Stress Test

  It worked. The stress test was rigorous, its results were reassuring, and because the test was also transparent, those results were credible. We forced the system to raise enough capital so that it could survive a depression, and that made the depression less likely. Most of the banks that did need more capital had little trouble raising it from private investors; confidence returned so quickly that most of the TARP money invested in banks was paid back by the end of 2009.

  We were certainly relieved that the stress test did not reveal massive capital shortfalls throughout the financial system, but it wasn’t just a matter of luck that the banks proved healthier than the markets’ worst fears. The combined force of the stimulus in the Recovery Act, the Fed’s monetary policy actions, and our various programs to strengthen the guarantees behind the financial system, together with our commitment to recapitalize the financial system, convinced the world we weren’t going to fall off the cliff. The stress test worked in part because these efforts began to get traction.

  We used as much force as we could; in an epic crisis, caution is a much riskier strategy. And even though my maiden speech as Treasury secretary was a disaster, and the markets doubted the seriousness and the efficacy of our pledges to stabilize the system, we kept following through on our commitments, and the markets began to believe. We restored confidence in the financial system and the economy, even though the public lost confidence in their government.

  DURING MY years as Treasury secretary, when my friends would ask me about Washington, my stock response was: “It’s even worse than you think.”

  I would describe in vivid detail the challenges of dealing with the “hyenas” among the press corps—their shrill recitations of conventional wisdom about our latest outrages, their unwillingness to challenge simplistic black-and-white narratives, their refusal to correct the record when events proved them wrong. I would tell stories about the peacocks and jerks in Congress, showboating at hearings where very little hearing was ever done, kowtowing to donors and lobbyists and ideological advocacy groups, putting partisanship and popularity over the fate of the country. It was deeply discouraging to watch so many Republicans refuse to back President Bush on TARP or President Obama on anything when the fate of the entire economy was at stake, to hear them blame us for the deficits they created, to see how comfortable they were dragging the United States to the brink of default. And I was often frustrated with the populist left, which never seemed to recognize the very real constraints the President was facing or the progressive legacy he was compiling.

  I despaired at the backbiting and posturing and political gamesmanship in Washington. It put all kinds of unnecessary obstacles in the way of good policy. I can’t say I enjoyed my confirmation hearing, or the derisive reviews of my initial speech and the plan it promised, or the early demands for my resignation from liberals and conservatives alike. It wasn’t fun for me, and it was especially hard on the people I love. But looking back at that period in our history with the benefit of some distance, I offer a revision: It’s better than you think.

  The financial crisis was a true stress test for the United States, a full-blown financial panic that obliterated $15 trillion in household wealth and triggered the worst recession in generations. It demanded the kind of response that democratic governments aren’t built for—swift, consistent, coordinated action that prioritized the desperate needs of the nation over the immediate demands of the public. The crisis certainly exposed rot in our system. At times, our response was neither swift, nor consistent, nor coordinated. Some of the brutal costs of the crisis could have been prevented if we had adopted our eventual strategy earlier, more forcefully, and with more support across the government—and if we had continued the fiscal support longer.

  But as dysfunctional as it seemed, Washington turned out to work better than people thought. A Republican president and a Democratic president both stood behind good policy at a time when the politics could not have been worse. Key financial policymakers—including intrepid Republicans like Hank Paulson and Ben Bernanke as well as impressive Democrats like Larry Summers and President Obama’s other advisers—grappled with the crisis with a relentless focus on efficacy, not always agreeing but genuinely trying to figure out the right answers. We had incredible support from hundreds of public servants who worked insane hours without recognition or reward to help their country and the world.

  And despite the steady stream of absurdity emanating from Capitol Hill, Congress did not ultimately block us from doing what needed to be done to save the financial system and the economy. In fact, at moments of extreme peril, enough of the nation’s lawmakers—mostly Democrats, occasionally joined by a few brave Republicans—were willing to do the right thing to prevent an already tragic situation from metastasizing into a second Great Depression. It wasn’t easy to fix the financial rules of the road to prevent similar disasters in the future, either, but again, a mostly Democratic coalition rose to the occasion, largely defying the power of financial interests, enacting comprehensive reforms that were not a panacea but were a tremendous improvement over the status quo.

  I HAVE plenty of regrets about my time in public service, starting with all the pain I caused my family, through my absences as well as my public notoriety. I wish I had pushed harder to improve the financial system’s ability to withstand a crisis of confidence when I was at the New York Fed. I wish I had figured out a way to respond more aggressively to the initial panic, and to sustain the initial power of our fiscal stimulus. I wish we had expanded our housing programs earlier, to relieve more pain for homeowners. I wish I had persuaded Congress to create more authority for the Fed and the Treasury in the financial reform legislation, and to make sure policymakers have the tools they need to engineer unpopular financial rescues in the future. And I wish I had done a better job of explaining our strategy, so that more Americans would have understood that we were working on their behalf, and wouldn’t have lost so much faith in their government. I remember one of the times I offered to resign during the spring of 2009, when “embattled” seemed to be part of my official title, Rahm said I wouldn’t be allowed to escape that quickly—but that when I did escape, I should probably expect my official Treasury portrait to be done in crayon.

  I don’t think the public ever really got to know me. Barbra Streisand said when we met at that state dinner that I must be all right because I was a Brooklyn Jew, which was kind of her, except that I’m not Jewish and I’ve never lived in Brooklyn. The broader misperception that I was a Wall Street lifer on loan to the government was damaging not just to me but to the President, and at times the country; even Angela Merkel seemed to think I spoke for the markets. I always tried to be a happy warrior, sometimes joking about my reputed past as a bankster, but these myths served to undermine people’s faith in my motives and intentions and cast a shadow over everything we did. Now that I finally have escaped, and have chosen to learn a new craft in the investment world, I know I may reinforce those perceptions. I loved my work in government, and I’m proud of what I did in public life, but I couldn’t do it forever.

  I hope this book will help cast a brighter light on what we did and why we did it, because that’s really important—not just for me and my colleagues, but for the country. The lingering public revulsion for what we did, for bailouts and stimulus and government intervention to resolve financial crises, is a serious problem for the policymakers who will stand in my shoes in the future. Because this time really was different. As bad as it was, it was better than it could have been, much better than the pattern of history.

  I also hope this crisis encourages Americans to reconsider the value of strong public institutions and capable public servants. When we were successful in limiting the damage, it was with the force available only to governments and central banks. And there is no viable strategy for reducing the damage of future crises that does not depend on strong government rules and oversight, and the ability to attract talented people to oversee the system. The
success of our financial rescue did not solve the many problems we still face as a nation, from high levels of poverty to global warming to appalling inequality in access to quality education and health care. These challenges will require better government—not necessarily more government, but smarter policies, designed on the merits, less distorted by politics and money. It would be good for the country if we could bring a similar level of creativity and ambition and force to these challenges, along with the quintessentially American pragmatism that helped keep us out of the financial abyss.

  There are lessons for the world in our mistakes as well as our successes. My hope is that they won’t have to be rediscovered in the fires of the next crisis.

  TRIBUTE TO THE CRISIS TEAM

  THE TEAM

  There was a lot that was remarkable about this financial crisis—the force of the panic, the extent of the economic damage, the size and novelty of the financial programs, the degree of international cooperation, and the sting of the political backlash. Also exceptional were the people involved in the response and their spirit of cooperation. I wanted to recognize them and give you a sense of their contributions, since I could not do them justice in the book.

  I am enormously grateful to President Obama, for asking me to work for him, pushing for an aggressive strategy, and sticking with it. And despite my efforts to escape, I am glad he compelled me to stay for his full first term. It was a great privilege to spend four years serving with him. Nothing we achieved would have been possible without his leadership and support.

  The four main architects of the strategy—Hank Paulson, Ben Bernanke, Don Kohn, and I—worked together with a degree of mutual respect and confidence in one another that is exceptionally rare in Washington and that I had never seen in other countries faced with a crisis. We had our debates, and we made our mistakes, but we kept searching for what would work, trying to honor President Franklin D. Roosevelt’s phrase that the country needed a period of bold, persistent experimentation.

  We were very complementary in our backgrounds, with a fortunate combination of experience in markets, monetary policy, and financial crises as well as knowledge of the economics of depressions. And we were willing to take risks and adjust course and change our minds. We didn’t peacock at one another’s expense, and we didn’t let our staffs do it in the press.

  Larry Summers, with his uniquely high ratio of thrill to torture, pushed and pushed to get us closer to the frontier of the possible. I valued and relied on his counsel, even when it was most uncomfortable.

  Hank Paulson brought together a very strong group of financial talent to the Treasury. Dan Jester and Steve Shafran helped design some of the largest and most complicated financial interventions and programs in history, including the GSE conservatorship, the money market guarantee program, and the TARP capital injections of 2008. They had a lot of help within Paulson’s Treasury from Bob Hoyt, Neel Kashkari, David Nason, and Ken Wilson, among many others.

  Ben Bernanke and Don Kohn directed the vast resources of the Federal Reserve toward solving the crisis during its most active period in history. Janet Yellen, as president of the San Francisco Fed and then as vice chairman of the Board was a thoughtful and consistent advocate of more aggressive policy at those dangerous moments when it was most vital for the central bank to act; the Fed will be in good hands with her as its chair. Kevin Warsh was a great resource to Ben, present on virtually every crisis conference call, providing his valuable mix of financial market and political advice. The governors of the Federal Reserve Board and the other members of the FOMC gave the chairman the votes he needed to act, even when many were deeply uncomfortable.

  The barons of the Federal Reserve Board staff—Scott Alvarez, Brian Madigan, David Stockton, and David Wilcox—helped Ben and Don expand the frontiers of central banking, not just in the design of the emergency liquidity and credit programs, but in finding ways to help monetary policy continue to help the economy after short-term interest rates were brought to zero. Michelle Smith did a masterful job improving the transparency of Fed decisions, and she was a valuable source of guidance on many of the toughest policy questions we faced.

  Also on the staff of the Federal Reserve Board, Tim Clark, Mike Foley, Andreas Lehnert, Nellie Liang, and Coryann Stefansson—working closely with Bev Hirtle, Kevin Stiroh, and others from the New York Fed—led the design of the stress test and guided teams of analysts and supervisors from across the regulatory community in its execution. These individuals deserve enormous credit for its success.

  I have particular admiration for the work of Pat Parkinson, who was a great partner to my New York Fed colleagues in the design of many of the liquidity and credit programs. Pat and Mark Van Der Weide, another exceptionally knowledgeable Fed staffer, came to work at Treasury in early 2009 and were central in helping to design the financial reforms.

  At the New York Fed, I had the privilege of working with a very talented group of classic central bankers. Tom Baxter, Terry Checki, Bill Dudley, Sandy Krieger, Chris McCurdy, Bill Rutledge, Joe Tracy, Simon Potter, and Jamie McAndrews, along with Chris Cumming, carried most of the burden of educating and advising me, first as we were trying to lean against the wind of the financial boom, and then as we were trying to contain the fire.

  Meg McConnell, as my adviser, played a critical role in all we did—sharp and funny, amazingly hardworking, always seeing the cloud in any silver lining, always searching for a deeper understanding of every problem, always pushing for a smarter response.

  Mike Silva was my able chief of staff, often pushing me to action, always providing balance and stability during a period when both were rare. Michael Held, the corporate secretary, graciously shared many of Silva’s responsibilities during the most intense periods of the crisis and provided me with critical support as I transitioned from the New York Fed to the Treasury.

  The unique amalgam of talent and expertise that is the New York Fed—economists; analysts; bank supervisors; traders; experts in payment, clearing, and settlement infrastructures; and many others—coalesced into a relentlessly innovative crisis fighting team. They worked together to diagnose and solve problems the Fed had never before confronted. Their insights and actions were central to the development and execution of the arsenal of Fed credit and liquidity facilities—with the confusing acronyms of TAF, TSLF, PDCF, CPFF, AMLF, TALF; to the special facilities of the Bear Stearns and AIG interventions; and to the overall strategy for recapitalizing the financial system. They worked in complete obscurity, never seeking credit, with months and months of endless days and nights, remaining focused and calm as the world was burning around them. They were brave and careful, taking exceptional risks and working diligently to manage those risks despite the turmoil and uncertainty.

  As a measure of the extent of their teamwork and their non-peacock tendencies, when I would later ask any one of them to remind me who deserved most credit for one thing or another, the common response was, “It was a mix of us.” That mix included Art Angulo, Adam Ashcraft, Sarah Dahlgren, Jeanmarie Davis, Richard Dzina, Ken Garbade, Joyce Hansen, Spence Hilton, Bev Hirtle, Michael Holscher, Lori Logan, Theo Lubke, Jamie McAndrews, Meg McConnell, Susan McLaughlin, Helen Mucciolo, Simon Potter, Marc Saidenberg, Mike Schetzel, Til Schuermann, Kevin Stiroh, and legions of others.

  Tanshel Pointer and Marlene Williams ran the Office of the President, during the most exacting moments of the crisis, managing a blizzard of conference calls and meetings while working terrible hours. And Tanshel gave me the most generous gift of moving to Washington to work at the Treasury for the first few months of the new administration.

  Under Nick Proto’s guidance, the FRBNY’s security force took very good care of me. I am particularly indebted to officers Eric Brisbon, Charles Henderson, Joseph Mitchell, Cary Newberry, Joe Sclafani, and Jorge Vasquez.

  I am very grateful to the directors of the Board of the Federal Reserve Bank of New York. They gave me a lot of advice and support. With the demands of the crisis
, it was a bit more than they bargained for. Pete Peterson and John Sexton were serving as chairman and deputy chairman when I started. John Sexton became chairman in 2004 and was succeeded by Jerry Speyer, then Steve Friedman. Jerry Speyer also served ably as deputy chairman prior to becoming chairman and was succeeded by Denis Hughes.

  The FDIC, led by Sheila Bair, oversaw the delicate, complicated process of taking over and resolving hundreds of failed banks with a system that is the envy of countries around the world. And then under her successor, Marty Gruenberg, the FDIC designed an innovative framework for dealing with the failure of large complex financial institutions in the future.

  John Dugan’s OCC played a valuable role in the messy triage of the crisis and in the design of our strategy to recapitalize the banking system.

  At Treasury, I was privileged to work with an incredibly talented, hardworking, ethical group of career civil servants and political appointees. The team of senior political appointees that came to Treasury to work for the President took on a crushing burden of policy challenges with grace and poise, never complaining, full of humor, proud to be working for their country. They gave me all sorts of ideas, and executed them with skill. They were quick to challenge me, and never too deferential.