When asked by a reporter why he wrote his memoir and whether he hoped it would vindicate him, Tim Geithner responded with a laugh and shook his head: “There’s no risk of vindication, there’s no chance of vindication, there’s no hope for vindication. I wanted to give people the chance to look through the choices we made through our eyes.”
After mostly shunning the spotlight since he left left the Treasury Department in beginning of last year, carrying with him the title as the president’s most controversial advisor, Geithner is back, talking with reporters, even going on The Daily Show, trying to give everyone “a feel for what we saw, what we missed, what our choices were.”
His message, which he conveyed repeatedly and in different ways to a group of reporters in the offices of his publisher Random House on Wednesday, was largely consistent with one of the more dire takeaways from his recently released book, Stress Test: there is a risk of another financial crises and the tools and the political will necessary to stop it might not be there in the future.
“It’s a big risk that our successors, faced with the pretty searing political costs of what we did, will take the wrong lesson,” Geithner said, “and say ‘those guys got killed’” and not pursue the type of dramatic actions he, along with Chairman of the Federal Reserve Ben Bernanke and then-Treasury Secretary Hank Paulson promoted, much to the detriment of the political standing of President Bush (the bank bailout bill passed with only 20 House Republican votes in October, 2008) and then immediately tarnishing President Obama when he came into office a few months later.
The Treasury directly injected some $273 billion into banks and the insurance company AIG, along with hundreds of billion more in loans and guarantees spread throughout the entire financial system.
When asked why the Treasury didn’t attempt to win stricter terms from the banks that received the money — effectively making the government a major shareholder in every large financial institution in the country — Geithner said, “We thought we were days away from the fucking thing collapsing and we didn’t think we could afford a long protracted negotiations over terms.” (Geithner is well known for his profanity when talking to staffers, friends, and reporters but his freedom with it on the record is a new development from his time out of the government.)
But in the future, if the government tried to do something like the Troubled Asset Relief Program again, Geithner says, a similar deal would end up being struck. Mainly because in a financial panic where investors severely doubt the value of banks’ assets and are worried about their imminent collapse, there is no effective market price for new equity. “It’s going to look relatively attractive financially, that’s its point,” Geithner said.
The best evidence that the programs were designed well, Geithner says, was how quickly banks tried to exit. Ten of the largest banks, including JPMorgan Chase, Goldman Sachs, and Morgan Stanley, paid back the government as soon as possible.
While Geithner is gloomy on future policymakers and legislators having the stomach and political will to temporarily loan and inject billions to teetering banks, he is heartened by increasingly high capital requirements for banks, which essentially cap how much they are allowed to borrow to fund their assets, making them more resilient to large losses that would otherwise drive them into bankruptcy.
And even with that higher capital, some banks (he wouldn’t say which) might be too large and complex to effectively oversee. “I’m sure some of them are too big to manage, they’re very complicated business and they’re very risky businesses,” he said.
Despite increased regulations on the size, leverage, and activities of the largest banks, there are holes in the financial system that could ignite a future crisis. Geithner specifically pointed to money market mutual funds, or funds which offer their investors a stable value per share and invest in short-term debt and offer bank-account-like ability for investors to redeem their investments.
When one of the largest money market funds, the Reserve Primary Fund, had its per-share value dip below $1 following the Lehman Brothers bankruptcy in September, 2008, billions of dollars fled other funds until the Treasury stepped in four days later to guarantee the entire market. Money market funds have very thin capital bases which makes them acutely vulnerable to panic conditions when investors doubt the value of the assets the funds hold.
Since then, attempts to regulate money-market funds to make them less vulnerable are still being discussed by the SEC. “Money market funds are banks without capital requirements, without protections against runs,” Geithner said, and they have been successfully able to defend against “the risk of stricter regulation.”
And while it may not be money market funds next, Geithner sees the lack of political will to put up a “wall of money” to support the financial system and the possibility that investors will, essentially overnight, lose fate in financial structures that invest in risky stuff that can’t be sold quickly, but whose investors can pull out overnight (think It’s A Wonderful Life) as sowing the seeds of another panic that could bloom into a crisis. “It’s a forever war, it’s never over.”