Stress test. Crisis lessons for all of us

Moving billions of dollars. In briefcases.

Can you imagine moving billions of dollars in briefcases and grocery carts? That is exactly what was done to save AIG. On Stress Test, Tim Geithner explains how it was done:

“They rushed stock certificates and other securities over to the New York Fed in briefcases and grocery carts. They would need $23 billion more over the next three days”.

At one dealer in the US, one is unable to pay for a Mercedes with a check (despite the fact that it takes them a week to get the title). Geithner explains how a $9 billion-dollar bank was paid with a check. He says:

“Banks were closed on Columbus Day, so Mitsubishi’s executives personally delivered a $9 billion check to Morgan Stanley that Monday morning to close their deal and avoid a Lehman-style collapse.”

Stress Test has numerous lessons we can use. Here are some of my favorites paragraphs:

Root-cause analysis

Frequently we make wrong decisions but not understanding what the problem is. Two concepts I like from the book are:

“Condoms don’t cause sex. The existence of firehouses doesn’t cause fires”

Credit risk and willingness to pay

In corporate finance, in exceptional cases, we ask a client to secure a credit line with his house. While we use AI models to determine ability to pay, we also try to measure willingness to pay. Geithner had a similar idea for banks. He says:

“I used to joke that there would be less moral hazard if financial executives had to put up their own homes as collateral, ahead of the assets of their firms.”

What to do in boring meetings

Geithner mentions that “meetings are life in Washington” and goes on to explain how he and his colleagues coped with it. He says:

“Sometimes the main purpose of meetings is to make people feel included. I got into the habit of asking “Is this a real meeting or a fake meeting?”

“Alan Greenspan told me his coping mechanism was to think about lunch.

Ken Rogoff told me he survived by playing a dozen games simultaneously in his head.”

How the Fed votes

“The heads of the twelve reserve banks have only five votes that rotate among them. New York is the only reserve bank with a permanent vote. The seven presidential appointees also have votes. In practice, decisions are made by consensus, with the chairman the dominant voice, and committee members dissenting only if they feel strongly.”

How much did sales and the market decline in 2009?

I remember March 2009 vividly. I was CFO at the time and had charts showing that sales had declined by 80% vs. PY. When I explain how we introduce direct debit, I always begin by pointing out GE could not borrow at any rate. This is what else was happening:

“Car sales at Chrysler and GM had fallen in half. General Electric, one of the highest rated firms in the world, struggled to borrow.

February was the worst jobs month yet, with unemployment rising to 8.1 percent. The S&P 500 had fallen to new lows, down 57 percent from its peak.

In the United States, private credit was now virtually unavailable.

American households lost 16 percent of their wealth in 2008, driven by falling home prices and stock prices, a decline five times larger than the 3 percent loss of wealth during the financial shock that precipitated the Depression in 1929.

The yuan would appreciate 16 percent in real terms during President Obama’s first term, and China’s trade surplus would be cut in half, to the considerable benefit of U.S. businesses and their workers.”

On hiring, and doing things which had never been done before

Hiring the smart guy: Geithner tried to convince Obama not to hire him.

Guaranteeing money market funds: although Geithner was initially against it, he says he then changed his mind. The Fed didn’t have the authority to guarantee money market funds, so Treasury guaranteed it.

Short-Sales: the SEC temporarily banned the short-selling of 799 financial stocks. He points out that “we all had reservations about this.”

The Treasurer asking on his knees. When I first saw this scene on “Too Big To Fail” I wondered whether it had actually happened. Geithner says it did. He writes: “Hank Paulson ended up getting on his knees to beg Speaker Pelosi not to abandon the bill because of Republican gamesmanship”.

I have two daughters and have raised them to “watch their language”. I also tell them the truth, so I did share with them while reading the book that Geithner’s language is “different”. It appears Rahm Emanuel’s is worse. Here is a quote (spelled out in the book):

“At a meeting in Rahm’s office in March, my deputy said that wasn’t possible, either. Rahm pointed to a desk with a computer. “Sit the f down and start typing,” he snapped. “And don’t get up until you’re finished.”

Geithner, the person

One of the qualities I like about Geithner is his humility. Here are two examples:

“During the day, coffee was brought to my desk on a silver tray. The first time I hosted a dinner I was served first while my guests watched. A buzzer was placed in front of me in case I needed to summon the staff. I would eventually change or eliminate many of these traditions, starting with the buzzer.

The Fed’s security officers drove me to and from work. At first, the drivers sometimes used their sirens to get me around traffic, even on my way home at night, but I ended that New York Fed tradition, too.”

WaMu, Citi, Wachovia during the crisis

I also found interesting how Washington Mutual was shut down on a Thursday, Citi’s stock fell to $1 after its failed bid for Wachovia, Larry Summers should have a permanent White House office in charge of knocking down dumb ideas, and Obama’s leadership style.

Why I read Stress Test

I have tremendous admiration for Tim Geithner’s intellectual capacity. I read his book to learn how to apply lessons from the financial crisis to corporate risk management. Someone training to present to a hostile audience, for example, should watch Tim Geithner’s congressional testimony. Seven years ago I watched one of his interviews to learn how to interview better for a CFO job. I got the job.

Stress Test is an excellent book to learn about politics, Washington and the financial crisis, from someone who was actually there.