Stress Test

  I still wanted us to stay vigilant—to keep thinking about what Kabaker called the “bad room” would look like. I had my team put together a deck of “Policy Alternatives if Conditions Deteriorate” that included all kinds of frightening scenarios. We weren’t out of the woods yet, which would affect an important and delicate personnel matter facing the President.

  BEN’S FOUR-YEAR term as Fed chairman was expiring in January 2010, but we would need to get a successor nominated and confirmed well before that. Early in the summer of 2009, I went to the President to begin the planning. He said his preference was to appoint Larry. He felt comfortable with Larry. I knew Larry wanted and expected the job. The President and I agreed he would be outstanding.

  But as we discussed the choice of Ben’s successor, we also discussed whether this was the right time for a change—at the Fed and at the White House. We were still at a vulnerable moment. The President still had an ambitious economic agenda. As we talked through it, the President said continuity might not be a bad idea.

  I knew some in the President’s progressive base would object if he kept a Republican in such a crucial economic job, but Ben had done an outstanding job fighting the crisis, keeping his promise to the public to do whatever he could to help avoid Depression 2.0. He was now presiding over a creative experiment through QE1, buying $1.75 trillion in Treasuries, high-quality mortgage securities, and Fannie and Freddie debt to provide extra support for the economy. I still talked to him just about every day, and I doubt there’s ever been a closer relationship between a Treasury secretary and a Fed chairman.

  And despite our financial strategy disputes, I thought Larry was an invaluable adviser to the President, the same awesome devil’s advocate who Kissinger said should have a permanent White House office. Larry never made heroic efforts to conceal his own views, but he was open to alternative views, even if he wasn’t always polite about the ones he found wanting. There was certainly some tension on our economic team, some resentment that Larry and I had too much sway, some grumbling that Larry’s meetings devolved into unfocused seminars. But I’ve attended plenty of decorous policy meetings with written agendas distributed in advance and formal speaking orders that amounted to nothing. I thought Larry’s messy, sprawling clusterfucks mostly led to deeper thinking and better decisions.

  I told the President I thought the current arrangement was working well, and I said this didn’t seem like a great time for change at the Fed. He liked the idea of keeping Larry by his side and Ben at the Fed. I spoke with Ben, and the President invited him over to the Oval Office, where Ben said he was willing to stay, although he wasn’t sure he wanted to serve a full additional term. He was tired, and the worst of the crisis seemed to be over. When it became clear the President wanted continuity, Larry was disappointed, but I think he also recognized it wasn’t an ideal time for a change. He was tired, too, and he considered leaving the administration. But the President, Rahm, and I all leaned on him to stay, and he relented.

  We still needed all hands on deck. We were relieved that the financial fires were receding, that the financial markets were recovering, that Americans whose savings had been vaporized during the crisis were recouping some of their losses. But the primary goal of our financial engineering had always been to revive the broader economy, and times were still very tough on Main Street. We could see early signs of economic growth in the data, but people weren’t feeling it on the ground.

  THE ECONOMY shed about three hundred thousand jobs a month from May through August 2009, which was horrible. But it was less than half the rate of job losses in the previous six months. Economists would later peg the end of the Great Recession to June 2009. The financial system was still damaged, but it no longer seemed to be tearing down the broader economy. And the Recovery Act was working, pouring cash into the economy. GDP still contracted by 0.4 percent in the second quarter, but again that was significantly better than the 5.4 percent decline in the first quarter. While Republicans mocked the stimulus as “Porkulus,” a big-government grab bag, its tax cuts and government investments were clearly helping to prevent things from getting much worse.

  Unfortunately, “Things are getting worse at a much slower rate” is not a convincing message of hope. Neither is “Things would be even worse if we hadn’t acted.” It’s hard to inspire the public with counterfactuals. And the one economic statistic everyone understands is the unemployment rate, which happens to be a lagging indicator after severe recessions, trailing the recovery in economic growth as businesses wait to see whether the improvement is real. By summer’s end, even though job losses were slowing, the jobless rate had soared to a gruesome 9.6 percent.

  Even mild financial crises leave terrible economic damage in their wake, and this had obviously not been a mild crisis. We knew our policies were limiting the carnage, and all the data bore that out, but what Americans could feel and see was the carnage. The President’s approval ratings, after hovering in the sixties during his early months in office, dipped to the low fifties that summer, and would never really recover.

  Even amid the signs of hope, we had a rich flow of new messes. For example, AIG turned a profit in the second quarter, another promising sign of stability. But after CEO Ed Liddy stepped down from his dollar-a-year job, the press soon reported that his replacement, former MetLife CEO Robert Benmosche, was spending much of his first month on vacation at his vineyard in Croatia. Benmosche then invited a reporter to his eight-thousand-square-foot villa on the Adriatic Coast, where he described his new $7 million compensation package as “bottom end,” complained of “lynch mobs” protesting the AIG bonuses, and mocked our economic policies as totally incompetent. We heard a lot of right-wing criticism about big-government intervention that summer, but we hadn’t expected it from our fresh recruit to run the largest beneficiary of our interventions. Benmosche would turn out to be a strong CEO of AIG, but at the time he seemed like a stranger-than-fiction plot to make us look inept.

  We still were living with the pervasive perception that President Obama had rescued the arsonists. Even Axelrod and Gibbs once suggested during a White House meeting that Americans were understandably angry at the administration because we had given the banks hundreds of billions of dollars. I reminded them that the Obama administration hadn’t given the major banks any new money. We had forced them to raise private money. But if the President’s top political aides thought we had pumped more cash into Wall Street, what were the chances that average Americans would understand the distinctions? We were still getting hammered over bonuses and bailouts, by the left and the right and a litany of government overseers, with virtually no acknowledgment that the financial system and the economy had stabilized.

  THERE WAS a new spasm of outrage in July when the special inspector general for TARP, a former prosecutor named Neil Barofsky, released a report proclaiming that the government’s crisis interventions had exposed taxpayers to $23.7 trillion in potential losses. As Politico noted, that was more than our GDP, more than the inflation-adjusted cost of every war the United States had ever fought, about a hundred times the cost of NASA’s moon mission.

  As a measure of the size of the markets we backstopped, the figure was in the ballpark, a kind of unintended compliment regarding our success at deploying overwhelming force. But as a measure of potential losses, $23.7 trillion was absurd. For losses to climb that high would require every mortgage backed by Fannie or Freddie to default, every house behind those mortgages to be worth nothing, and every U.S. bank that had received TARP funds to fail. Nevertheless, this $23.7 trillion sound bite was soon rocketing across the airwaves, a gift-wrapped talking point for our critics. It would have been laughable if it weren’t so damaging.

  Oversight is vital, especially when vast sums of taxpayer dollars are at stake, and skepticism is in order when the government floats cash to well-connected private firms. But Barofsky’s desire to prevent perfidy was untainted by financial knowledge or experience. He assumed our motives were
self-evidently sinister, as if we had helped banks for fun and profit rather than to cure a metastasizing financial crisis. He was outraged by every program, uninterested in context, unmoved by evidence of success, never burdened by having to examine alternatives. He would hire a staff to scrutinize TARP that was almost as large as the staff we had to manage TARP, and he would requisition firearms and bulletproof vests for his antifraud troops. Neither he nor his well-armed team ever produced a follow-up report to explain how the actual cost of TARP’s bank investments to taxpayers turned out to be zero—less than zero, really, because they turned a substantial profit for the taxpayer. Hank Paulson apologized to me twice during our work together—once for initially failing to persuade the House to pass TARP, and once for bequeathing me Barofsky.

  Watchdogs weren’t the only voices adding to the deep public despair about the crisis and the rescue. That was the Tea Party summer, when grassroots conservatives rallied against the President’s supposedly far-left, debt-exploding, freedom-killing agenda. I used to joke that I was personally responsible for the birth of the Tea Party, because Rick Santelli’s rant on CNBC was a response to the mortgage modification program, and the Tea Party movement focused so much of its initial fire on the financial rescue. But it quickly morphed into a clearinghouse for anti-Obama and anti-government anger, raging against the stimulus, health reform, taxes, spending, and debt.

  The Scope of the Financial Rescue

  Market Size and Crisis Response

  Our alphabet soup of crisis response programs provided support directly and indirectly to firms and markets with about $30 trillion in financial liabilities. The diversity of programs was necessary to extend a safety net against panic broad enough to cover the institutions and markets most critical to economic growth. This is an imperfect representation of the scope and diversity of programs, as there is some double-counting across sectors due to the overlapping nature of our support.

  Sources: Federal Deposit Insurance Corporation, Federal Reserve Board, U.S. Treasury Department, and company filings. (Data as of June 30, 2008; Government Sponsored Enterprises include only Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and do not include other GSEs or Ginnie Mae.)

  I sometimes wondered where this newfound right-wing enthusiasm for fiscal discipline had been during the Bush years, when unfunded wars, tax cuts, and a new Medicare prescription drug benefit had helped turn the Clinton surpluses into deficits. By contrast, Obamacare included reforms aimed at reining in the rising medical costs that threatened our fiscal future, and the Congressional Budget Office estimated that it would reduce future deficits overall despite its subsidies to extend care to the uninsured. Then again, the original Tea Party protested an unelected king who raised taxes, while Obama was an elected president who had lowered taxes, so consistency wasn’t really the point.

  The rise of the Tea Party reflected and also intensified the Republican Party’s decades-long drift to the far right. I don’t think we ever expected many Republicans to cooperate with the President, especially after their lockstep opposition to the stimulus, but we still underestimated the relentlessness and effectiveness of their opposition. I considered the President a moderate, market-oriented Democrat—he wouldn’t have chosen Larry and Rahm and me if he weren’t—but the Republican base saw him as a wild-eyed leftist, a perception fed by Republican politicians in Washington. I don’t know how many of them truly believed the President was turning the country into a socialist dystopia, and how many were just afraid of Tea Party primary challenges, but it didn’t really matter. After their wounding electoral defeats in 2006 and 2008, opposition to Obama brought them together.

  I remember on my first trip to Beijing as secretary, an embassy official called to tell me that Mark Kirk of Illinois, one of the few nominally moderate Republicans left in Congress, had just held an unusual meeting with Chinese officials. Kirk had advised them not to buy Treasuries or other U.S. government debt, warning them that our spending was driving us toward default, and that the Fed was creating hyperinflation. I couldn’t believe it. Not only were those fears delusional, but he was undermining American interests on foreign soil. I called him on his way out of China to explain that there was this noble tradition in politics that you don’t criticize the United States while you’re abroad—and you definitely shouldn’t say we’re going to default on our debts. But partisan politics no longer seemed to stop at the water’s edge.

  The impossibility of achieving true bipartisanship in Congress meant the President had to keep the Democrats with him if he wanted to pass anything. This was especially true in the Senate, where Republicans were using the filibuster with unprecedented regularity, blocking just about anything that didn’t have the sixty votes needed to overcome it. For the second half of 2009, the Democrats had exactly sixty senators, which led to side deals like the “Cornhusker Kickback” that clinched Nebraska Senator Ben Nelson’s vote on Obamacare. But as the President’s policies became less popular, many Democratic senators began keeping their distance. Moderates from Republican states didn’t want to look like big spenders. Liberals thought we were too restrained in our spending and too close to Wall Street. With lockstep opposition from Republicans, it became increasingly difficult to get anything through Congress.

  The President was often blamed for gridlock in Washington, but I thought he got a remarkable amount done despite a polarized Congress. I found that much of the criticism of his effectiveness as an executive—especially from CEOs who didn’t have to overcome filibusters—reflected a misunderstanding of the constitutionally imposed balance of power in Washington, the limits of executive authority in economic policy, and the constraints imposed by a determined opposition that had the votes to block action. I thought he was smart, thoughtful, hardworking, demanding (but not harshly so), confident (but not overly so), relentlessly practical, and relatively indifferent to short-term political costs. He did his homework. He listened. He delegated. Some found him distant, but I saw him show plenty of warmth and emotion and dry humor. He was especially sweet to my mother, who gave him a lucky stone from the Cape. He wasn’t paralyzed by the ugliness of choices or the prospect of criticism. He handled adversity remarkably well, which was fortunate, because he faced a lot of it.

  He was human, of course. Sometimes I thought he wore his frustration too openly. He harbored the overly optimistic belief that since his motives and values were good, since his team was thoughtful and well-intentioned, we deserved to be perceived that way. But I didn’t find most criticisms of the President compelling. I could relate to the distance he kept from the Washington establishment. I liked the audacity of his aspirations, his instinct to expand the frontier of the possible, his effort to achieve fundamental Democratic Party objectives but also his willingness to defy his Democratic base. He focused on doing the big things he always said he would do. When a president has political difficulties, the Beltway inevitably debates whether the problem is his bad policies or bad message or bad personality or bad leadership, but I didn’t think that explained the Tea Party summer and the paralysis that followed.

  Our main problem was the economic fallout from a vicious crisis. Unemployment was 9.6 percent and still rising, so we looked ineffective. As Jon Stewart said while introducing a Daily Show segment about a homeowner who had moved from Westchester to Washington but couldn’t sell his home: “We all know the economy, uh, sucks.” The homeowner in question was me.

  “Hold on. Timothy Geithner, the man responsible for getting us out of this economic shitstorm, cannot sell his house?” the correspondent, John Oliver, asked with mock horror. That’s right, replied a local real estate agent. “Oh, God,” Oliver gasped. He spent a lot of the segment making fun of pictures of the blue tiles in my son’s bathroom, as if to suggest they should disqualify me from public service.

  Carole and Elise had been inside baking brownies for her high school graduation party when Oliver and his crew showed up to film outside. They were trapped inside the h
ouse until he left, and they were pretty upset. Even though The Daily Show was my favorite TV show, and I was certainly a fair target, I was angry at the invasion of our privacy. I hated the idea that my family was by extension subjected to ridicule. I also hated the idea that Elise was graduating from high school, and that my work had kept me away during so much of her last year at home.

  As the financial crisis began to ebb, my fear and anxiety morphed into numbness and exhaustion and anger. I felt singed. I remember talking over dinner with my close friend Josh Steiner, who had lived through the political attacks on the Clinton administration during his Treasury days, about what was harder to deal with emotionally, fear or anger. He said that anger made it much tougher to keep focus and perspective, and I agreed. I was always pretty good about tuning out fear and focusing on my work, trying to preserve that impression of equanimity, but I had to make a conscious effort not to let the anger eat away at me.

  THE TRAJECTORY of the economy continued to improve for the rest of 2009, which is to say it shed jobs less rapidly—down to about two hundred thousand a month for September and October, averaging less than one hundred thousand a month in November and December. The economy actually began growing again in the summer, and expanded at an impressive 3.9 percent clip in the fourth quarter. Home prices stabilized. In December, Bank of America and Wells Fargo fully repaid their TARP funds, and even Citigroup paid us back most of what they owed; by year’s end, we had recouped about two-thirds of the federal outlays for bank rescues. I was finally confident that the U.S. portion of the financial crisis was over.

  The media seemed to recognize that, although it was curious how often that fact was reported in the passive voice, as if the crisis had simply ended of its own accord. It was amazing to see how quickly the overlapping government watchdogs scrutinizing TARP pivoted from dire warnings that our investments were exposing taxpayers to vast losses to equally fervent complaints that we hadn’t ensured taxpayers enough of the profits. At a meeting that fall with the four major TARP oversight bodies, their redundancy on stark display as they crowded into Treasury’s large conference room, I told them we planned to put them out of business early by getting the government’s money back as soon as possible. They didn’t seem to find that as worthy of celebration as I did.