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Any student who has had the misfortune of enduring these insufferable Jacobins knows intimately of what I speak. For the crime of slandering liberal orthodoxy, one could be called out or relegated to the outer darkness by the effortless rolling of eyes, the condescending grin or the boisterous laugh -- followed shortly by the dry expressionless question: designed not towards engaging in dialogue, but to firmly put you in your place. And if shyness or the possession of a nonconfrontational nature did not therein quiet you, one could always count upon the True Believers amongst your brethren who possessed the selfsame pack mentality as the famished coyote. These lockstep drones intuitively understood the court etiquette of ideological tyrants, and knew well that the act of hectoring and humiliating the Master’s cowed and cornered prey could only enhance one’s academic standing.
Timothy Geithner, the former Treasury secretary (2009-13), believes in the forceful application of U.S. tax dollars when financial institutions are in crisis. It's a belief he holds proudly. In "Stress Test," Mr. Geithner makes a persuasive case that he is the man most responsible for the federal bailouts of 2008.
Some prefer to credit his Treasury predecessor, former Goldman Sachs CEO Hank Paulson. Others focus on the role of former Federal Reserve Chairman Ben Bernanke. But Mr. Geithner insists that, time and again as the crises flared in 2008, he was the most consistent and tireless advocate for government aid to struggling firms. His core principle is that, during a crisis, the creditors of large financial institutions should not suffer any losses.
In 2008, Mr. Geithner was president of the Federal Reserve Bank of New York,BK +1.58% and the first big test of his thinking was the March rescue of the investment house Bear Stearns. The firm, which was heavily exposed to subprime mortgages, had been planning to file for bankruptcy protection, and its regulators at the Securities and Exchange Commission were prepared to protect customer brokerage accounts. This was standard practice when securities firms failed. But Mr. Geithner intervened to give the firm short-term liquidity and arranged a sale to J.P. Morgan, a move that put U.S. taxpayers on the hook for some of Bear's risky mortgage paper. And so the taxpayer safety net was stretched to cover not just commercial banks but Wall Street investment houses as well.
In "Stress Test," Mr. Geithner argues that, though he understood that Bear "was not that big—only the 17th largest U.S. financial institution at the time"—its failure could have been catastrophic because "there were too many other firms that looked like Bear in terms of their leverage" and had similar exposure to devastating housing losses.
Stress Test
By Timothy F. Geithner
(Crown, 580 pages, $35)
(Crown, 580 pages, $35)
But that's not what he was saying at the time, according to transcripts of the Fed's Federal Open Market Committee. At a meeting on March 18, 2008, a few days after the Bear rescue, Fed governor Kevin Warsh said that financial institutions were undercapitalized. In other words, they had too much leverage and too much exposure to potential losses. Mr. Geithner objected, saying: "It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized. . . . But based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern."
Regardless of the story Mr. Geithner is telling now, there remains the question of why exactly America couldn't survive without a firm like Bear Stearns, which held no taxpayer-insured deposits. Mr. Geithner tells the story of Warren Buffett approaching him at a conference shortly after the rescue to offer congratulations. "I was sort of hoping you wouldn't do it, because then everything would have crashed and I would have been first in line to buy," said Mr. Buffett, according to the book. "It would have been terrible for the country, but I would've made a lot more money." A scenario in which Mr. Buffett is snapping up bargains doesn't sound like Armageddon.
One of the themes in "Stress Test" is Mr. Geithner's difficulty in understanding the health of large financial firms. He admits that he didn't see the mortgage crisis coming and didn't grasp the severity of the problems after it appeared. He didn't require that the banks he was overseeing raise more capital because his staff's analysis couldn't foresee a downturn as bad as the one that occurred.
None of this is particularly surprising in a man who, at the time he became president of the New York Fed, had never worked in finance or in any type of business—unless one counts a short stint in Henry Kissinger's consulting shop. At Dartmouth, Mr. Geithner "took just one economics class and found it especially dreary." After three years at Kissinger Associates, he spent 13 years at the Treasury Department, becoming close to both Robert Rubin and Larry Summers, and then worked at the government-supported International Monetary Fund. Messrs. Rubin and Summers recommended him to run the New York Fed. "I felt intimidated by how much I had to learn," he writes of taking up the job in 2003.
Mr. Geithner's New York Fed was the primary regulator for Citigroup, C +0.62% where Mr. Rubin was a director. Although a former senior executive at the bank had warned Mr. Geithner that Citigroup was "out of control," and the staff at the New York Fed "always considered [Citigroup] a laggard in risk management," Mr. Geithner figured it wasn't as risky as many of the non-banks that didn't hold insured deposits. Looking back now, he concludes that "Bob Rubin's presence at Citi surely tempered my skepticism, and he probably gave Citi an undeserved aura of competence in my mind." Citigroup would require a series of taxpayer bailouts after it had been allowed to hide more than $1 trillion in risky assets outside its balance sheet. Mr. Geithner admits that "it wasn't as well capitalized as we thought."
Mr. Geithner was perhaps a natural choice to be Barack Obama's Treasury secretary, given how many Rubin and Summers associates were populating the administration. In his new job, he continued to promote his no-haircuts-for-creditors principle and even helped codify a plan for the largest firms to avoid bankruptcy if regulators believed their failure could be damaging to the financial system.
Mr. Geithner scoffs at what he calls the "moral hazard fundamentalists" and "Old Testament" types who worry that bailing out financial firms will encourage even riskier behavior. He says that the financial rescue programs enacted in the crisis years were a success because the alternative—which no one can ever know—would have been far worse. What we do know is that, six years later, the economy is suffering through a historically weak recovery and the emergency programs haven't ended. The Federal Reserve is still providing easy credit for banks and for the U.S. government, which has racked up more than $8 trillion in additional debt since the end of 2007.
Mr. Freeman is assistant editor of The Wall Street Journal editorial page.
