In his new book, former Treasury Secretary Tim Geithner says he told President Barack Obama that Charlotte-based Bank of America was one of five “financial bombs” that had to be defused when he took over the Cabinet post in early 2009.
Bank of America and New York-based Citigroup were the biggest of the bombs, Geithner writes in “Stress Test: Reflections on Financial Crises,” which was published Monday.
“… We had to make sure they didn’t drag down the system, even if it looked like we were rewarding the reckless,” writes Geithner, who stepped down as Treasury Secretary in January 2013.
The new memoir describes Geithner’s efforts, along with former Treasury Secretary Hank Paulson and former Federal Reserve Chairman Ben Bernanke, to rescue the tottering financial system in late 2008 and early 2009. The account provides few new major details, but offers Geithner’s defense of controversial bank bailouts that he argues prevented a much bigger financial catastrophe.
All five bombs, including insurer AIG and mortgage giants Fannie Mae and Freddie Mac, were a threat to detonate, but did not explode and the U.S. economy “escaped its death spiral,” says Geithner, who was head of the New York Fed before becoming Treasury secretary.
Despite populist anger over bank bailouts, Geithner says he resisted a push by “several” of Obama’s advisers to fire Bank of America CEO Ken Lewis before stress tests of big banks’ financial strength were completed in the spring of 2009.
“I understood the impulse to chop off a banker’s head and mount it on a stake,” Geithner writes, “but while Bank of America had taken lots of risk and had received extraordinary assistance, we didn’t control the firm.”
Geithner said the government would have fired Bank of America’s management if the bank had failed to raise private capital after its stress test and the government had taken a majority interest.
Lewis, who had engineered troubled acquisitions of Merrill Lynch and Countrywide Financial, later retired at the end of 2009, replaced by current CEO Brian Moynihan. Reached by the Charlotte Observer, Lewis said he hadn’t read the book and declined to comment.
During the crisis, federal officials also scrambled to rescue Charlotte-based Wachovia, which experienced a run on its deposits after the collapse of Lehman Brothers and Washington Mutual in the fall of 2008.
At one point, Geithner and other officials attempted to broker a merger between investment bank Goldman Sachs and Wachovia, but Goldman was worried by what it found in Wachovia’s books.
“We even considered Fed assistance, but the financials looked uncertain, and the optics were awful,” Geithner writes, referring to close government ties to both banks. Then-Treasury Secretary Hank Paulson was a former Goldman Sachs executive, as was Wachovia’s then-CEO Bob Steel.
Wachovia had been “choking” on bad mortgages it acquired from Golden West Financial since the beginning of the crisis and was “doomed” after the turbulent collapse of Washington Mutual, Geithner writes. In the book, he recounts the well-known enmity that brewed between him and former Federal Deposit Insurance Corp Chairman Sheila Bair, who was reluctant to bail out big banks.
After Bair backed a Wells Fargo offer for Wachovia that upended a previous government-backed deal by Citigroup, Geithner says he was livid.
“The United States government made a commitment,” Geithner says he told Bair. “We can’t act like we’re a banana republic.”
Geithner also says he was worried that breaking up the Wachovia-Citi deal could undermine an already struggling Citigroup, a much bigger player in the world financial system that was regulated by the New York Fed. Then-Citi CEO Vikram Pandit warned that there was now a “good chance” that Citi would fail.
Geithner, however, acknowledged Bair may have felt she didn’t have a choice in backing the Wells Fargo-Wachovia deal, saying Wells Fargo’s privately financed $15 billion offer was “certainly more attractive” than Citi’s taxpayer-assisted $2 billion deal.
In her 2012 book, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” Bair says Geithner and Pandit were angry at her for refusing to object to Wells Fargo’s purchase of Wachovia. “Wells was a much stronger, better-managed bank and could buy Wachovia without help from us,” she wrote.
Geithner’s new book also gives his side of a dispute with Richmond Fed president Jeffrey Lacker, whose bank covers the Carolinas and regulates Charlotte’s big banks.
At a meeting of Fed leaders in August 2007, Lacker questioned whether Geithner had improperly disclosed a plan to cut the so-called discount lending rate the Fed offers banks as an option of last resort. At the meeting, Lacker said Bank of America’s CEO had told him he had appreciated what Geithner was “arranging by way of changes in the discount facility,” according to minutes released in January 2013.
Lacker issued a statement after the minutes came out in January 2013 that said it was his understanding that Geithner had discussed a reduction in the discount rate with a few large banks in connection with a program to support the asset-backed commercial paper market.
In his book, Geithner says he did not leak any plans, but had talked to bankers about how the market would receive any efforts to use the discount window to ease the financial crisis. Geithner said he would never disclose any action in advance, but that Lacker “was understandably irked” that he had heard first word about a possible plan from a bank CEO in his district.
Geithner contrasts his aggressive efforts to stabilize the financial system with Lacker’s resistance to bank bailouts and his focus on containing inflation, one of the Fed’s central mandates.
“I found the more hawkish obsessions with moral hazard and inflation during a credit crunch bizarre and frustrating,” Geithner writes. “Recession seemed a more plausible threat than inflation.”
A spokesman for Lacker says he has not read the book and has no comment.