so close that for years they, and other Treasury colleagues, went to a tennis academy in Florida run by Nick Bollettieri, who coached Andre Agassi and Boris Becker. Geithner, with his six-pack abs, had a game that matched his policy-making prowess. “Tim’s controlled, consistent, with very good ground strokes,” Lee Sachs, a former Treasury official, said.
When Clinton left office, Geithner joined the International Monetary Fund, and it was from there that he was recruited to the New York Fed. Despite having served a Democratic administration, Geithner was sold on the job by Peterson, a well-connected Republican.
The presidency of the New York Fed is the second most prominent job in the nation’s central banking system, and it carries enormous responsibilities. The New York bank is the government’s eyes and ears in the nation’s financial capital, in addition to being responsible for managing much of the Treasury’s debt. Of the twelve district banks in the Federal Reserve System, the New York Fed is the only one whose president is a permanent member of the committee that sets interest rates. Owing to the relatively high cost of living in New York, the annual salary of the New York Fed president is double that of the Federal Reserve chairman.
His idiosyncrasies notwithstanding, Geithner gradually grew into his job at the New York Fed, distinguishing himself as a thoughtful consensus builder. He also worked diligently to fill in gaps in his own knowledge, educating himself on the derivatives markets and eventually becoming something of a skeptic on the notion of risk dispersion. To his way of thinking, the spreading of risk could actually exacerbate the consequences of otherwise isolated problems—a view not shared by his original boss at the Fed, Alan Greenspan.
“These changes appear to have made the financial system able to absorb more easily a broader array of shocks, but they have not eliminated risk,” he said in a speech in 2006. “They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure.”
Geithner understood that the Wall Street boom would eventually falter, and he knew from his experience in Japan that it was not likely to end well. Of course, he had no way of knowing precisely how or when that would happen, and no amount of studying or preparation could have equipped him to deal with the events that began in early March 2008.
Matthew Scogin poked his head into Robert Steel’s corner office at the Treasury Department. “Are you ready for another round of Murder Board?”
Steel sighed as he looked at his senior adviser but knew it was for the best. “Okay. Yeah, let’s do it.”
Hank Paulson had been scheduled to testify before the Banking Committee with Geithner, Bernanke, and Cox, chairman of the Securities and Exchange Commission, that morning of April 3, with Alan Schwartz of Bear Stearns and Jamie Dimon of JP Morgan to appear later. But Paulson was on an official trip to China that could not be postponed, so his deputy, Steel, would be there in his place.
Like Geithner, Steel was largely unknown outside the financial world, and he viewed his testimony before the Senate Banking Committee as presenting an opportunity, of sorts. His staff had been trying to help him prepare the traditional Washington way: by playing round after round of “Murder Board.” The game involved staff members taking on the roles of particular lawmakers and then grilling Steel with the questions the politicians were likely to ask. The exercise was also designed to help make certain that Steel would be as lucid and articulate under fire as he could be.
A seasoned and assured public speaker, Steel had appeared before congressional committees, but the stakes hadn’t been nearly as high. In addition to tough questions about what had come to be known as “Bear Weekend,” he knew another subject was likely to arise: Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises that bought up mortgages. The GSEs, which were blamed for inflating the housing bubble, had been political and ideological hot buttons for decades, but never more so than at that moment.
With Bear Stearns’ failure, the senators might even begin connecting the dots. One of the first causalities of the credit crunch was two Bear Stearns hedge funds that had invested heavily in securities backed by subprime mortgages. It was those mortgages that were now undermining confidence in the housing market—a market that Fannie and Freddie dominated, underwriting more than 40 percent of all mortgages, most of which were quickly losing value. That, in turn, was infecting bank lending everywhere. “Their securities move like water among all of the financial institutions,” Paulson had said of Fannie and Freddie.
Quick-witted and handsome, Steel was actually a much better communicator than Paulson and would often upstage his boss, who couldn’t help stammering even at routine Treasury meetings. The two men had known each other since 1976, when Steel went to work at the Chicago office of Goldman Sachs after graduating from Duke University. Like Paulson, Steel came from a modest background, growing up near the campus of Duke University. His father serviced jukeboxes and later sold life insurance; his mother worked part time at a Duke psychiatry lab. At Goldman, Steel was an ambitious banker and rising star; he moved to London in 1986 to start the equity capital markets group there and help the firm gain a foothold in Europe.
But four years earlier, Steel—now worth more than $100 million as a result of being a partner during Goldman’s IPO—had decided to retire, having worked in various senior positions but not being next in line to lead the firm. Though he always planned a triumphant return to the private sector, he wanted time to pursue public service, like many other Goldman alums. After establishing his public-sector bona fides, including a position as a senior fellow at the John F. Kennedy School of Government at Harvard, he accepted Paulson’s invitation to join him at Treasury as under secretary for domestic finance on October 10, 2006.
Now, as he entered the conference room with Scogin for one last round of Murder Board, he knew he had to be on his game. Treasury colleagues David Nason, chief of staff Jim Wilkinson, and Michele Davis, assistant secretary for public affairs and director of policy planning, were already seated with a small group across the table.
The burning question they all knew would be asked: What role had the government played in the negotiations that had led to the original $2-a-share price for Bear Stearns? None of the Treasury staffers had a clue as to what the other witnesses—JP Morgan’s Jamie Dimon and Bear’s Alan Schwartz—were going to say about what had actually occurred when they testified later in the day.
Steel knew that Paulson had pushed for a lower price to send the powerful message that shareholders should not profit from a government rescue. But no one at Treasury had ever confirmed that, and for Paulson’s and everyone else’s sakes, it would be best not to acknowledge what had really happened: On Sunday afternoon, March 16, Paulson had called Dimon and told him, “I think this should be done at a very low price.”
Steel knew he had to dodge that issue at the hearing. It was imperative, as Davis and others had stressed during Murder Board sessions and at other meetings, that he avoid getting drawn into a debate over whether $2 was the right price—or $10, for that matter. The key idea he had to focus on was Paulson’s overall concern that, because taxpayer money was involved, shareholders should not be rewarded. And more important, they encouraged Steel to remain adamant that Treasury had not negotiated the deal for Bear. If anything, he should deflect the question onto the Fed, which was the only government agency that legally could be party to such a transaction.
