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Stress Test: Reflections on Financial Crises QUOTES

Stress Test: Reflections on Financial Crises QUOTES

1 " The rating agencies were not exceedingly competent "

― , Stress Test: Reflections on Financial Crises

2 " you cannot enjoy the light without enduring the heat. "

― , Stress Test: Reflections on Financial Crises

3 " you can’t judge a decision by how it turns out, only by whether it made sense given the information available at the time. "

― , Stress Test: Reflections on Financial Crises

4 " Financial stability cannot depend on omniscient supervisors identifying and preemptively defusing any potential source of crisis; it requires safeguards that can help the system withstand the force of a severe storm, and tools the government can use to limit the damage. "

― , Stress Test: Reflections on Financial Crises

5 " But derivatives did create new dangers. If you were making a loan, and you were confident you could hedge some of the credit risk of that loan, you might be tempted to make a larger and riskier loan. And the instruments themselves often had leverage embedded in them, so investors could be exposed to greater losses than they realized. Firms weren’t required by law to post any collateral (or “margin”) to make derivatives trades, and the market wasn’t requiring them to post much, either. This meant fewer shock absorbers for the system if those trades went bad. That’s why Warren Buffett had called derivatives “financial weapons of mass destruction. "

― , Stress Test: Reflections on Financial Crises

6 " it takes the average country eight years after a financial crisis to reach its pre-crisis income levels. "

― , Stress Test: Reflections on Financial Crises

7 " I was in many ways an unorthodox choice to lead Treasury. I wasn’t a banker, an economist, a politician, or even a Democrat. I was a registered independent without much of a public profile—and the profile I had didn’t exactly signal Obama-style hope and change. "

― , Stress Test: Reflections on Financial Crises

8 " Of the twenty-five largest financial institutions at the start of 2008, thirteen either failed (Lehman, WaMu), received government help to avoid failure (Fannie, Freddie, AIG, Citi, BofA), merged to avoid failure (Countrywide, Bear, Merrill, Wachovia), or transformed their business structure to avoid failure (Morgan Stanley, Goldman). The stock market dropped more than 40 percent from its 2007 peak. "

― , Stress Test: Reflections on Financial Crises

9 " In a futile gesture against the overwhelming consensus, I did call a New York Times editor to complain about a damaging story portraying the AIG rescue as a backdoor bailout for Hank’s former colleagues at Goldman Sachs. I had asked Lloyd Blankfein about Goldman’s direct exposure to AIG; when he assured me Goldman’s exposures were relatively small and fully hedged, I made him send me the documentation. Still, the Times wouldn’t correct the record, and my call probably strengthened its suspicions. The same reporter later did a story portraying the entire crisis response team as servants of Goldman, accompanied by a vampire squid–like diagram with me in the middle. In the media, in the public, even in the financial community, we faced withering skepticism about our motives as well as our competence. After all, we had lent a mismanaged insurance company three years’ worth of federal spending on basic scientific research. "

― , Stress Test: Reflections on Financial Crises

10 " Sheila Bair, a former Republican Senate staffer who was President Bush’s FDIC chair, quickly agreed to sell WaMu for $1.9 billion to JPMorgan Chase, which would take over the failed bank’s uninsured and insured deposits. But the FDIC did not require JPMorgan to stand behind WaMu’s other obligations, as we had required it to do for Bear Stearns, leaving WaMu’s senior debt holders exposed to severe losses. "

― , Stress Test: Reflections on Financial Crises

11 " There’s no way to be sure exactly when a bubble will pop, no certain way to prevent a mania from becoming a panic. "

― , Stress Test: Reflections on Financial Crises

12 " The recession of 2007 to 2009 was still the most painful since the Depression. At its depths, $15 trillion in household wealth had disappeared, ravaging the pensions and college funds of Americans who had thought their money was in good hands. Nearly 9 million workers lost jobs; 9 million people slipped below the poverty line; 5 million homeowners lost homes. "

― , Stress Test: Reflections on Financial Crises

13 " Financial crises can’t be reliably anticipated or preempted, because human interactions are inherently unpredictable. "

― , Stress Test: Reflections on Financial Crises

14 " She was determined to guard against moral hazard and protect the FDIC insurance fund. She saw this as a teachable moment, a chance to show the world that the irresponsibility of WaMu and its bondholders would be punished. She made the same argument the Germans and other moral hazard critics had made against IMF assistance during the emerging-market crises: It will only encourage bad behavior in the future. "

― , Stress Test: Reflections on Financial Crises

15 " Sheila was a formidable advocate for her agency and its insurance fund, savvier about politics and the media than any of us. So despite my objections, the FDIC orchestrated a deal that let WaMu default on its creditors. Shareholders and subordinated debt holders were mostly wiped out, which was understandable. But senior debt holders were exposed to serious haircuts as well. The price of WaMu’s senior debt traded at only 25 cents on the dollar the next day, Friday, September 26. "

― , Stress Test: Reflections on Financial Crises

16 " The U.S. government had sent a message that creditors of U.S. financial institutions were not safe, precisely the wrong message to send at a time of peril. Wachovia’s creditors were so unnerved they demanded repayment of half the bank’s long-term debt that day, trying to call in more than $50 billion in loans. "

― , Stress Test: Reflections on Financial Crises

17 " THE FINANCIAL system could easily absorb the $30 billion collapse of IndyMac. There was no way it could absorb the collapse of Fannie Mae and Freddie Mac. The two government-sponsored enterprises held or guaranteed more than $5 trillion in mortgage debt. "

― , Stress Test: Reflections on Financial Crises

18 " Despite Hank’s pleas, Fannie had raised only $7.4 billion in new capital in 2008, while Freddie had failed to raise a dime. "

― , Stress Test: Reflections on Financial Crises

19 " The market crash seemed to focus their minds. Before Monday, the public reaction to TARP had been all anti-bailout anger, but now politicians started hearing from constituents whose life savings were disappearing. Senate leaders added some sweeteners to the bill, including extensions of dozens of tax breaks for businesses. The bill also temporarily raised the FDIC’s deposit insurance limit from $100,000 to $250,000, to help protect the kind of account holders burned by IndyMac’s haircuts, and to help prevent runs on traditional banks. On Wednesday, October 1, the tweaked version of TARP passed the Senate with broad bipartisan support, 74–25. On Friday, it passed the House as well, as 57 representatives flipped from no to yes. The abrupt reversal evoked the Winston Churchill line about Americans always doing the right thing after trying everything else, but there was also something inspiring about it. "

― , Stress Test: Reflections on Financial Crises

20 " I knew we'd be accused of rewarding incompetence, or throwing public money down a rat hole. But I believed we had gotten taxpayers a reasonable deal, not just in the financial terms of the loan, but by avoiding even more severe damage to the economy. "

― , Stress Test: Reflections on Financial Crises