Former Treasury Secretary Timothy Geithner defends bailout

Geithner says he and other top officials had little choice but to reward 'the arsonists'

Timothy Geithner

Former U.S. Treasury Secretary Timothy Geithner is interviewed by former U.S. Treasury Secretary Henry Paulson (not pictured) during an event sponsored by Chicago Council on Global Affairs in Chicago. (Scott Olson / Getty Images)

Former Treasury Secretary Timothy Geithner is convinced he saved the country from a depression and regular Americans from ending up in shantytowns and bread lines. And he's taking another shot at convincing you too.

In his new book, "Stress Test," he says he was a lousy communicator amid the financial crisis, so he tells the story now by providing more detail while enlisting some of the metaphors he used in 2008. He likens himself, Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson during the financial crisis to firemen trying to put out a raging inferno of financial disaster and panic, or pilots trying to land a plane engulfed in flames.

The book is an interesting read of crisis after crisis —– from Bear Stearns and Lehman to AIG and Washington Mutual — during one of the scariest periods in the nation's financial history. But it probably won't erase the bitterness felt by conscientious Americans, who continue to feel they were abused by Wall Street and government when they were forced to pay the price for those who set off the blaze.

Geithner, who headed the Federal Reserve Bank of New York before becoming treasury secretary in 2009, doesn't suggest that what happened in the financial crisis was fair. But, he said in an interview in Chicago, "I'm sure what we did was best" compared with strategies employed in Japan and Europe. Japan is still struggling for sound footing after decades of deflation, and Europe's central bank is still trying to find the formula for recovery.

As he looks back at the crisis, Geithner claims he had no choice than to do what seemingly was "rewarding the arsonists." Although many Americans thought banks should be allowed to collapse and investors and lenders to those institutions incur the losses, Geithner said letting that happen would have added fuel to the fire. Financial institutions desperately needed capital, and if investors and lenders thought they'd be hit with losses, they would have bolted just when troubled firms needed money most to survive.

He criticized former FDIC Chairwoman Sheila Bair in his book for stoking the flames when Washington Mutual was failing, because she wanted "to teach bondholders a lesson" and let them take losses.

I asked Geithner the two questions readers have asked me most often about the intentions of bailout masterminds in 2008: What specifically did Geithner see at the time that proved the financial system was in such danger that the taxpayers had to bail out the institutions? And why did Geithner and the others who masterminded the financial bailout do so without attaching strings, such as requiring banks to lend after getting bailout money and forgo bonuses? As banks slammed the door on credit, the economy suffered, and a lack of credit for potential homebuyers and small businesses is still holding the economy back.

To the first question, Geithner said Paulson thought the financial system was three days away from ATMs not working. Eventually, if the panic had been allowed to continue, good institutions and bad would have failed because no one would have been able to discern which were insolvent and which were not, Geithner said. Banks would not have been able to get their hands on the money they needed to function, he said. Even corporate money kept in banks to meet payrolls would have been tied up, he said.

And to the question of why he didn't attach strings to the bailout, Geithner simply responded: "Good question." Then he turned to a familiar point that he and bankers have made repeatedly: It wouldn't have made sense to lend to consumers and businesses who had already borrowed too much before the financial crisis.

But, I said, it isn't just the highly indebted people who haven't been able to get loans. I noted that a year ago an Ellie Mae report showed that the average FICO credit score for getting a conventional mortgage was 759 — a nearly perfect score that made almost all Americans unqualified. Now, lenders aren't being quite as picky, but with the average score at 726 for mortgages, the majority of people still can't buy homes and fill them with furniture and appliances.

Meanwhile, I told Geithner, while regular Americans have struggled to get the loans that would have helped fuel the consumer economy, lenders are fawning over commercial borrowers and dropping their guard. Speculative bond investors have been hungry for loans to some of the riskiest business — those rated CCC by credit rating agencies.

Geithner's answer: "There is no way you can have government decide how to force lending." And then he returned to his financial crisis metaphor. "In that moment it was like a plane on fire." Under such out of control conditions, he argued, no one "would have wanted us to step out of the cockpit."

As for the book, Geithner does note that plenty of people were questioning bailouts with no strings attached amid the crisis. He notes that even inside the Federal Reserve he was criticized for coddling the perpetrators of the disaster, but he labels those who wanted to see bankers and risk-takers held accountable as "Old Testament" thinkers.

Geithner relates a compliment from Warren Buffett. The famous investor told Geithner that letting financial institutions fail "would have been terrible for the country." On the other hand, Buffett said, if the institutions had been allowed to fail, "I would have been the first in line to buy" them.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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