One of the themes in "Stress Test" is Mr. Geithner's difficulty in understanding the health of large financial firms. He admits that he didn't see the mortgage crisis coming and didn't grasp the severity of the problems after it appeared. He didn't require that the banks he was overseeing raise more capital because his staff's analysis couldn't foresee a downturn as bad as the one that occurred.
None of this is particularly surprising in a man who, at the time he became president of the New York Fed, had never worked in finance or in any type of business—unless one counts a short stint in Henry Kissinger's consulting shop.
At Dartmouth, Mr. Geithner "took just one economics class and found it especially dreary." After three years at Kissinger Associates, he spent 13 years at the Treasury Department, becoming close to both Robert Rubin and Larry Summers, and then worked at the government-supported International Monetary Fund. Messrs. Rubin and Summers recommended him to run the New York Fed. "I felt intimidated by how much I had to learn," he writes of taking up the job in 2003.
Mr. Geithner's New York Fed was the primary regulator for Citigroup, where Mr. Rubin was a director. Although a former senior executive at the bank had warned Mr. Geithner that Citigroup was "out of control," and the staff at the New York Fed "always considered [Citigroup] a laggard in risk management," Mr. Geithner figured it wasn't as risky as many of the non-banks that didn't hold insured deposits. Looking back now, he concludes that "Bob Rubin's presence at Citi surely tempered my skepticism, and he probably gave Citi an undeserved aura of competence in my mind." Citigroup would require a series of taxpayer bailouts after it had been allowed to hide more than $1 trillion in risky assets outside its balance sheet. Mr. Geithner admits that "it wasn't as well capitalized as we thought."
Mr. Geithner was perhaps a natural choice to be Barack Obama's Treasury secretary, given how many Rubin and Summers associates were populating the administration. In his new job, he continued to promote his no-haircuts-for-creditors principle and even helped codify a plan for the largest firms to avoid bankruptcy if regulators believed their failure could be damaging to the financial system.
Mr. Geithner scoffs at what he calls the "moral hazard fundamentalists" and "Old Testament" types who worry that bailing out financial firms will encourage even riskier behavior. He says that the financial rescue programs enacted in the crisis years were a success because the alternative—which no one can ever know—would have been far worse. What we do know is that, six years later, the economy is suffering through a historically weak recovery and the emergency programs haven't ended. The Federal Reserve is still providing easy credit for banks and for the U.S. government, which has racked up more than $8 trillion in additional debt since the end of 2007.
I think it's interesting to compare Rubin to his predecessor in the long transition to the Wall Street Uber Alles economy, Michael Milken. Back in the 1980s, Milken was the man with a plan, but government just didn't play that big a role in it. I suspect that Milken made a big mistake by moving in 1978 from the East Coast back home to Encino, CA, while Rubin has merely shuttled back and forth between NY and DC. Moreover, Milken was kind of odd, crass, pushy, and didn't have great hair like Rubin. Milken thought he had enough pull, but he ultimately went to prison.
Since Milken got out of prison a couple of decades ago, he's learned his lesson to butter up politicians and the media. Milken's Davos Jr. conference every April in Beverly Hills doesn't get your heads of state like Davos does, but it does get your Tony Blairs, Al Gores, and current governors of California.