“Most of the time, we did not know what was going to happen next.”
“We did not know the impact of what we were doing.”
“We could not reassure credibly because of that.”
“This is a world of humans. We should be skeptical of humans.” — Timothy Geithner
Former US Treasury secretary Timothy Geithner sat down last month with MIT’s Andrew W. Lo in New York City for a frank and illuminating conversation to mark the tenth anniversary of the Global Financial Crisis.
Their discussion was part of the 2008 Financial Crisis: A Ten-Year Review Conference, a gathering sponsored by CFA Institute Research Foundation, Annual Reviews, NYU Stern, and the MIT Golub Center that brought together many central figures and leading scholars of the crisis for two days of dialogue.
The participants — former central bank heads Ben Bernanke, Jean-Claude Trichet, and Mervyn King, among other luminaries — explored how events unfolded, what lessons they learned, and how a similar crisis might be avoided in the future. They offered their reminiscences and insights into those frenetic, uncertain, and panic-filled weeks and months when the global financial system ground to a halt and nearly toppled over.
Few individuals played as critical a role in navigating the crisis as Geithner. What was striking was how even 10 years on, he still seemed to carry the burden of those days.
In his talk with Lo, Geithner described his tenure as US Treasury secretary during the financial crisis as “a dark, hard time,” a mentally and physically brutal ordeal that nothing had prepared him for.
He first joined Treasury at age 28 and helped manage a number of crises outside the United States. But those experiences were of little value during the Global Financial Crisis, he said, and he was in the dark about most aspects of what ultimately mattered.
In the lead-up to the crash, there had been a sense that there was a bubble, Geithner recalled, that the financial and economic system was not especially healthy. But the exuberance was hard to stamp out. As Charles “Chuck” Prince, former head of Citigroup, once explained, “As long as the music is playing, you’ve got to get up and dance.”
Finance is inherently vulnerable to failure, Geithner said, and the financial crisis was caused by a cascading series of failures: failures of supervision and regulation and the failure to adapt. The ensuing panic demonstrated that our system had outgrown its Great Depression-era safeguards.
As the crisis unfolded, Geithner found the reach of the financial safety net — both the standing and contingent — very narrow, narrower, in fact, in the United States than anywhere else. “We were uniquely unprepared,” he said, with no standing to guarantee liability.
“All the things that conspire against action,” Geithner said, “would.”
He describes his job at Treasury during that time as “defusing bombs” — Bank of America, Fannie Mae, and Freddie Mac, among them. It was not about saving one institution but saving the whole system. Not until the Troubled Asset Relief Program (TARP) was passed and a second wave of authority was granted in early 2009 did Geithner have a sense that there might be light at the end of the tunnel.
In managing a panic like the financial crisis, he says the focus should be on taking out the extreme tail. That often means throwing a lot of money at the problem to reassure the public and forestall bank runs. The optimal system, according to Geithner, is one with constraints on leverage and capital supplemented by a safety net that’s a little more elastic. He also recommends designing an emergency arsenal.“You have to take the punch bowl away,” he said. “Or, limit the alcohol in the punch bowl before the party gets started.”
That system would have to be designed to work even when people aren’t scared enough to fix it. “You need to have delegated authority [at Treasury],” he said, “subject to checks and balances . . . So the near-term choices can be taken out of politics.”
Indeed, in surveying the landscape today, Geithner singled out politics as the main source of systemic risk.
“Our political system is not designed to do things,” he said. “It’s designed not to do things.”
For more insights from the gathering, video coverage of the 2008 Financial Crisis: A Ten-Year Review Conference, with the exception of Geithner’s presentation, is available from CFA Institute.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image courtesy of the US Department of the Treasury