Stress Test

  “Here’s what you’re going to say,” Cutter said.

  She handed me the text, and I skimmed the outrage I was expected to express. I’m not very convincing as an angry populist, and I thought the artifice would look ridiculous.

  “I’m not doing this,” I said.

  Instead, I sat uncomfortably next to the President while he expressed outrage.

  Americans were furious about bailouts for overpaid bankers, and the White House political team wanted us to show we were on the side of the backlash. Axelrod and Press Secretary Robert Gibbs were clamoring for some public displays of Old Testament justice. I got that. Symbols did matter. On my first day as secretary, we had pressured Citi to cancel a tone-deaf plan to buy a new corporate jet; the headline in the New York Post had been “Just Plane Despicable.” A week later, the President and I would announce a set of compensation reforms for senior executives at TARP firms, designed by a Treasury team led by Gene Sperling. The reforms were stringent enough to infuriate Wall Street, but not nearly stringent enough to satisfy the public outrage.

  That’s what made me uncomfortable. The public outrage was appropriate, and I understood why the President wanted to embrace it, but I didn’t see how we could ever satisfy it. We had no legal authority to confiscate the bonuses that had been paid during the boom. We had no power to set compensation for most private firms. We had more authority over firms receiving TARP funds, but we couldn’t reduce bonuses to levels that the public might find acceptable without unleashing an exodus of talent from those banks, reducing their prospects of navigating their way to safety. In any case, I thought the public’s rage on these issues was insatiable. I feared that the tougher we talked about the bonuses, the more we would own them, fueling unrealistic expectations about our ability to eradicate extravagance in the financial industry.

  My view was that our best response to all the anger would be to do all we could to end the crisis, repair the damage it had inflicted, and revive the economy so that more people could get back to work. That was our most important obligation, as well as the best path to a measure of justice for victims of the crisis. I also hoped that we could channel the country’s populist outrage into support for comprehensive long-term reforms of the financial system, as well as the President’s many other initiatives designed to create equal opportunity for more Americans. But at this point, the most important thing was to repair the banking system, not to get caught up in vilifying it.

  By early February, our small team at Treasury, working closely with the Fed, had devised the broad outlines of a three-part financial strategy: the stress test followed by capital injections to stabilize the largest banks, the public-private investment funds to buy distressed assets, and the TALF expansion to resuscitate credit markets. At the same time, we needed to make a more credible commitment that we would allow no more messy failures of systemic firms, and no more haircuts of senior bondholders—in other words, no more Lehmans or WaMus. And we needed to launch our new housing plan, which we hoped would ease pressures on some of the victims of the crisis, even though we knew we wouldn’t be able to prevent millions of foreclosures.

  We spent hours in meetings trying to build consensus for this approach, with Larry as well as the FDIC, the Fed, and other regulators. I wanted everyone on the same page to give the plan credibility, to reduce the risk of more confusing lurching. I kept saying we could not afford to come across as Afghanistan, crippled by tribal warfare among regulators. I told everyone that I wanted us to agree on a plan and sign our names in blood, to show the world we would use the combined force of our agencies to fight the crisis.

  But we had a hard time generating enthusiasm for our strategy inside the government. It seemed awfully generous to the banks, yet our decision not to buy toxic assets seemed like a problem for the banks. Most of the dissenters had smart concerns but no alternatives, a phenomenon I was familiar with from our internal debates over the previous year and a half. I often reminded them: Plan beats no plan.

  Sheila did propose a plan of sorts, a bad bank that she called an “aggregator bank,” in which the government would buy toxic loans from financial institutions. This idea had the same pricing problems as the other asset purchase plans. If the pricing was too generous, it would look like an expensive gift to the banks and leave taxpayers with too much risk. If the pricing was too harsh, it wouldn’t strengthen the banks. Either way, it would take too long to put in place. Larry and I didn’t think it made sense, and neither, ultimately, did the Fed. But Sheila continued to talk it up in interviews in the more generous form, and her aides leaked that it was likely to happen in articles with headlines such as “Obama Team Considers New ‘Bad Bank’ ” and “ ‘Bad Bank’ Plan Gets Momentum to Revive Lending.”

  The markets loved those articles, because the government-run bad bank sounded like a way for Wall Street to dump its garbage on Uncle Sam at generous prices; financial stocks had two days where they jumped double-digit percentage points in late January when press accounts were fueling bad-bank rumors. My team wanted to start preparing the markets for our actual plan, but I told them I didn’t want us fighting leaks with leaks. My staff got so annoyed by the drumbeat of FDIC-planted stories that at one point they gave Sheila’s aides a harmless snippet of wrong information, just to see if it would end up in the media. It quickly did.

  Everyone seemed to have anxiety about our strategy, and I warned the President in a February 5 memo that our approach did have real risks. There would be a long period of uncertainty before the stress test was done, a time when fears of potential dilution or even nationalization “could reignite the run on financial institutions.” We thought we’d need a lot more money soon, and “a long political fight about additional resources and authorities will raise anxiety globally.” We were in uncharted territory, with “little consensus among knowledgeable academics and experts,” so we could expect withering attacks no matter what we did. And the five financial bombs, along with other wobbly institutions, would need help in a hurry, “possibly before this plan will start to show results, which will add to fragility.”

  That memo wasn’t a decision memo. There weren’t agree-disagree boxes for the President to check. It was an informational memo, letting him know exactly what we were doing, marinating him in our unpleasant choices, giving him a chance to object if he wanted a different approach. He didn’t object. He asked smart questions, and subjected my recommendations to no-holds-barred debate with my colleagues. But he hadn’t run for president to be a financial engineer. He relied on us to figure out what needed to be done, and he gave me a lot of deference on the substance.

  After all, he had a lot on his plate. He was suddenly commander in chief, waging wars in Iraq and Afghanistan. He had a government to run, which posed enormous staffing challenges; his nominee to run health care reform, Tom Daschle, had just withdrawn because of tax issues. (I knew my own tax issues had magnified the focus on Daschle’s, yet another source of guilt during my early days on the job.) The White House was also finishing negotiations on the Recovery Act, and not a second too soon. The economy had shed another 600,000 jobs in January—later revised to more than 800,000—and unemployment was up to 7.8 percent.

  President Obama had walked into a nightmare. These had been America’s worst three months for jobs since World War II ended and the defense industry shut down its wartime factories. We were all relieved that three moderate Republican senators agreed to back the stimulus, ensuring a filibuster-proof majority to try to stop the economic free fall. But the compromises necessary to lure those Republican votes and keep Democrats on board would be a harbinger for the Obama presidency. The three Republicans, along with quite a few Democrats, limited the size of the package to $800 billion. That included a $70 billion fix to the alternative minimum tax that nobody in the administration wanted to include, because it provided almost no stimulus. But the President needed the legislation, so he had to take whatever he could get. We didn’t have time for endless negot
iations; we wanted the stimulus to start flowing immediately.

  In any case, now that the stimulus was done, we had to get moving on the financial mess. After a couple of delays to try to build consensus, we settled on February 10 for my fateful speech to unveil our plan.

  “But we don’t have a plan,” Meg protested.

  She had a point. We didn’t have many details in place, but I decided that we needed to lay out the framework of our strategy for the markets as soon as possible. The vacuum of information and constant speculation was too damaging. I didn’t want expectations to continue to be distorted by inaccurate leaks. And I thought a deadline might force resolution of our remaining internal disagreements.

  The run-up to my speech was horribly tense. White House staff wanted the speech to reassure the public by emphasizing our determination to get tough on Wall Street and save taxpayer dollars. My Treasury team wanted to reassure the markets by emphasizing our determination to do whatever it took to prevent more bank failures. The results were predictably schizophrenic. I remember Larry came over to my grand new office, with twenty-foot ceilings and an Alexander Hamilton portrait over the fireplace, to read an early draft. He proceeded to eviscerate it as unworthy of the office I occupied—the same office, he did not need to mention, that he used to occupy.

  “I can’t tell you what to do, but I wouldn’t give a speech like this,” he said. I felt the same way about the early drafts, and the later drafts weren’t poetry, either.

  The night before my speech, my team was still negotiating with the FDIC, the Fed, the OCC, and the OTS over a joint statement of support, and with the White House over a fact sheet for the press. We wouldn’t finalize the terms of the joint statement until after I began speaking, so instead of going out to the press in advance of my remarks, the statement wouldn’t be ready until after markets had already reacted and reporters had filed their stories.

  My team spent most of the night before the speech in a second-floor corner office at Treasury, arguing and rewriting and then arguing some more. At one point, Lee exploded at Gene when he tried to rebrand our capital plan as a “Financial Stability Trust,” which might sound good to the public but might also be confusing to the markets. Meg was hunched over a computer, stripping out the remaining populist rhetoric, while Gene and Lee hovered behind her, debating with each other about what needed to be put back in.

  “You guys seem to be on the same page,” she said sarcastically. “Why don’t you type?”

  At one point, Meg noticed that a strawberry Pop-Tart she had bought from one of Treasury’s vending machines had vanished. She looked over at Gene, who shrugged and admitted he had eaten it. He said he would buy Meg another in a tone suggesting he comprehended neither the enormity of his crime nor the inadvisability of messing with Meg when she was tired and hungry.

  “When, Gene?” she demanded. “When are you going to get me another?”

  I had a bad feeling that the speech the President had foreshadowed as my “moment in the sun” would be a mess. (The billionaire Pete Peterson, my former board chairman at the New York Fed, later asked me if the President had intentionally made me a fall guy, which, of course, he hadn’t.) I was supposed to do a few rehearsals to learn how to use the teleprompter, but I kept putting them off; I finally did a couple of half-hearted run-throughs that evening, repeatedly stopping to edit my text as I went along. I also had no time for prep sessions for my national TV appearances after the speech. Rubin used to do roughly sixty minutes of prep for every minute on Meet the Press; I did zero minutes of prep for the first TV interviews of my career.

  I knew I could now move markets any time I opened my mouth; I stashed a New York Times headline about minimalism in Japanese design in my office drawer when I was a young civil servant to remind myself never to say too much. I also knew that my first words to the world could do a lot to build or destroy confidence. “Talk is cheap—or really expensive,” I kept telling my team. I meant that credible rhetorical commitments to the safety of the system could reassure lenders and investors even more than money in the window, while loose language stoking fears about haircuts or nationalization could be instantly destabilizing.

  Back when I was in my first senior position at Treasury, I used to explain to new recruits that deciding on the right policy was only 10 percent of their challenge. And it was important to decide early, so they would have time for the other 90 percent—negotiating the substance, framing the narrative, figuring out how to execute. But I had spent so much time devising our financial stability strategy and fighting over its substance that I had spent virtually no time on getting the explanation right. I had neglected the theater, even though I had no real personal experience with the theater. I was probably in some denial about my transition from anonymous mandarin to public figure. The weekend before my speech, I mentioned to Mark Patterson that I was pleased I could still walk around in public without being recognized.

  “That’s not going to last much longer,” Patterson said.

  MY SPEECH, as I mentioned in the introduction to this book, sucked.

  Barclays Capital’s chief U.S. economist called my speech “shock and ugh.” Martin Wolf’s Financial Times column about the already-doomed Obama presidency called our plan “yet another child of the failed interventions of the past one and a half years: optimistic and indecisive.” The consensus view was that my inept delivery and lack of detail had dramatically increased uncertainty in the financial system. The conservative columnist Jim Pethokoukis summarized my message as: “We have a plan to have a plan.” He added a one-word editorial comment: “Ouch.”

  Ouch was right. I had announced a series of novel, complicated programs with no precedent in crisis response, while providing few clues about what would be in them or how they would work. Not even Paul Krugman, the Nobel laureate economist and progressive New York Times columnist, could figure out what we intended to do. “I really don’t know, at least based on what we’ve seen today,” he wrote. And Krugman had one of the least hostile reviews of my speech, at least acknowledging the possibility that it could conceivably be “a Trojan horse that smuggles the right policy into place.” Most commentators simply took it for granted that my public debut had been an unmitigated fiasco, before moving on to speculation about how long I would last as secretary.

  “Mr. Geithner … doesn’t know what he’s doing, and pretty soon, everybody’s going to find out,” the hedge fund investor Jim Rogers scoffed on Bloomberg TV.

  The speech had a bunch of big commitments, without much explanation of what they meant. I said we would mobilize up to $1 trillion each for both the investment fund and the credit program, to make it clear they would be substantial relative to the size of their markets. And I tried to draw a definitive “no more Lehmans” line in the sand: “We believe that the U.S. has to send a clear and consistent signal that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy.” But those new commitments just reinforced the public’s view that we would continue to throw money at Wall Street, while the parts of the speech designed to ease some of the public’s outrage about bailouts—pledging a new era of transparency and tough conditions for TARP recipients—just seemed to unnerve investors. Lacking detailed information about our plans, everyone assumed the worst, as if I were a toxic asset myself.

  It’s not a good sign when stocks plummet during a Treasury secretary’s first speech. But as bad as my speech and my delivery were, the reaction of the markets had a lot to do with their expectations, fueled by pre-speech leaks, that we would announce a bad bank to buy troubled assets at inflated prices. The public was outraged that we still seemed to be bailing out banks, but investors were disappointed that our plan didn’t sound like enough of a bailout.

  With a Democrat in the White House, the markets were also afraid that the stress test would be a prelude to nationalizing banks, even though we repeatedly insisted that wasn’t our goal. In fact, I envisioned the stre
ss test as an effort to prevent unnecessary nationalization. But we wouldn’t know for sure whether we would have to take over any insolvent institutions until the stress test was complete and we could see how bad things really were. That would be a terrible source of uncertainty in the coming months.

  That evening, as the condolence notes rolled in, I told my team I was sorry I had put us in such a tough position, by going public with so few details and botching the theater. I warned that the next few months would be tough, because critics would be ripping our plan to shreds, and we wouldn’t have much of a story to tell beyond: Hang on, trust us, it’s better than you think. But we just needed to keep putting flesh on the bones of our plan.

  “The only way we’re going to get out of this is to get the details right and execute,” I said. “This is the plan. We know it’s a good plan. We just have to demonstrate that.”

  I wanted our work to have a cadence. I said we should roll out new details every week or so, as fast as we could finalize them, gradually building credibility and reducing uncertainty.

  “The world needs to see that we’re going to keep at it until we fix it,” I said.

  It wasn’t fixed yet, though. The markets kept falling. The media kept pounding. I left two days after the speech for a G-7 meeting in Rome, where my fellow finance ministers, some of whom I had known since my days as Larry’s noisy scribe, seemed pleased to see me but genuinely worried about my plan. They didn’t understand it, either.