Geithner: 'We were looking at the abyss'
Treasury Secretary Tim Geithner recalls the anxious meetings among a handful of top bankers and officials as they struggled to halt the firestorm all around them.
(Fortune Magazine) -- In the thick of the crisis a year ago, Treasury Secretary Tim Geithner played a key role as chief of the New York Fed. Fortune managing editor Andy Serwer, Washington editor Nina Easton, and senior editor at large Allan Sloan interviewed Geithner recently over breakfast at the Treasury. Edited excerpts:
Can you describe the atmosphere leading up to the day Lehman filed for bankruptcy?
A lot of people think the crisis began that week, but it really began at the end of July 2007, and we'd been living with an escalating crisis since then. We were facing a classic 1930s-style run on the financial system.
By September 2008 everything had started to get worse, because the real economy was weakening significantly. People could feel it. Anyone who had built close to the fault line of this earthquake was very exposed.
What transpired at the New York Fed offices that weekend?
We spent that weekend getting the top banks and Wall Street firms together. We had them come spend the weekend at the New York Fed. And we said to them, "Look, we're going to figure out whether we can solve this. But because we're not sure we can solve it, we're going to make you work with us to figure out how we contain the damage."
We did not believe we could insulate them from the consequences of default by Lehman, because by then the force of the storm was so acute. We'd been living with an escalating crisis.
What was your directive?
We were looking at different options for solving Lehman but also how to put "foam on the runway" -- figuring out how to contain the damage if we failed to find a solution. But the dominant reality was that a solution for Lehman would not be sufficient to contain the intensifying storm.
Remember, Lehman was the symptom of how powerful this crisis was, not the cause or the precipitator. We were already in the midst of a run on other institutions. You really did have -- for the first time in 80 years -- the initial signs of a classic panic. Everybody knew we were looking at the abyss.
So Lehman's future wasn't the only thing on your minds that weekend.
We came out of the weekend having, we thought, solved Merrill [Lynch]. We moved very quickly to decide we had to act on AIG (AIG, Fortune 500). The government did a money-market guarantee. We did the backstop for the commercial-paper market. That was fundamental.
Secretary Paulson went to Congress to get the authority for capital injections. What was decisive was the combination of the FDIC guarantee and the government actions to put capital into the financial system.
People have said you and Paulson refused to rescue Lehman so as not to create a moral hazard suggesting the government would bail out any institutions considered too big to fail.
People got the impression that we were trying to make a point. There's zero truth in that. Understandably, there was a deep public antipathy to putting public money at risk, to rewarding firms for taking too much risk. But that was not relevant. What was relevant in the end was that the government of the U.S. did not have the ability to help rescue Lehman in the absence of a willing buyer.
In a crisis you need to make a choice. You can choose to solve the problem and protect the innocent from the results of the firestorm. Or you can try to teach them a lesson. You can't solve the problem by teaching people a lesson. That's not a strategy for solving the crisis. It's a strategy for inflicting a lot of damage.
You've said that the government didn't act quickly enough to stem the crisis in late 2007 and early 2008. Did you already believe that going into September 15?
The Fed had acted aggressively, but it was acting pretty much alone. Treasury had no authority to do anything meaningful without Congressional action.
Here we were, the most important economy in the world, coming into the worst crisis in generations -- but with terribly limited instruments available. Faced with only bad options, countries tend to wait to do the hard thing in financial crises, because it's so deeply politically offensive.