“Put the Money in the Window” — Stress Test, Book Review

By | July 25, 2014

Sometimes we read press releases made by the Fed or by the Treasury and we have no clue what really stands behind these often convoluted statements. After reading Tim Geithner’s book, you will know how to read into these statements much better and that’s alone is a good enough reason to pick up the book and read it.

The book is called Stress Test: Reflections on Financial Crises. It is an exciting read — since I read it on my Kindle, I had no idea the book is so thick until I watched this two-part interview.

The book begins with a review of Tim Geithner’s life abroad. I wasn’t aware of his very diverse international exposure since young age and I had no idea that he can speak Mandarin. Also, I was always sure that Geithner is an ex-banker and that he used to work for Goldman before becoming the Secretary of the Treasury. Surprisingly, I learned that I wasn’t the only one that had this wrong perception as the book mentions that a lot of people thought the same way (I really wonder why). Well, Geithner is not an ex-banker and he never worked for a Wall Street bank but somehow many people thought otherwise. Actually, he was a civil servant throughout his career. Another myth he was faced with was the he is Jewish and that he grew up in Brooklyn. Guess what, he is not Jewish and he did not grow up in Brooklyn.

Next the book goes on to recount Geithner’s career advancement in the Fed and tells the story of the pre-crisis years as was seen at the time by Geithner. It is really exciting to see things from his point of view and understand the constraints that policy makers are faced with. Sometimes we tend to get angry at civil servants for doing (or not doing) what we think is right and we have a tendency to think that they are either ignorant or stupid. This book shows you how complicated reality really is.

When the 2008 financial crisis hit, Geithner was still the president of the Federal Reserve Bank of New York. His policy and past experience in handling crises could be summarized in one sentence: “put the money in the window.” In the old days, bankers used to put big piles of money in their windows in order to avoid a run on the bank and to reduce panic. Putting money in the window alleviates people’s fear that the bank might go broke and they will never meet their money again. The motive of building confidence and taking catastrophic risk off the table is repeated throughout the book and is reflected in most of the actions that Geithner and his team took.

After Obama was elected, he chose Tim Geithner to be the Secretary of the Treasury. Initially, Geithner did not want to take his position because he wasn’t a politician and didn’t want to meddle in the Capitol Hill politics. Little did he know what awaits for him down the road. Obama eventually talked him into taking the job and off he went to Washington to tackle the worst financial crisis in the last 80 years.

The book tells the story of the unending conflict that policy makers were faced with — while the public demanded to do “justice” with the bankers, the leaders in Washington knew that letting the financial system melt down would lead to high unemployment and the consequences of the crisis would be felt well beyond Wall Street. The descriptions and the reproduced dialogues take you behind the scenes of the discussions that took place among people in the highest ranks and the decision making process at the peak of the crisis. I found this exciting and I highly enjoyed reading the sections of the book that told the story of how the crisis was handled as events unfolded. I was highly impressed by the careful and not populist thinking and decision making that took place at a time when it was very easy to just “shoot” the bankers and throw the baby with the bathwater.

There were two things that I didn’t like about the book. First, he wrote about Dick Kovacevich (former Wells Fargo CEO) in a negative tone and hinted that Kovacevich didn’t really know the risks that Wells Fargo was faced with during the crisis. This came at the time when the treasury forced the banks to raise more capital. While my investments in the TARP warrants that were issued back then were among the best investments I have ever made, I think that Geithner shouldn’t have treated Wells as if it was at a risk of running out of capital. Second, there is a chapter that deals with the battle for financial reform that started when the economy seemed to come back to life. In this chapter the details and the political battles around it are chronicled, which was somewhat tiring and even boring. This is the kind of chapter you want to read when you have trouble falling asleep. Or, maybe I didn’t enjoy this chapter because I don’t really like politics, especially not the Washington type.

While it might seem that Washington was somewhat ineffective during the crisis, the chapter that describes Europe’s response to it shows us what ineffectiveness is all about. Europe’s initial response was just a drop in the bucket and didn’t inspire confidence, which caused the EU financial crisis to be much more difficult to contain. If you think Washington-style politics are ugly, just take a look at what the Europeans have to offer.

I enjoyed reading the book and if you have any interest in macroeconomics or in investing I think you should do too. There are many things to learn from it and for the most part the book is engaging and well written. Here are some typical Geithner quotes that I particularly liked:

Plan beats no plan

Life is about alternatives

I’d choose pain now over pain later

He got an excess conviction relative to knowledge

Hope is not a strategy

Un-fucking-believable (I had to put that one in…)

Was Geithner successful? Has what he done and the relatively fast V-shape recovery that took place helped to avoid a bigger crisis? I think that the answer to both questions is yes but the jury is still out.

Go read the book, you will enjoy!

Side note: I didn’t post in a while but that is not because I’m not active, quite the opposite. I made the first big new investment in a while. I hope to resume writing more often soon, so stay tuned. 


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