Former Fed, Treasury leaders voice confidence in regulators’ ability to address future crisis

Don’t ever bet against the U.S. government in a crisis – “crisis can bring out the best in people,” the former Secretary of the Treasury during the financial crisis of 2008 said Wednesday at a session looking back at the emergency 10 years later.

In a panel discussion with his colleagues who led key federal financial regulatory agencies that responded to the high point of the financial crisis – the week when investment bank Lehman Brothers collapsed in September 2008 – former Treasury Secretary Henry M. “Hank” Paulson Jr. told an audience at the Brookings Institution that “you’re not going to get me to say that we couldn’t do it today.” Paulson was responding to the question, “If the crisis happened today, would federal regulators be able to deal with it?”

From left: Former Fed Chairman Ben Bernanke, New York FRB President (and Treasury Secretary) Tim Geithner, Treasury Secretary Hank Paulson and Andrew Ross Sorkin of the New York Times participate in the discussion at the Brookings Institution.

Paulson was joined by former Federal Reserve Board Chairman Ben S. Bernanke and New York Federal Reserve Bank President (and former Treasury Secretary) Timothy F. “Tim” Geithner in a 90-minute panel discussion focusing on the actions they and their agencies led during the height of the financial crisis. The failure of Lehman (on Sept. 15, 2008) and subsequent events (including regulatory and congressional action) is widely considered the apex of the crisis.

Geithner supported Paulson’s view, noting that “in the fall of 2008, people focused on country over party.” However, Geithner noted that “we want to preserve the defenses” for the financial system that were adopted in the wake of the crisis and “make sure that they don’t erode over time.”

“It has to get really terrible for Congress to provide the tools to deal with the crisis,” he observed. But he also noted that the financial system is much better off today than in 2007, when signs of the financial crisis began emerging.

In other comments:

  • The three former regulators praised the professional staff at their agencies for their work in developing a response and solution to the financial crisis. “In our system, results depend on the quality of the people working on the problem,” Geithner said. “We had the support of the two presidents (of the U.S.) we worked for; but also had team(s) of people focused on determining solutions – finding the best of bad alternatives,” he said. Bernanke agreed, noting that “the quality of the bench is important.” The problem “requires dozens if not hundreds of people who understand technicalities of regulation and supervision of banking. Quality of execution is vital,” he said. Paulson added, wryly, “and they they worked for no bonuses.”
  • Geithner reiterated points made by the three in an op-ed they published in the New York Times Friday about the dangers of ignoring or repealing regulations adopted in the wake of the crisis. “Among these changes, the FDIC (Federal Deposit Insurance Corp.) can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic,” the three wrote in the piece. Geithner repeated those changes, but noted that the powers could be restored quickly if Congress chose to. But he warned it’s “hard in a crisis to get the political will to muster the support for tools.”
  • Both Bernanke and Geithner pointed to improvements to the financial regulatory system that dampen the likelihood of a similar crisis, particularly “Orderly Liquidation Authority” (OLA). “OLA gives a systematic, preprogrammed way” to deal with a crisis, such as the failure of Lehman, Bernanke said. “People have questions about how it would work. Speaking as a bureaucrat, having procedures in place is good. If we had had that with Lehman, we wouldn’t have solved the problem – but there would have been a more orderly, structured wind-down. It could very well work.” Geithner observed that OLA wasn’t “designed save us from risk of a panic.” However, he said “you should let that process work.
  • Paulson noted his personal disregard for the “Volcker Rule” (adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which prohibits banking firms from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds). “I’m not a big believer in the Volcker Rule; not the right way to go,” Paulson said. “I’m more concerned about risks outside of the U.S.”