When I heard that Timothy Geithner was putting out his memoir Stress Test, I couldn’t help but to think back to the first time I interacted with him. It happened on the 14th floor basketball court of the Federal Reserve’s New York branch (the “New York Fed”). Back in 2003, I was a relatively green Fed lawyer—two years out after completing a J.D./M.B.A. at Columbia University.
Mr. Geithner was a relatively green CEO—only several months into his first major executive role as New York Fed President. In our pick-up games, Geithner proved to be a fantastic player, routinely flashing the best shooting touch. Despite this prowess, however, Geithner invariably shied away from taking the big shots. At the moment of truth, his gaze often became curiously unsteady, his hands seemingly shaky.
Little could I have realized then that the inherent risk aversion I was witnessing would come to shape the course of U.S. history.
I worked for a total of nine years at the New York Fed over two separate stints. In the aftermath of Lehman Brothers’ 2008 collapse, I returned there to manage the centerpiece program of the experimental stimulus program known as “Quantitative Easing” or "QE." Several months ago, I apologized publicly for my role in QE, suggesting that it had become the greatest backdoor Wall Street bailout of all time. But I've never spoken openly about why I left the Fed in the first place: It was mainly because of Mr. Geithner.
Inside the New York Fed, I wouldn’t actually realize how cautious a leader Mr. Geithner was until 2006 when I transferred to a mid-level management position in its “Bank Supervision” department—arguably, the Fed’s most important regulatory division.
The department I now joined was in complete disarray. Rife with politics, the only thing it seemed to excel at was demoralizing the bright, idealistic minds it was recruiting from the nation’s finest graduate schools (staggeringly, up to a quarter of the 600-plus person department was leaving each year). Even more tellingly, in the period directly preceding the largest U.S. banking crisis since the Great Depression, the New York Fed’s bank regulators were obsessively focusing on the systemic risk from hedge funds—not banks.
Mr. Geithner’s response? He seemed to float above the action. Far too often, in the senior-level regulatory strategy sessions I attended, Geithner simply peppered the room with questions, rather than providing any concrete direction. And, instead of making any serious attempt to straighten out a chronically underperforming bank regulatory division, Geithner had instead begun filling various, key New York Fed positions outside of the regulatory function with trusted advisors from Wall Street firms like Goldman Sachs, J.P. Morgan, and American Express.
In early 2008, after a few too many months of waiting for more forceful leadership from Mr. Geithner, I finally opted to become just one more demoralized ex-Fed bank regulator, accepting a job on Wall Street.
For as poorly as his New York Fed was regulating its banks, though, it would be unfair to suggest that Timothy Geithner (or any other U.S. bank regulator) was primarily responsible for what metastasized shortly thereafter: the 2008 financial crisis. Fueled by a potent mix of greed and mismanagement, the U.S. banking sector did a bang up job of blowing up itself—and the American economy along with it.
It would be equally unfair not to give Geithner immense credit for the U.S. government’s response. By almost all accounts from inside and outside the Fed, he finally stepped up to take the shot. As head of the New York Fed (by his own description, the “fire station of the financial crisis”), Geithner guided the U.S. Central bank’s operational attack and tirelessly helped stabilize Wall Street—a role that would end up netting him the job of U.S. Treasury Secretary as of early 2009.
But, however heroic, Mr. Geithner’s boldness proved to be short-lived and eventually appeared to have been a reflexive reaction to unprecedented contagion. In the aftermath of the U.S. financial crisis’ most acute phase—at what would have been the right moment to pursue the type of resolute, strategic moves that might prevent such a catastrophe from ever happening again—Geithner seemed to revert to his previous form.
Fighting for a return to bright-line (Glass Steagall-like) regulation that would have effectively broken up the big banks? Fat chance. Geithner shepherded through Congress a convoluted Dodd-Frank bank reform that continues to be only roughly 50 percent implemented. Those celebrated stress tests that have supposedly served to validate the U.S. banking system’s resilience? As we saw only two weeks ago with Bank of America’s admission of misreporting capital levels, the results still fundamentally rely on opaque internal bank modeling. In response to such observations, Mr. Geithner might cite the barrier of congressional intransigence and throw up his hands, but, I’d ask, did he ever really try to take the ball strong to the hoop?
Now, looking out at the U.S. economy little more than five years after Mr. Geithner’s becoming U.S. Treasury Secretary, what do we see? The more things are said to have changed, the more they’ve stayed the same. Nursed back to health by massive government support, the U.S. financial sector is once again America’s largest enterprise, accounting for more than 30 percent of the nation’s corporate profits. Moreover, Wall Street’s six biggest banks—the so-called “too big to fail” ones—have gotten 37 percent bigger.
There are those who impugn Timothy Geithner’s character, but, in my seven years of interacting regularly with him at the Fed, he couldn’t have come across as more gracious and professional. There are those who point to his recent move to private equity and retroactively question his motivation while in government, but the implication seems unfair when you consider that he spent 23 straight years in public service.
No, I’d argue Mr. Geithner's story is ultimately one about missed opportunity. For all the justifications he surely provides in his new book, Mr. Geithner should be seen as occupying a particularly sad place in the evolution of the U.S. economy. More than any other American, he personifies the era when we lost our nerve when it came to reining in the size and concentration of Wall Street’s banks.
This essay originally appeared at Business Insider, an Atlantic partner site.
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