If Tim Geithner had his way, the government would have bailed out Washington Mutual bondholders and prevented Wells Fargo from acquiring the floundering Wachovia Corp. in 2008, ensuring instead that it was awarded to Citigroup.
In his role as president of the Federal Reserve Bank of New York during the financial crisis and later as Treasury secretary, Geithner is often viewed as the most aggressive in pushing for government intervention. Former Federal Deposit Insurance Corp. Chairman Sheila Bair even derided him as "bailouter-in-chief" in her book on the crisis.
In his own account of the housing debacle, Geithner reinforces that view, instead seeming relatively unapologetic about his pro-bailout positions, even in cases where a rescue later turned out to be unnecessary.
What's clear is that Geithner continues to view the failure of Washington Mutual as one of the seminal points of the financial crisis, a turning point that because of the government's failure to rescue the Seattle-based company he says made the situation far worse.
On paper, at least, Wamu's failure was one of the few successes during that period. Although it was the largest failure in U.S. history, its collapse did not cost the government a penny after its operations were bought by JPMorgan Chase & Co.
But Geithner doesn't see it that way. He upbraids the FDIC and Bair in particular for refusing to invoke the systemic risk exception that would have allowed the government to bail out Wamu's bondholders, which were forced to take haircuts in the wake of the thrift's collapse.
"It seemed obvious to me that in a moment of extreme vulnerability, haircuts would only intensify the crisis, but Sheila didn't see it that way," Geithner writes. "She was determined to guard against moral hazard and protect the FDIC insurance fund."
After the Sept. 25, 2008 failure of the thrift, the situation grew far worse, Geithner says. He blames it for accelerating Wachovia's collapse, noting that the bank's ten-year bonds cratered to 29 cents from 73 cents immediately following Wamu's failure.
"Wamu was an overlooked mess that unnecessarily intensified the crisis," Geithner writes. "Wamu's demise was in some ways as damaging to confidence as the Lehman debacle, because Wamu's haircuts were totally avoidable. They sent a message to the world that the U.S. government was not seriously committed to defusing the financial crisis and containing the economic damage, even when it had the capacity to do so."
Wamu clearly haunts Geithner, who returns to the subject of the thrift's failure several times during his book. He also rejects arguments by Bair and others that bailing out the big banks would only spur them to take bigger risks down the line.
"I had heard enough moral hazard fundamentalism," Geithner declares.
To be sure, the battle over Wamu's failure began raging almost as soon as the thrift was shuttered. In his book "On the Brink," former Treasury Secretary Henry Paulson agrees the collapse was a turning point, calling Wamu "systemically important," and saying that wiping out shareholders and haircutting bondholders "only served to unsettle the debt holders in other institutions."
Bair, however, says the government would have been helping speculators who were hoping for a bailout after hearing plans for what would become the Troubled Asset Relief Program.
"Our phones started ringing off the hook the week following the Wamu failure, mostly irate flippers," she writes in her book, "Bull by the Horns." "They were at least honest; they told me that they had purchased Wamu stock at a steep discount when they had seen in the news that Paulson was seeking Troubled Asset Relief Program funds and had been expecting to profit when Wamu was bailed out There was no defensible reason for the FDIC to bail out Wamu's shareholders and creditors."
In its own report, the Financial Crisis Inquiry Commission in 2010 didn't draw a conclusion on the issue. But it did quote Federal Reserve Board General Counsel Scott Alvarez as agreeing with Bair.
"There should not have been intervention in Wamu," Alvarez said, according to the report.
Yet the fight over Wamu was hardly the only point where Geithner disagreed with the government's eventual decision. He also recounts his anger after Wells Fargo unexpectedly bid on Wachovia's banking operations after they were initially awarded to Citigroup under a government-assisted deal. Because Wells' offer did not include any government help, the FDIC supported allowing it to go forward, effectively scuttling the earlier announced Citi-Wachovia deal.
"When I first heard the change was in the works, I was livid," Geithner writes. "On a series of conference calls, I once again argued that Sheila's position was untenable. 'The United States government made a commitment,' I said. 'We can't act like we're a banana republic!'"
In retrospect, many observers feel like Wells' intervention helped the government dodge a bullet, particularly since Citigroup a few weeks later required its own tailored assistance package a rescue that would have been bigger if Wachovia's assets had been absorbed by Citi.
Indeed, Geithner says one of his top concerns was how Citi would weather the fallout from the failed Wachovia deal.
"I was worried that scuttling the Citi deal could end up crippling an already vulnerable $ 2 trillion institution, weakening it at the worst possible time," he writes. "Markets now assumed that Citi must have needed Wachovia's domestic deposits to survive. There was no bank more intertwined in global finance than Citi, which handled as much as $2 trillion of the world's payments every day, and CEO Vikram Pandit, understandably enraged, warned us there was now a good chance it could fail."
But Geithner said his largest concern was that it hurt the government's credibility, a view he still seems to have.
"I thought reneging on our word would make the U.S. government look unreliable," he writes.
Yet ultimately, most view the Wells-Wachovia transaction as a far better deal. Instead of a $2 billion offer from Citi that included a government backstop, Wells offered $15 billion with no FDIC involvement. Geithner reluctantly concedes the point, but maintains his position was still right.
"Our constant zigzags looked ridiculous," he writes. "We were lurching all over the place, and no one had any idea what to expect next. Hank said he wouldn't need to inject capital into Fannie and Freddie, then did what had to be done and injected $ 200 billion. Collectively, we helped prevent Bear's failure, then seemed to suggest we let Lehman fail on purpose, then turned around and saved AIG from collapse. Now we had announced and then unannounced a merger Our unpredictability undermined the effectiveness of our response."
Rob Blackwell is the Washington Bureau Chief for American Banker.