NEW YORK (Real Money) -- The insanity revolving around the critiques of Tim Geithner's Stress Test shows precisely why there will not be a resolution any time soon about the bank stocks and their detractors.
The near-universal condemnation of Geithner stems from his perceived "coddling" of the bankers, with that word probably being the single-most overused term when it comes to Stress Test.
This judgment is infuriating to those of us who watched the chaos unfold because it presumes that once the systemic weaknesses were revealed, Geithner swung into action to protect the very people who caused the near collapse of the American financial system. They blame Geithner for all sorts of sins. These observations are so often off the mark that you can see the agenda seeping into the critiques, the agenda being that the bankers and the system wasn't worth propping up and was only done so because Geithner either wanted to buddy up or was buddies with those in the system we most abhor.
As someone who was so critical of Geithner during the early days of the chaos, someone whom Geithner freely admits was right to call him out at the very beginning with my "they know nothing" rant, I find all of this criticism rankling and largely uninformed.
First, Geithner says repeatedly that he got it wrong from the get-go. Neither he, nor the staff of the New York Fed, saw the subprime crisis developing because he, along with pretty much everyone else in government and business, didn't believe we could have a sustained multiyear downturn in the price of housing because it had only happened once in the Great Depression and that was directly related to the collapse in the banking system before federal deposit insurance. Geithner does absolutely nothing to defend himself for this lack of clairvoyance and simply kicks himself for getting it wrong. His only real alibi, if you will, comes because there was so much banking outside the banking system, chiefly mortgage mills long since disappeared, which also relied on the same set of statistics. Was that Geithner's fault? Hardly. Not only that, but the regulators for the worst actors in the system, the thrifts such as Washington Mutual, were totally clueless, especially the captured Office of Thrift Supervision.
How about the constant charges that once the problems were discerned he did nothing to stop them? Because of his own lack of insight and lack of insight of many others, almost every action came as a firefighter, not as a preventer of fires.
Like unhappy families, each fire was dysfunctional in its own way. Bear Stearns had based all of its models entirely on housing having no more than a two-year downturn. It had been packaging mortgages for eager hedge funds believing that the 2005 and 2006 "vintages" were the only real problem and that there were enough mortgages in each bond that investors would be protected. The investors, for the most part, were initially sophisticated hedge funds reaching for yielding by borrowing huge amounts from Bear in the short-term paper market and then failing to come up with the capital needed to maintain their positions when the bonds started sinking. You can easily blame Bear for being really stupid, as even its own in-house managers failed to see any of this coming. But when the Justice Department brought a case against these managers and failed to convict, it ended the possibility of accountability in the system and set up a free-for-all where salespeople felt free to jam unsophisticated clients with paper that they had no idea was filled with failing mortgages and felt protected anyway because of mortgage insurance.
I wish Geithner had spent more time on this concept, but he seemed to be content with saying that "reaching for yield" was at the fault of many bad client decisions.
Now, when Bear went down, JPMorgan Chase (JPM) stepped up to the plate at the behest of the government and got some guarantees against the worst of the paper. In retrospect, this was one of Jamie Dimon's most ridiculous decisions, one that the government was pilloried for as a giveaway but instead has haunted the bank for years now. I was surprised that Geithner didn't spend more time on what a chump Dimon was and instead defended the government's decision to do the deal. In other words, there was no reason to defend this one at all because Dimon was all in, incorrectly, and should have been chastised by his shareholders. This was early on in the image-making of the fortress balance sheet era of Dimon, though, and he was viewed as the smartest man in the room by the media.
The Bear lesson for the government going forward was a bad one. It consisted of a belief that there would always be white knights for failed banks because Dimon was supposed to be a visionary with the Bear deal, so others would leap to it, too.
That judgment clouded the process that brought down Lehman, which was the central catastrophe that triggered the systemic risk. The book is weak on this issue and I complained and questioned Geithner about this during my interview of him at Barnes & Noble, an interview described as well-scripted by The New York Times, even as Geithner picked me because he believed people would understand how unscripted it would be. We didn't speak about the book until we got up to the podium. We both wanted it that way.
I found that judgment of my interview, made by the righteous Gretchen Morgensen, to be most disingenuous, given that Geithner directly attacks her accuracy in her repeated salvos against Geithner for coddling up to Goldman Sachs (GS) during the AIG (AIG) debacle. Why not savage him, he savaged her? I think disclosure was clearly a needed and ignored disinfectant on this charge.
The Lehman clusterf***, as Geithner calls almost all of these attempts to put out fires, is quite Rashomon-like in its depiction, but Geithner seems somewhat unaware that he's describing it in so many different postures.
First, we had the no-more-Bear-bailouts camps, led chiefly by Treasury Secretary Hank Paulson, namely because of the legacy that Dimon got the best of the government. Of course, that was wrong and punitive to all. But it was righteous, a view that Geithner subtly castigates. Geithner doesn't take himself nearly to task as much as he should in the Lehman debacle because then-CEO Richard Fuld's financials seem out-and-out fraudulent and should have been caught by his office. Did Fuld skate because he was on the board of the directors of the Fed? Unanswered by Geithner and potentially very damning.
But it was the proximate cause of why no deal could be put together to save the bank. Hence, a second version of events. Paulson, at first, says no bailouts because of Bear and that Lehman should be allowed to fail (the Old Testament theme that Geithner castigates throughout "Stress Test"). Then he relents and accepts that Lehman is so bad off that a White Knight has to be found. The feds seize on Barclays as the potential White Knight. But Barclays is so weak that the British regulators won't bless it. Meanwhile, a hapless and devious Fuld promises a Korean bank bailout that he can't pull off. If the feds had insisted that Fuld go well ahead of that fateful weekend, I believe there would have been a better resolution. Again, was Geithner too cozy with Fuld? Not at all clear.
I know that Geithner had a solid look at Lehman before it went down, well warned by others at the bank, but it seemed to mean nothing because Geithner felt constrained by the law and the lack of Fed tools to save the banks. Again, there's another Rashomon view because it somehow, wrongly, presumes that there is an authority that could have blocked the Fed and Treasury from taking action.
I questioned Geithner in the so-called scripted interview about why he doesn't admit that the there was no countervailing authority and it could easily have been done in the same way that President Lincoln suspended habeas corpus, but Geithner deftly parried this by saying the lawyers wouldn't let him do it. Of course lawyers are made to be overridden and the bank could have been saved. Our history is filled with leaders who have overridden counsel for public policy concerns. A more engaged president sure could have helped and might have if he were involved, as he is hardly villainous in the text, much to the chagrin of most liberal commentators of Stress Test.
Suffice to say that everyone had a hand in blowing up Lehman and it was a disaster of many fathers, including the Securities and Exchange Commission, which checked off on ridiculously rosy books that Fuld personally generated.
As soon as Lehman went down it was "Katy, bar the door!" because of Lehman's collateral, and its packaged bonds were as worthless as they turned out to be everyone else's would be, too. That's why the next bailout -- of AIG -- was so important and so significant. Unlike Lehman, which now appears to have no worthy collateral that could be liquidated -- an important caveat -- AIG had substantial assets away from its financial services guarantee division. AIG was incredibly poorly run and management let its U.K. division do whatever it wanted, including guaranteeing every mortgage bond under the sun. Again, Geithner doesn't do justice to what happened at AIG, which is that the company relied on many outside experts, including business professors paid for by AIG who agreed that the waterfall protection built into the faulty bonds would stop the insurance from ever kicking in.
That was just plain wrong, as we increasingly realize that the 2006-07 vintages included a vast number of phony mortgages that the banking system keeps paying for.
Geithner correctly realized that the assets away from AIG's financial services division were bountiful, which is why he and the Fed were willing to take them on. The gist of the AIG bailout: You could always sell off the worthwhile pieces of AIG if you could just get the government to offer collateral guarantees so that the bad loans had a chance to turn good. This pretty much worked out, but it took a long view, one that didn't seem to come into play for any other entity because the banks were choking with bad loans.
Geithner spends too little time on the fools at Fannie Mae (FNMA) and Freddie Mac (FMCC) who blessed anything that came in the window over the transom. Those one-time safe arbiters of mortgages became greed-filled institutions that had the same faulty models as everyone else in the system.
But Geithner does make judgments about the other failing institutions. He puts the run on WAMU squarely on Sheila Bair, who seems to care more about the sanctity of the FDIC than about saving institutions so the depositors knew their money was safe. He similarly obliquely does the same for Wachovia. Bair's anything but heroic in the book, something no one seems to address in any critique that I have read.
How about Citigroup (C)? I like how Geithner subtly points the finger at Bob Rubin for lending his imprimatur to Citi's totally hideous portfolio. The subtext here is that Geithner blew it because he trusted Rubin, and he's been merciless toward himself for doing so, something he admitted freely without any provocation at the Barnes & Noble interview.
Still, though he had a good plan to save two birds with one stone in a heavily negotiated transaction to save Wachovia, which again had a Bair-inspired run by merging it with Citigroup. At the last minute Bair broke up the deal and allowed Wells Fargo (WFC) come in. Geithner's appalled because he gave his word that Citi and Wachovia would merge, but I think his anger seems misplaced because Dick Kovacevich bought Wachovia without a government guarantee. But Citigroup then had to become a ward of the state when the deal broke up. I personally think that Wachovia-Citi would have been a ward of the state anyway. Still, if Bair hadn't helped start a run on Wachovia it might have survived on its own. It's a complicated read to understand what Bair did wrong, chiefly involving haircuts to bond holders that were, again, Old Testament-like, but I think it is a convincing indictment.
Which brings me to the indictments. Where were they? A persistent undercurrent of almost every single negative critique of the books, and there are myriad critiques, has to do with how Geithner left everyone off the hook during this period.
That's just plain fatuous and does not survive a close or critical reading of the text. I think Geithner would have welcomed the prosecution of just about everyone he dealt with on the banking side. One of the less-noted undercurrents in the book is the absence of Justice Department interest in any of these matters. At the end of the Bush administration, the Justice Department was in total disarray, largely because of a scandal involving the completely inept Alberto Gonzales, who turned the Justice Department into a political hack arm of the president. When he resigned in 2007, the Justice Department turned lame duck and did nothing.
Nor did the clueless Christopher Cox, the SEC head, who should have been referring case after case to the Justice Department for repeated Sarbanes-Oxley prosecutions. But the administration either didn't believe in the broad powers given by Sarbanes-Oxley or the Justice Department felt so gun-shy after the failure to convict the two Bear Stearns executives who apparently lied or misjudged their portfolios. The failure to win that case haunts all the other attempts for justice.
Geithner doesn't dwell on this, nor does he finger Attorney General Holder for getting involved and getting his hands dirty going after the ne'er-do-well executives. That's not Geithner's fault. Justice skates, sinfully, in the book, and only brought the cases we now see, cases where no exec is ever brought up on charges and the shareholders repeatedly pay for the crimes of these exec.
That's the biggest outrage of the book, but neither President Obama nor Holder come under any scrutiny at all here. But was it Geithner's job either as head of New York Fed or later as Treasury Secretary? Definitively not. The critics are obtuse about any of this, and no one takes Obama or Holder to task. That's just sinful.
The most important part of the book from the point of view of public policy is Geithner and Ben Bernanke's resolve to fix the system through aggressive capital raises. I think Geithner doesn't give Bernanke enough credit for stopping the runs on the banks with his fabled interview on 60 Minutes at the exact bottom of the stock market when he said there would be no more failures. In fact, Bernanke really doesn't get his due in the book. I don't know why that is, but it seems gratuitous by Geithner. Instead, he discusses how wrong Larry Summers would have been to go ahead with his plan to nationalize all the banks as if we were Sweden, a country about the size of Georgia. He also obliquely chides Volcker and the president for focusing on the internal hedge funds within the big surviving investment banks, even as the prop desks had nothing to do with the systemic woes whatsoever. Just another wrongheaded view by Washington that detracts from any logical fix.
Finally, Geithner makes it clear that the whole system would have failed and the U.S. not gotten back on its feet if he hadn't set up the actually-extremely-rigorous stress tests that created a surfeit of capital and preserved the remaining institutions, all of which he said needed it, particularly the utterly mindless Bank of America (BAC) and the very indignant Wells Fargo, another shot at Kovacevich, who has now spent years coming on television saying his bank didn't need the money. I find his protestations funny. Which brings me to the last and most faulted portion of the book, save the coddling charge, and that's Geithner's view that not only have his actions and the actions of others pointedly mentioned within Treasury saved the system, but they have brought prosperity to the country.
While Geithner makes it clear that the prosperity is relative vs. Europe, this one rings hollow with all Republicans who think the economy is weak and all Democrats who want more help putting people to work. He's hated in an equal-opportunity way for his own judgment.
I do not regard the book as political, but maybe that's because it isn't, save one paragraph where he asks the Tea Party where it was during the Bush administrations heinous deficit creation and the unfunded wars that amount to presidential freebooting and fecklessness. When I read the paragraph out loud at Barnes & Noble it got a real belly laugh but, it does raise a pertinent question. Where, indeed, were they?
Am I a defender of Geithner? No, I am a defender of his view of events, with certain differences having to do with my own experiences covering the chaos. Is he an honest broker? I think so. Will that matter? Nope. The polemicists have seized the mike and buried the man.
It's a shame. He deserves better.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long JPM.
Editor's Note: This article was originally published at 8:30 p.m. EST on Real Money on May 26.