Keep Tim Geithner

Shaping the future with today’s choices.

I don’t think for a moment that Tim Geithner is in any trouble with his boss. But given Congress’ general idiocy as they talked to him last week, and a similar lack of regard I’ve heard from way too many progressives, someone should stand up for him and make the vastly-stronger counter arguments. It comes down to this: the combination of brains, guts, calmness, and a willingness to act are virtually non-existent in Washington in any era, but particularly in this one. When you find the combination in a significant cabinet level job, you should value it.

At the moment, progressives or liberals hate him because he did not take over or dismember the banks, and publicly execute their senior managements. He also manages to be tarred by proximity to the now much despised Goldman Sachs — although he is not an alumni. Conservatives hate him because they feel he was unkind to the banks, and hurt senior managements’ feelings. Of course, he also caused the financial debacle, and the recession; and mis-designed the Federal Reserve Board 97 years ago. And no one thinks he is tall enough. If you read the accounts of Secretary Geithner’s hearings last week, you know this is all classic Washington behavior. If there is one thing at which the glibocracy in DC excels, it is coming out of the hills after the battle is over and shooting the wounded. This is Washington today, a system in total gridlock, in which counting coup is the central activity.

Lets review the bill of accounts against Tim Geithner more dispassionately.

First, he did not anticipate and head off the crisis and the recession. This is a tough one. Clearly he did not, and clearly, as the head of the New York Fed, he was there when it happened. But by my account no-one, anywhere, did. A couple of people, Nouriel Rubini and Stephen Roach, get credit for being close to right, although neither actually predicted this particular crisis, and both have a bit of a tendency to predict 4 or 5 of the last 1 recessions. Merrill Lynch’s economists were closest to getting the macroeconomic disaster right, but not the crisis. EPRI got the leading indicators right. In fact, by 2006 and early 2007 everyone thought we were headed to a cliff, but no one knew when or what the triggering mechanism would be. The capital market experts I was listening to all thought the banks were going crazy, and that the terms of major loans being offered by the banks were nuttiness of epic proportions. I spoke directly with Tim Geithner during this period, and he was deeply worried, anything but optimistic.

To take this point deeper, this crisis was long in coming and it was a totally integrated failure of intellectual traditions, global macro-economic imbalances, government policy making, regulatory supervision, financial sector greed, incomprehensible boards of directors absences without leave, and breath-taking management short-sightedness. No one and no institution put together an understanding of the set of factors that triggered this particular debacle. Tim is included in this “no one”, but so is everyone else.

Second, Tim Geithner misplayed the crisis once it began to happen. The exact opposite is true. Starting from late 2007, as the crisis began to unfold, Geithner was at the spear point of every issue and, along with Bernanke, was a creative policy maker who clearly saw the immense dangers we faced and stretched all of the powers of the Federal Reserve Board to find solutions no one else could. I have close friends who understand the capital markets at a level I do not and who believe that the decision to let Lehman go was a horrible mistake and should have been known at the time. Maybe, but neither they nor anyone else has ever faced a set of issues of this magnitude all going red simultaneously. That weekend AIG was going; Lehman was going, and Merrill was going. I have been in, by comparison, minor league circumstances like that and you do not have a single moment to think, you are besieged by innumerable individual interests, and the crowd of people willing to join you in taking responsibility gets smaller by the second. Then, beginning with his assumption of the Treasury job in November — long before he was confirmed, so he was clearly going to be beaten up on every action he took, but he went ahead and took them - he was at the lead of every major decision made in the recovery effort. (During this presidential transition period, it would have been easy to keep away from the decisions by saying that power was still in the hands of President Bush. But the Bush Administration by that point was completely spent. Someone had to step up and Tim Geithner did.)

After the inauguration of President Obama, Geithner’s policy was undramatic, a muddling through, not philosophically clear, emotionally unsatisfying to the Democratic base, but against all of the assertions at the time it was basically right and it worked. As David Brooks said in his Friday column, 49 economists gave him an “F” (which should have been a pretty good forward indicator, since when did any group of economists have a view of public policy worth taking seriously?) but his judgment turns out to have been pretty good. His use of stress tests, which was roundly laughed at by everyone, worked, helping enormously to make much more transparent and less scary the situations all of the major banks were in. I have no idea what the counter-factual might have been with another policy: maybe there was a choice available which would have led today to a completely recovered economy, an unemployment rate of 4%, and the conversion of the bank/investment bank cultures into warm, supportive, loving environments. Maybe.

Third, he is accused of being far too easy on the banks, the investment banks, AIG, and everyone else in the course of arriving at his policy. Paul Krugman said it on Friday. Gretchen Morgenstern said it over the weekend. I have a lot of sympathy with this point of view, but am not entirely sure it matters. I think the last two years have revealed the single largest failure of senior management in the financial sector, and of the board system in American history. I think I am correct in saying that there was not a single independent director in America who stood up on this issue. I do not understand why every board of every institution that failed was not asked to resign immediately. But I guess the answer is “when you are up to your ass in alligators, it is hard to think about draining the swamp.” Geithner had other things to do at that moment than settle scores.

More to the point, he is accused of being far too soft in the AIG settlement — allowing the banks and investment banks — and particularly Goldman Sachs — to get away with being paid off 100% on the dollar for their bad investments in credit default swaps. There are two problems with this analysis. First, most of the banks had either insufficient or no capital. It is not as though you were dealing with plush and successful businesses. So every penny you whacked them for in a settlement simply increased the level of capital inadequacy you were then going to have to solve. Second, the credit default swaps were insurance contracts. (That they could be sold as insurance companies without any of the capital reserves normally required and with almost infinite leverage was an enormous regulatory failure but they were.) I have been told by securities lawyers who deal with this stuff that every “haircut” forced on the banks could have been a legal claim involving totally different and completely plain vanilla lines of insurance. So if AIG is only required to pay off to the banks some percentage less than 100%, there is no legal reason why AIG would not also be able to pay off less than 100% to the holders of perfectly legitimate other insurance. This is an endless morass.

I come back to where I started. Tim Geithner acted. He acted at the moment action was required, in circumstances no one else had every faced, and with the full knowledge that he would face exactly what he is now facing. I’ve known cabinet officers who would have found a way to run away from these decisions. But he acted, he was essentially right in his actions, and we are a lot better off today than we would be if he had avoided these decisions. Get off his back.

Roosevelt Institute Braintruster Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.