Geithner’s Stress Test – My Reflections on Financial Crisis

Geithner_Stress_Test_-_Google_SearchBy David Nelson, CFA

Former Treasury Secretary Tim Geithner’s book “Stress Test” comes out this week. Naturally the media will zero in on Mr. Geithner’s time in public service, along with his version of the events that led up to the financial crisis and the aftermath that followed.

Let me say at the outset I haven’t had a chance to read the book however, Mr. Geithner has already given several interviews and passages from the book appear in many reviews.

Books of this sort are generally tell-all in nature, so it will be interesting in the weeks that follow to see how some of the actors in the play react to Tim’s version of this dark period in American history. Hearing his description of those difficult days reminded me of the Stress Test we were all put through.

He slams into Larry Summers hard and at least from some of the passages; it appears they went to battle several times throughout his tenure. I believe it will be Larry’s reaction that will be most sought after by the media.

aig_-_Google_SearchThere will be countless critiques of his performance. Without a doubt his biggest challenge will be defending the government bailout of financial institutions, while these very same firms managed to set aside funds to pay out increased bonuses. The $182 Billion government bailout of AIG was perhaps the biggest pill for taxpayers to swallow. Americans were outraged in 2009 when it was revealed that the company was going to pay its workers a cool $165 million in bonuses.

My Reflections

Rather than focus on the book or even Mr. Geithner’s tenure, let me approach the topic from a more personal view.

I’ve been running money for the last 20 years and like many of my colleagues, I am certain the dark days of 2008 were the most challenging in my career. I’ve always enjoyed putting pen to paper so in addition to my financial responsibilities during the crisis, I was also writing occasional articles for the New York Post.

I remember in early November that year my editor asked me to do a story and find an industry that was doing well during those tough times. Despite my reservations thinking this is all but hopeless, I took the assignment.

Retail_Bullseye_NY_Post_DCN_jpgRetail Bullseye (2008)

Most industries were suffering with layoffs being announced daily. One business however, seemed to be hitting the ball out of the park; Gun Stores. My home state Connecticut isn’t exactly Texas or Oklahoma but I went online to find a retail gun store and check out my theory.

After finding a store in nearby Norwalk, I called the owner and asked if I could get an interview with him as well as some of his customers. He agreed and invited me down that weekend.

When I arrived, there was a line to the store halfway out the parking lot. I soon learned they were all customers looking to purchase a weapon or apply for a pistol permit. My earlier work had shown permit applications had gone through the roof. The owner of the store told me his sales would easily be up 100% year over year.

It’s true there was some fear the Obama administration might make it more difficult to purchase weapons in the future but it wasn’t long before I found out the real reason behind the rush to bear arms.

Most of those on line were not what I would call gun people. Many were first time buyers and most had never shot a weapon in their life. They were scared.

The economic crisis and severe downturn in the economy frightened them with many admitting they were preparing for a potential breakdown in society. What added more weight to the conversation was the number of bankers and traders many from the desks of some of our largest financial institutions.

Most wouldn’t go on the record but many battle weary from the front lines of collapsing bond and equity markets told me they weren’t taking any chances. They were arming themselves to protect their families. They were convinced a complete breakdown in the financial system could happen at any moment.

lehman_brothers_collapse_date_-_Google_SearchI know, it sounds like something out of a Stephen King novel but ask yourself what you were thinking THEN. I was on that conference call when Bear Stearns was sold to JP Morgan. I remember like it was yesterday when Lehman, my alma mater went under. I got in my car, drove to the nearest ATM and hit it for everything I could. Yes, I was scared too.

We’re all probably going to have a chance to reflect on our own personal memories of that time. Mr. Geithner’s version of the crisis will be the subject of an intense debate with some praising his efforts and even more saying he sold out to Wall Street.

In a recent interview he was asked; “Does it surprise you that no one went to jail?”

“It doesn’t surprise me,” said Geithner. “What may have been immoral or unethical was not illegal.”

I think many will find it difficult to understand why no one went to jail. I wasn’t inside the room so in no position to judge. However I have asked myself the question; what would it have been like if the system actually went under? I hope I never find out.