On Wall Street, Geithner fit in easily and impressed everybody—so much so that in 2007 he was approached about becoming CEO of Citigroup, even though his private-sector experience was limited to Kissinger Associates. Friends ascribe to him an almost Victorian sense of duty, and the fact that he’d spent most of his working life in government was indeed unusual, not just on Wall Street but in Washington. Even those Republicans for whom government is the primary object of ambition usually leave at some point for a stint in the private sector, because it’s considered suspicious to spend a career serving an entity to which one is supposed to be philosophically opposed. Most Democrats also leave for the private sector, though for a different reason—money. Geithner hasn’t, yet.
When the crisis broke, Geithner was instrumental in the government’s rescue of Bear Stearns; its decision not to rescue Lehman Brothers; and its bailouts of AIG, Citigroup, and Bank of America. Whether or not these were the right responses will be debated for years; what’s not disputed is that Geithner, Ben Bernanke, and Henry Paulson were the chief actors in deciding how the government handled the biggest panic since the Great Depression. Public-opinion polls indicate overwhelming disapproval of their actions, but many insiders defend them. “Markets are funny animals,” Rubin told me. “Tim, through his work on the Asian financial crisis, got a lot of exposure to market psychology and how markets work, and developed a feel for it. Very few people who have not worked in the markets develop a feel for what they’re like, but Tim did. It could have been an absolute disaster if someone had been in the job who didn’t have his experience.”
The official story of Geithner’s selection as Treasury secretary is that he was one of three serious candidates, along with Summers and former Federal Reserve Chairman Paul Volcker. The background story is that it was always between Geithner and Summers, Volcker’s inclusion being both courtesy to a legend and a political maneuver to reflect gravitas onto Obama. Summers wanted the job, and looked to be the favorite. (He also had his eye on the Fed chairmanship.) A confirmation hearing would have brought controversy—his rocky tenure as president of Harvard, his hedge-fund job—but probably not enough to sink him in the middle of an economic free fall. Obama hardly knew Geithner. While Summers ran the campaign’s daily economic briefings, Geithner was in New York attending to the crisis. By the accounts I heard, Obama chose Geithner largely on the strength of a single 65-minute interview on November 16.
One can imagine the realization dawning upon Obama that here was the man he needed. Someone who understood the crisis in all its terrifying detail, and could explain it succinctly. Someone who proposed a course of action (“Plan beats no plan,” Geithner liked to say), and whose habit it was when speaking frankly to interpolate blunt profanities, so you’d get right away that this wasn’t some uptight staffer but rather someone you could see working with—someone who was even a little ballsy. Obama would already have heard from the right people that he was loyal, disinclined to drama, accustomed to subordinating his ego to a principal’s. Everything—his international background, his athleticism, his appearing to lack the kind of baggage that could imperil a nomination—would argue for his choice. To top it off, putting him at Treasury would greatly reassure the market. Was it even close?
But things got off to a terrible start. Geithner’s nomination was leaked on November 21 and followed by the only serious professional setback he had ever experienced. His confirmation was jeopardized by the discovery that he had failed to pay $34,000 in taxes during the years after the Clinton administration when he worked at the International Monetary Fund—an error that he himself had committed while using TurboTax. A few weeks later, Tom Daschle, the former Senate majority leader nominated as secretary of Health and Human Services and intended to be the point man on health-care reform, also encountered tax troubles. “With the tax troubles it kind of became clear that with Daschle’s and Geithner’s nominations moving simultaneously, one of them probably wouldn’t make it,” a veteran Democrat who worked on the transition told me. In the end, Geithner was confirmed by the narrowest margin of any member of the new Cabinet. Daschle withdrew, bitterly disappointing staffers, who perceived Geithner as an undeserving newcomer and, furthermore, ungrateful to those who had scrambled to save him. “When Daschle’s nomination failed and Geithner’s succeeded,” the staffer says, “the line you often heard was, ‘We did exactly what the government did. We saved Bear Stearns and let Lehman fail—in other words, we saved the wrong one.’”
Then there was his awkward new situation. He was back battling a crisis alongside Larry Summers, but no longer the junior figure. Now they were equals; and Geithner, by virtue of having bested his old mentor for the Treasury job, could even be perceived as slightly the senior. Summers, say many who know him, had difficulty adjusting. “Larry is not, by nature, built to make that easier,” says a friend. As Obama was preparing to take office, the economy was shrinking at an annual rate of 6.4 percent. One of the most significant failures of Obama’s presidency is that he hasn’t been able to win more credit for how quickly he turned this around. Right away his team devised a strategy that drew on the lessons of the 1990s, but rested upon a novel feature that was essentially a gamble designed to save taxpayers trillions of dollars—a gamble that has so far paid off. And yet, today, just about everybody thinks Obama took a frantic and costly ad hoc approach to the crisis, of which the best that might be said is that he meant well.
The belief that shaped the administration’s response was that governments always move too slowly. “I’d watched the emerging-market crises,” Geithner told me. “The simplest way to say it is that you have to move quickly with overwhelming force. You’ll be able to get out more quickly if you do. You’ll solve the problem more cheaply—less cost to the economy, less unemployment, less business failure, less cost to the taxpayer. People do the gradualist approach for two reasons. One is, the politics are terrible, because nobody wants to have to take that consequential act of putting a lot of money behind a financial system and helping a bunch of people that caused the crisis. The other reason is that people tend to hope it will get better, hope they’re overestimating the problem, hope it’ll heal itself, and that causes them to wait. But ultimately it takes capital in the financial system, and it takes the fiscal cannons of the government to work.”
Geithner thought the best plan would align three cannons. The first was monetary policy: the Federal Reserve would lower borrowing costs to nearly nothing. The second was fiscal policy, through which massive government outlays—a stimulus—would help fill the gap in private spending. The third was the recapitalization of the financial sector, which meant getting money into banks to help them absorb losses and continue lending. Upping the degree of difficulty was the need to coordinate with other countries, since the crisis was already global. (This happened at the G-20 meeting in March 2009.)
All of this was textbook crisis response. The daring break from form—really, the plan’s defining feature—lay in where the bulk of the money would come from. History said the answer was government. But there was, theoretically, another option. “The distinction in strategy that we adopted when we came in,” Geithner says, “was to try and maximize the chance that capital needs could be met privately, not publicly”—that investors, rather than taxpayers, could supply the money banks needed. If the plan worked, it could save taxpayers a great deal. Research by the Cleveland Fed into financial crises estimates the typical cost at 5 to 10 percent of GDP, which would leave taxpayers on the hook for somewhere between $700 billion and $1.5 trillion—and presumably more, given the depth of this crisis. (A recent IMF study put the average cost of a crisis even higher, at 13 percent of GDP, or $1.9 trillion.) The danger, if the plan failed, was that the crisis—and the cost—would escalate, and that the government’s credibility would be shot. It’s a barometer of how uneasy some administration officials were about the plan that they referred to it in the press as the Geithner Plan. If it failed, there’d be no doubting who would get the blame.
The first challenge was to persuade panicked investors, amid what amounted to a run on every bank, to buy shares in any of them. The infamous “stress tests” were designed to accomplish this. The idea came from Geithner, whose stress-testing at the New York Fed had informed his warnings about derivatives and fat tails. In essence, stress-testing is a risk-management tool that measures the probability of future outcomes, including worst-case scenarios. When Obama took over, the markets were frozen because investors, uncertain of how bad the crisis could get, assumed the worst.
Geithner says he settled on stress tests as the centerpiece of the economic response in December, while sitting on a beach in Mexico. The plan was to force banks to submit to an appraisal of how they’d fare if conditions worsened, and then make a judgment about how much additional capital they’d need. They’d have a chance to raise that money privately. But if they couldn’t, the government would supply it—with all the strings that implied. The gambit was that injecting this new measure of uncertainty would ultimately be helpful. Good results would halt the panic and might lure back investors; bad ones would at least clarify the severity of the crisis. “The basic strategy,” Geithner says, “was to dispel the cloud of uncertainty.” Initially, that didn’t happen. Many people assumed the tests were a pretext for allowing the government to seize weak banks. Others complained that the tests were too mild, and suspected that the whole thing was an excuse to let banks try to grow their way out of trouble—to reprise what Japan did.
To just about everybody’s surprise, though, the plan has appeared to work. The Dow bottomed out last March. But this brought further challenges. The reason that many White House officials viewed the Geithner Plan with asperity was not only because it might fail but also because seeing it through to success could be poisonous. Any strategy that depends on the private sector’s willingness to invest amid chaos must tread cautiously in the market or risk scaring off the very people it seeks to attract. The charge that the White House has coddled Wall Street isn’t just true—it was key to the whole endeavor! The major struggle within the White House last year is often mistakenly assumed to have been over whether (and how) to nationalize ailing banks. But no plan besides Geithner’s was seriously put forward—and the difficulty of seeing that plan through was the basis of the struggle that played out across Obama’s first year.
Geithner’s plan was wildly out of sync with the public desire for swift, retributive justice against the banks. Geithner strenuously opposed this way of thinking, which often put him at odds with others in the administration, including Summers. The big debate among economists and members of Congress when Obama took office was whether to nationalize the weakest banks. Elite opinion was drifting toward the view that this was an unpleasant but necessary step. Geithner countered that it would be premature, grossly expensive, and, by putting the government in charge of banks, unlikely to succeed. “We’d have had 18 AIGs on our hands!” Lee Sachs, one of his top aides, exclaimed to me. Summers, though he claims never to have advocated nationalization, was more hawkish about wanting to impose the government’s will, particularly on Bank of America and Citigroup, recipients of billions of dollars of support. But even this spooked Geithner, who feared that even measures short of nationalization would send investors fleeing.
Geithner became phobic about intervening in the markets in any way that investors could perceive negatively, fighting off White House efforts to impose stringent pay caps on banks receiving federal aid. When Britain’s prime minister, Gordon Brown, advocated a tax on financial transactions to reduce the appeal of purely speculative trading (an idea Summers once favored), Geithner publicly dismissed the notion out of hand. He has exasperated the bailout program’s chief watchdog, Neil Barofsky, by refusing to make all of the banks explain how they use their bailout money. “It’s hard to be on the wrong side of this issue,” Barofsky marveled when I asked him about it. “This is just basic accountability.” Barofsky has become Geithner’s chief tormentor.