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From Davos to Big Sur, Geithner Recounts Staring Into the Abyss

Timothy F. Geithner was at the edge of a cliff.

After tangling with European policy makers in Davos, Switzerland, in early 2008 over what would soon become a financial crisis, he took his family to the more laid-back Big Sur, where they checked into a hotel with yurts overlooking the central California coast.

With the worst of the crisis yet to come, the then-president of the Federal Reserve Bank of New York had already been referring to the turmoil in the past tense, he recounts in his new book “Stress Test: Reflections on Financial Crises,” to be published May 12. The bad news followed him on vacation when Dick Fuld called.

“I spent most of the time on a satellite phone,” Geithner writes. “I had to drive to the edge of a cliff just to get a signal, and spend hours in a light rain on call after call.”

Fuld, then chairman of Lehman Brothers Holdings Inc. and one of the reserve bank’s board members, called to “describe the carnage in the real-estate markets” and was getting more concerned. Fuld wanted more help from the central bank, according to the book, a copy of which was purchased by Bloomberg yesterday.

Each morning Geithner’s staff at the bank three blocks north of Wall Street was sending him “a dashboard of about 50 economic and financial indicators,” mostly looking ugly. Mortgage-backed securities were “bleeding” and credit-default swaps were rising, suggesting conditions would quickly go from bad to worse.

Bailout Supporter

Geithner, 52, would become Treasury secretary in President Barack Obama’s first term and one of the key officials grappling with the worst financial crisis since the Great Depression. He writes that he offered to withdraw his nomination early on when questions arose in Congress about his prior tax returns and that the White House rebuffed at least two attempts to resign.

In 2008, as New York Fed president, he was instrumental in decisions to bail out insurer American International Group Inc. and allow Lehman to fail.

Geithner, who joined private-equity firm Warburg Pincus LLC this year, sums up his experience at the center of the storm: “I don’t think the public ever really got to know me.”

Crown Publishers, an imprint of Random House Inc.’s Crown Publishing Group, published the 558-page memoir that spans the start of the crisis through the banking bailout and the administration’s regulatory crackdown on Wall Street. In it, Geithner defends his actions and offers some regret that he and others didn’t do more to see the crisis forming before it damaged the economy.

Safeguarding Banks

“With the knowledge we have today, it’s clear we didn’t do enough,” he writes. “Before the crisis, I didn’t push for the Fed in Washington to strengthen the safeguards for banks, nor did I push for legislation in Congress to extend the safeguards to non-banks.”

He praises many of his fellow crisis fighters including then Fed Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson. He also called National Economic Council chief Lawrence Summers the “smartest economist” and “most talented policy thinker” he knew.

Geithner details how he promoted Summers’s rival for chairmanship of the Fed. In 2011, Summers knew he would probably lose the job after Obama nominated Janet Yellen as the central bank’s No. 2 official. Indeed, she succeeded Bernanke this year as Fed chair after Summers, who never was formally nominated, bowed out amid opposition from Democratic senators.

`Larry Mused'

“I felt bad that the Fed chairmanship hadn’t worked out for him,” Geithner writes. “The job would open up again in 2014, but when the president, on my recommendation, nominated my excellent former Fed colleague Janet Yellen to be vice chair in April 2010, Larry mused that she was certain to be the next Fed chair, because she would be too compelling a choice to pass over -- another correct prediction.”

Geithner has mostly kind words for Elizabeth Warren, who headed a congressional oversight panel that monitored the $700 billion Troubled Asset Relief Program and is now a Democratic senator from Massachusetts.

Warren was “a thoughtful and passionate consumer advocate” and “smart and innovative,” Geithner writes, crediting her with the idea that became the Consumer Financial Protection Bureau. Still, the two had a “complicated relationship.”

“Her criticisms of the financial rescue, if well intentioned, were mostly unjustified, and her TARP oversight hearings often felt more like made-for-YouTube inquisitions than serious inquiries,” Geithner writes.

Lacey Rose, a spokesman for Warren, said in an e-mail that the senator's office declined to comment on Geithner's book.

Confirmation Fight

While Obama was torn about whether to nominate Warren as head of the new consumer agency, the president ultimately decided not to engage in a confirmation fight, Geithner writes. She was opposed by some moderate Democrats, as well as Republicans. Senate leaders told the White House there was no chance she could be confirmed.

The president called Geithner at home, a rare occurrence, to discuss the potential nomination, according to the book.

“It was really eating away at him,” Geithner writes. “He had a huge amount of respect for Warren, but he didn’t want an endless confirmation fight, and he was hesitant to nominate someone so divisive that it would undermine the agency’s ability to get up and running.”

Volcker Rule

The book also details the administration’s ultimately successful efforts to pass the 2010 Dodd-Frank law that tightened government oversight of the financial industry. As Treasury secretary, Geithner was one of the point people on the effort.

“Dealing with Congress, to put it mildly, did not feel like a careful, deliberative journey in search of the best public policy,” he writes.

Geithner recounts one meeting he had with then Senator Scott Brown, a Republican Warren later defeated. After discussing their children and triathlons, Brown told Geithner that he would support the legislation as long as it watered down a provision banning proprietary trading championed by former Fed Chairman Paul Volcker, according to the book.

Brown proposed allowing banks to invest as much as 3 percent of their capital in hedge funds and private-equity funds. The Obama administration ceded to the demand.

“My staff didn’t like this, and neither did Volcker, but there wasn’t much we could do about it,” Geithner writes. “We needed 60 votes for reform.”

Blasting Barofsky

The book also settles some scores, taking on one of his biggest critics: Neil Barofsky, a former prosecutor who was appointed the special inspector general to police TARP.

“Barofsky’s desire to prevent perfidy was untainted by financial knowledge or experience,” Geithner writes. “He assumed our motives were self-evidently sinister, as if we had helped banks for fun and profit rather than to cure a metastasizing financial crisis.”

Geithner notes that Barofsky hired a staff to monitor TARP that was almost as large as the one the Treasury used to run the entire bailout. The inspector also ordered up firearms and bullet-proof vests for his investigators, Geithner writes.

Hank Paulson apologized to me twice during our work together -- once for initially failing to persuade the House to pass TARP, and once for bequeathing me Barofsky,” Geithner writes.

Reached by phone yesterday, Barofsky dismissed the criticism.

Geithner “is regurgitating the same old insults” and “engaging in petty name calling,” said Barofsky, who is now a partner at the law firm Jenner & Block LLC in New York. “These comments reflect much more poorly on him than on me.”

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray

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