Last week, in an anonymous New York Times op-ed, a senior Trump official attempted to reassure the public that members of the administration were actively impeding their boss’s wishes. One member of the public wasn’t soothed: Trump’s predecessor. “The claim that everything will turn out okay because there are people inside the White House who secretly aren’t following the president’s orders, that is not a check,” Barack Obama said in a speech. “That’s not how our democracy’s supposed to work. These people aren’t elected. They’re not accountable.”
It was interesting timing for Obama to condemn executive branch defiance. This week marks the tenth anniversary of the fall of Lehman Brothers, seen as the emblematic event of the financial crisis. And early in Obama’s first term, as he struggled to prevent further collapse, he faced similar insubordination from a key official: Treasury Secretary Timothy Geithner.
According to credible accounts, Geithner slow-walked a direct presidential order to prepare the breakup of Citigroup, instead undertaking other measures to nurse the insolvent bank back to health. This resistance to accountability for those who perpetrated the crisis, consistent with Geithner’s demonstrated worldview, had catastrophic effects—including the Trump presidency itself.
Ron Suskind was the first journalist to dig out this history, which has been largely forgotten, in his 2011 book Confidence Men. On March 15, 2009, Obama’s economic team met to discuss Citigroup, which had seen its stock price plummet after reporting $8.29 billion in losses for the fourth quarter of 2008. Toxic mortgage securities still cluttered Citi’s balance sheet, and two government bailouts totaling $45 billion, plus $306 billion in loan guarantees, had failed to stop the bleeding.
Larry Summers, then the National Economic Council director, was intrigued by the concept of nationalizing the sickest commercial banks, similar to what Sweden had done a decade earlier. Summers had discussed the mechanics of it with FDIC chairwoman Sheila Bair, as she recounted in her 2012 book Bull by the Horns. Obama had already publicly rejected nationalization in an interview with ABC News, but his economic team had differing viewpoints, which they hashed out in the March 2009 meeting.
They decided that the remaining bailout funds would be used to support a “resolution” of Citi. The worst assets would be put into a “bad bank,” with shareholders wiped out and the rest of the firm downsized and restructured. Obama wasn’t exactly gunning for bank retribution, as his dismissal of the Swedish option showed, but he approved the order that night and tasked the Treasury Department with nailing down the details.
Geithner simply didn’t follow the request, failing to produce any proposal for the unwinding of Citi, according to Suskind. It was a classic Washington move: When your boss asks for something you don’t like, just ignore it and hope that the request isn’t necessary when the boss follows up.
Geithner and his bank regulator colleagues made sure a breakup wouldn’t be needed by using Federal Reserve loans, guarantees, and a third bailout to save Citi. Little was asked from the company in return. Geithner had devised “stress tests” to judge how large banks would handle another downturn, and Citi’s initial test estimated that the bank would need $35 billion in additional capital to reassure markets that it was safe. But Citi haggled with regulators, dropping their capital requirement to $5.5 billion, about the same as what the bank paid out in bonuses that year.
In Confidence Men, Geithner rejected Suskind’s account of the March 2009 meeting, saying, “I don’t slow-walk the president on anything.” But Obama didn’t deny it. Describing how he felt about Geithner’s response to his order, he said, “Agitated may be too strong a word.” He later added that “the speed with which the bureaucracy could exercise my decision was slower than I wanted.” As Suskind would conclude, “The Citibank incident, and others like it, reflected a more pernicious and personal dilemma emerging from inside the administration: that the young president’s authority was being systematically undermined or hedged by his seasoned advisers.”
Any objective look at Geithner’s actions in response to the financial crisis confirms that he would maximize his power on behalf of big banks, even if it meant going around his colleagues and his president. That included paying off AIG’s investment bank counter-parties at 100 percent instead of forcing a discount, or blocking Bair, the FDIC chair, from forcing higher capital rules on banks. Every action fit Geithner’s worldview: The financial system must be stabilized at all costs, as the only way to heal the economy so real people benefit. “We do not need to imagine that he was in the pocket of any one bank,” Adam Tooze wrote in the new book Crashed. “It was his commitment to the system that dictated that Citigroup should not be broken up.”
But this neglects the political implications of deploying massive resources to save Citigroup and Wall Street more broadly. Failing to hold anyone accountable for causing the Great Recession as the economy struggled to regain its footing generated significant public resentment, from the Tea Party on the right to Occupy Wall Street on the left. The same urgency and ingenuity was simply not adopted to save homeowners drowning in mortgage debt, which weighed down the overall recovery. Obama fired the CEO of GM, but no bank executive suffered for a moment. And people noticed.
The statistics of the era speak to this inequity. In Obama’s first term, the top one percent took more than all of the gains from the economy after the crisis. Meanwhile, at least 9.3 million families lost their homes to foreclosure due to the mortgage meltdown. For many Americans, the financial and psychological damage will be lifelong. But banks weathered the storm well, and this year posted record profits.
Propping up the existing system instead of overhauling it made it easier for Big Finance to pull off its comeback. Geithner’s stress tests are now seen as weak and easily gamed; Summers recently called them “comically absurd.” Banks like Wells Fargo continue to break the law with impunity, because virtually nothing is done to them when they get caught. A shocking number of those who wrote the Dodd-Frank financial reform now work for the financial firms succeeding at chipping away at it, including Geithner himself, who now runs a private equity firm that owns a predatory lender.
Today, some may welcome the internal dissension in the Trump administration. But Geithner’s actions to protect banks from the president he served, and the anger it bred at a “rigged” system, diminished the public’s faith in government intervention and helped install Trump in the White House. Ten years later, Geithner’s one regret, as he put it in the Times, was that regulators don’t have as much power now as he had then to bail out banks. But he wasn’t given that power unilaterally; he took it, and America is still dealing with the consequences.