CHAPTER THREE
On the evening of Wednesday, April 2, 2008, an agitated Timothy F. Geithner took the escalator down to the main concourse of Washington’s Reagan National Airport. He had just arrived on the US Airways shuttle from New York, and his driver, who normally waited outside of security for him, was nowhere to be found.
“Where the fuck is he?” Geithner snapped at his chief aide, Calvin Mitchell, who had flown down with him.
Geithner, the youthful president of the New York Federal Reserve, seldom exhibited stress, but he was certainly feeling it at the moment. It had been less than three weeks since he had stitched together the last-second deal that pulled Bear Stearns back from the brink of insolvency, and tomorrow morning he would have to explain his actions, and himself, to the Senate Banking Committee—and to the world—for the very first time. Everything needed to go perfectly.
“Nobody’s picking up,” Mitchell moaned as he punched the buttons of his cell phone, trying to reach the driver.
The Federal Reserve usually sent a special secure car for Geithner, who by now had grown accustomed to living inside the bubble of the world’s largest bank. His life was planned down to the minute, which suited his punctual, fastidious, and highly programmed personality. He had flown to the capital the night before the hearing precisely out of concern that something like this—a hiccup with his driver—would happen.
On the flight down he had studied the script he had been tinkering with all week. There was one point he wanted to make absolutely clear, and he reviewed the relevant passage again and again. Bear Stearns, to his thinking, wasn’t just an isolated problem, as everyone seemed to be suggesting. As unpopular as it might be to state aloud, he intended to stress the fact that Bear Stearns—with its high leverage, virtually daily reliance on funding from others simply to stay in business, and interlocking trades with hundreds of other institutions—was a symptom of a much larger problem confronting the nation’s financial system.
“The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole,” he wrote. “This is not theoretical risk, and it is not something that the market can solve on its own.” He continued refining those ideas, using the tray table to take notes until just before the plane landed.
Over the course of the weekend of March 15, it had been Geithner—not his boss, Ben Bernanke, as the press had reported—who’d kept Bear from folding, constructing the $29 billion government backstop that finally persuaded a reluctant Jamie Dimon at JP Morgan to assume the firm’s obligations. The guarantee protected Bear’s debtholders and counterparties—the thousands of investors who traded with the firm—averting a crippling blow to the global financial system, at least that’s what Geithner planned to tell the senators.
Members of the Banking Committee wouldn’t necessarily see it that way and were likely to be skeptical, if not openly scornful, of Geithner at the hearing. They regarded the Bear deal as representative of a major and not necessarily welcome policy shift. He’d already been the target of stinging criticism, but given the scale of the intervention, it was only to be expected. That, however, didn’t make having to listen to politicians throw around the term “moral hazard” any less galling, as if they hadn’t just learned it the day before.
Unfortunately, it wasn’t just a chorus of the ignorant and the uninformed who had been critical of the deal. Even friends and colleagues, like former Fed chairman Paul Volcker, were comparing the Bear rescue unfavorably to the federal government’s infamous refusal to come to the assistance of a financially desperate New York City in the 1970s (enshrined in the classic New York
Geithner did have his supporters, but they tended to be people who already had reason to be familiar with the financial industry’s perilous state. Richard Fisher, Geithner’s counterpart at the Dallas Fed, had sent him an e-mail: “Illegitimi non carborundum—Don’t let the bastards get you down.”
Much as he would have liked to, Geithner had no intention of announcing to the U.S. Senate that he had been surprised by the crisis. From his office atop the stone fortress that is the Federal Reserve Bank of New York, Geithner had for years warned that the explosive growth in credit derivatives—various forms of insurance that investors could buy to protect themselves against the default of a trading partner—could actually make them ultimately more vulnerable, not less, because of the potential for a domino effect of defaults. The boom on Wall Street could not last, he repeatedly insisted, and the necessary precautions should be taken. He had stressed these ideas time and again in speeches he had delivered, but had anyone listened? The truth was, no one outside the financial world was particularly concerned with what the president of the New York Fed had to say. It was all Greenspan, Greenspan, Greenspan before it became Bernanke, Bernanke, Bernanke.
Standing at the airport, Geithner certainly felt deflated, but for now it was mostly because his driver hadn’t appeared. “You want to just take a taxi?” Mitchell asked.
Geithner, arguably the second most powerful central banker in the nation after Bernanke, stepped into the twenty-person-deep taxi line.
Patting his pockets, he looked sheepishly at Mitchell. “Do you have cash on you?”
If Tim Geithner’s life had taken just a slightly different turn only months earlier, he might well have been CEO of Citigroup, rather than its regulator.
On November 6, 2007, as the credit crisis was first beginning to hit, Sanford “Sandy” Weill, the architect of the Citigroup empire and one of its biggest individual shareholders, scheduled a 3:30 p.m. call with Geithner. Two days earlier, after announcing a record loss, Citi’s CEO, Charles O. Prince III, had been forced to resign. Weill, an old- school glad-hander who had famously recognized and cultivated the raw talent of a young Jamie Dimon, wanted to talk to Geithner about bringing him on board: “What would you think of running Citi?” Weill asked.
Geithner, four years into his tenure at the New York Federal Reserve, was intrigued but immediately sensitive to the appearance of a conflict of interest. “I’m not the right choice,” he said almost reflexively.
For the following week, however, the prospect was practically all he could think about—the job, the money, the responsibilities. He talked it over with his wife, Carole, and pondered the offer as he walked their dog, Adobe, around Larchmont, a wealthy suburb about an hour from New York City. They already lived a comfortable life—he was making $398,200 a year, an enormous sum for a regulator—but compared with their neighbors along Maple Hill Drive, they were decidedly middle-of-the-pack. His tastes weren’t that expensive, save for his monthly $80 haircut at Gjoko Spa & Salon, but with college coming up for his daughter, Elise, a junior in high school, and his son,
