Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

Following in the steps of his father, grandfather, and uncle, Tim Geithner went to Dartmouth College, where he majored in government and Asian studies. In the early 1980s, the Dartmouth campus was a major battleground of the culture wars, which were inflamed by the emergence of a right-wing campus newspaper, The Dartmouth Review . The paper, which produced prominent conservative writers such as Dinesh D’Souza and Laura Ingraham, published a number of incendiary stories, including one that featured a list of the members of the college’s Gay Students Association, and another a column against affirmative action written in what was purported to be “ black English.” Taking the bait, liberal Dartmouth students waged protests against the paper. Geithner played conciliator, persuading the protesters to channel their outrage by starting a rival publication.

After college, Geithner attended the Johns Hopkins School of Advanced International Studies, where he graduated with a master’s degree in 1985. That same year he married his Dartmouth sweetheart, Carole Sonnenfeld. His father was best man at the wedding at his parents’ summer home in Cape Cod.

With the help of a recommendation from the dean at Johns Hopkins, Geithner landed a job at Henry K issinger’s consulting firm, researching a book for K issinger and making a very favorable impression on the former secretary of State. Geithner learned quickly how to operate effectively within the realm of powerful men while not becoming a mere sycophant; he intuitively understood how to reflect back to them an acknowledgment of their own importance. With Kissinger’s support, he then joined the Treasury Department and became an assistant financial attaché at the U.S. Embassy in Tokyo, where he ruled the compound’s tennis courts with his fierce competitiveness. The courts were also a place he could hold informal discussions with Tokyo correspondents from major publications, diplomats, and his Japanese counterparts.

During his tour in Japan, Geithner witnessed firsthand the spectacular inflation and crushing deflation of his host’s great bubble economy. It was through his work there that he came to the attention of Larry Summers, then the Treasury under secretary, who began promoting him to bigger and bigger responsibilities. During the Asian financial and Russian ruble crises of 1997 and 1998, Geithner played a behind-the-scenes role as part of what Time magazine called “The Committee to Save the World,” helping to arrange more than $100 billion of bailouts for developing countries. When aid packages were proposed, Geithner was automatically summoned into Summers’s office. In this respect Geithner was lucky; he happened to be a specialist in a part of the world that had suddenly become critical. He had also honed the diplomatic skills he had first displayed at Dartmouth, often mediating disputes between Summers, who tended to advocate aggressive intervention, and Rubin, who was more cautious.

When the South Korean economy almost collapsed in the fall of 1997, Geithner helped shape the U.S. response. On Thanksgiving Day, Geithner called Summers at his home and calmly laid out the reasons the United States had to help stabilize the situation. After much debate within the Clinton administration, the plan that emerged—to supply Seoul with billions of dollars on top of a $35 billion package from the International Monetary Fund and other international institutions—bore a close resemblance to Geithner’s original proposal. The following year, Geithner was promoted to Treasury under secretary for international affairs.

Geithner remained close to Summers, whom he used to play elaborate practical jokes on. More than once, when Summers was out giving a speech, Geithner would rewrite the wire news article about the presentation, purposely misquoting him. When Summers would return to the Treasury building after his speech, Geithner would present Summers with the doctored news report as if it were the real thing, and then just watch Summers blow up, threatening to call the reporter and demand a correction until Geithner let him in on the joke. The two men became 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.