakes hadn’t been nearly as high. In addition to tough questions about what had come to be known as “Bear Weekend,” he knew another subject was likely to arise: Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises that bought up mortgages. The GSEs, which were blamed for inflating the housing bubble, had been political and ideological hot buttons for decades, but never more so than at that moment.
With Bear Stearns’ failure, the senators might even begin connecting the dots. One of the first causalities of the credit crunch was two Bear Stearns’ hedge funds that had invested heavily in securities backed by subprime mortgages. It was those mortgages that were now undermining confidence in the housing market—a market that Fannie and Freddie dominated, underwriting more than 40 percent of all mortgages, most of which were quickly losing value. That, in turn, was infecting bank lending everywhere. “Their securities move like water among all of the financial institutions,” Paulson had said of Fannie and Freddie.
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