Too Big to Fail [35]
“The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole,” he wrote. “This is not theoretical risk, and it is not something that the market can solve on its own.” He continued refining those ideas, using the tray table to take notes until just before the plane landed.
Over the course of the weekend of March 15, it had been Geithner—not his boss, Ben Bernanke, as the press had reported—who’d kept Bear from folding, constructing the $29 billion government backstop that finally persuaded a reluctant Jamie Dimon at JP Morgan to assume the firm’s obligations. The guarantee protected Bear’s debtholders and counterparties—the thousands of investors who traded with the firm—averting a crippling blow to the global financial system, at least that’s what Geithner planned to tell the senators.
Members of the Banking Committee wouldn’t necessarily see it that way and were likely to be skeptical, if not openly scornful, of Geithner at the hearing. They regarded the Bear deal as representative of a major and not necessarily welcome policy shift. He’d already been the target of stinging criticism, but given the scale of the intervention, it was only to be expected. That, however, didn’t make having to listen to politicians throw around the term “moral hazard” any less galling, as if they hadn’t just learned it the day before.
Unfortunately, it wasn’t just a chorus of the ignorant and the uninformed who had been critical of the deal. Even friends and colleagues, like former Fed chairman Paul Volcker, were comparing the Bear rescue unfavorably to the federal government’s infamous refusal to come to the assistance of a financially desperate New York City in the 1970s (enshrined in the classic New York Daily News headline: “Ford to City: Drop Dead”). The more knowing assessments ran along the following lines: The Federal Reserve had never before made such an enormous loan to the private sector. Why, exactly, had it been necessary to intervene in this case? After all, these weren’t innocent blue-collar workers on the line; they were highly paid bankers who had taken heedless risks. Had Geithner, and by extension the American people, been taken for suckers?
Geithner did have his supporters, but they tended to be people who already had reason to be familiar with the financial industry’s parlous state. Richard Fisher, Geithner’s counterpart at the Dallas Fed, had sent him an e-mail: “Illegitimi non carborundum—Don’t let the bastards get you down.”
Much as he would have liked to, Geithner had no intention of announcing to the U.S. Senate that he had been surprised by the crisis. From his office atop the stone fortress that is the Federal Reserve Bank of New York, Geithner had for years warned that the explosive growth in credit derivatives—various forms of insurance that investors could buy to protect themselves against the default of a trading partner—could actually make them ultimately more vulnerable, not less, because of the potential for a domino effect of defaults. The boom on Wall Street could not last, he repeatedly insisted, and the necessary precautions should be taken. He had stressed these ideas time and again in speeches he had delivered, but had anyone listened? The truth was, no one outside the financial world was particularly concerned with what the president of the New York Fed had to say. It was all Greenspan, Greenspan, Greenspan before it