Tim Geithner says he tried to push back against the heavy risk-taking that doomed the financial system in 2008 while fighting complacency among fellow regulators. He was openly worried that calamity could hit the system at any time. So why didn’t Geithner prevent the financial collapse before it started?
You really won’t find an answer in his new book, “Stress Test: Reflections on Financial Crises,” which covers his years as one of the country’s most powerful economic bureaucrats during the meltdown, both as head of the New York Federal Reserve Bank and later as President Obama’s Treasury secretary.
For the answer, you have to turn to a non-public source, which I have been lucky enough to review: Geithner’s deposition in a private lawsuit brought by Hank Greenberg, the former chief executive of American International Group, one of the financial firms at the center of the ’08 debacle.
Greenberg is suing the government because he believes the bailout of AIG was illegal since it penalized the insurer’s shareholders, like Greenberg, more than those at other firms and shareholders receiving bailout money, like Lloyd Blankfein at Goldman Sachs.
The government denies it, and I have no idea whether Greenberg’s case has merit. But I know what evidence uncovered in the case says about the knowledge of one of the banking industry’s top watchdogs — when the country needed someone with some knowledge the most — and it isn’t pretty.
If Geithner’s “Stress Test” makes him look like a man with all the answers amid the chaos of 2008, his deposition under oath and questioning by Greenberg attorney David Boies makes him seem more like a cipher; here was a guy who’d been meeting with bank CEOs for years but had no idea they created a casino about to explode. That is, until the crash was well under way.
Keep in mind AIG was one of the most important financial companies on the planet. In addition to writing plain old insurance for average people, it wrote insurance on the risky mortgage debt held by the big banks. That insurance, known as a credit default swap, gave banks a false comfort that they could keep taking enormous risk by gobbling up mortgage debt because they had a backstop in AIG.
It also meant that if for some reason AIG couldn’t make good on its obligations, the banks would have to write down large losses, which is exactly what happened.
Greenberg was ousted from AIG in 2005 over accounting irregularities (he’s fighting those charges). In his absence, the company went wild insuring multiple billions in mortgage debt held by banks, and as mortgage prices fell, AIG ran out of cash to cover the losses.
With that, the banking system faced imminent insolvency — until Geithner and his team concocted a massive bailout of AIG that saved the company and probably the system. Where were Geithner and his cohorts before all the bad stuff hit? Well, at least under questioning, largely MIA.
In Geithner’s own words, he didn’t focus on the potential catastrophic outcome if AIG folded until after Lehman collapsed — when the financial crisis went full throttle. It was only at that late hour that he and others realized AIG was a powder keg, or as he put it in the deposition, “The failure of AIG would have very damaging consequences for the US economy and for the global financial system.”
In the deposition, Geithner says his last-minute scramble came after meeting with the then-chief executive of AIG, Bob Willumstad, at least three times in the months before the meltdown and that he brushed aside pleas from the company for early aid and intervention.
Why didn’t he act sooner? Geithner conceded he personally “did not spend time…looking at AIG” in terms of a bailout because it was an insurer and not a bank.
OK, but anyone with even half a clue knew or should have known AIG wasn’t an ordinary insurance outfit but a massive financial conglomerate that provided support for the fragile financial system by writing those insurance policies on toxic debt.
That’s probably why government lawyers had that deposition, as well as those taken from former Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Hank Paulson, sealed from public consumption.
I’ve asked Geithner numerous times to discuss his words under oath and he declined, and to be fair, he wasn’t the only culprit; other regulators, like Bernanke and Paulson, were equally clueless to the risk-taking, depositions show.
But being the tallest midget in the room is no bargain for taxpayers. Which is why the courts should release all these depositions — so we can finally get at the truth.