One of the plotlines in Ron Suskind’s Confidence Men concerns the various bureaucratic and substantive moves through which Tim Geithner and Rahm Emmanuel dissuaded the president from ordering the seizure and shutdown of Citigroup. The story starts with the fact that Larry Summers and Christina Romer, who were sympathetic to the idea, lacked the staff resources to develop a plan for doing it, while Geithner, who had the staff, thought it was a bad idea. Sheila Bair also had the staff, and also wanted to go ahead, but was out of the loop:
But when it came to controlling information, there was one area in which Geithner’s office had been successful. Key disclosures of what actually happened in the March 15 “showdown” never leaked. Bair didn’t know, and never found out, that the president had been trying to push forward what the FDIC chairwoman was recommending. He wasn’t successful, either. Alan Krueger said one reason Treasury dragged its feet on a constructing a plan for Citigroup’s resolution was Sheila Bair. They would have had to consult the FDIC chairwoman. After all, her agency is in the business of closing banks. “The fear was that Sheila would leak it,” Krueger said, in a comment echoed by others at Treasury. “And there’d be a run on Citi.” He added that this was one of many reasons: “It was more than just that. The bottom line is Tim and others at Treasury felt the president didn’t fully understand the complexities of the issue, or simply that they were right and he was wrong, and that trying to resolve Citi and then other banks would have been disastrous.”
Krueger, for one, disagreed, and that very day he was due to have lunch with someone uniquely suited to edify him about the resolution of troubled banks: Andrea Borg, the Swedish finance minister.
This stated rationale both makes perfect sense and is completely crazy. It’s clearly the case that one problem with seizing failed banks and resolving them is that before you seize a bank, you have to consider seizing the bank and preparing to do it. And if word of your plan leaks, then there’ll be a run on the bank. Very sensible worry. But by the same token, this worry is so sensible that the FDIC struggles with it all the time. This is kind of like how one problem with asking NASA to send someone into space is that rocket science is difficult. It is difficult, but this is the business NASA is in. Either the FDIC is a completely dysfunctional agency that regularly sparks bank runs through leaks, or else there’s no problem here. Since the FDIC isn’t a completely dysfunctional agency that regularly sparks bank runs through leaks, there’s no problem.
I think the best case for the Geithner view is simply that nationalization, recapitalization, and reorganization weren’t necessary. I can’t really connect the dots between “Sheila Bair wins this argument” and “unemployment is lower today.” I was a proponent of Bair’s view at the time, and I think her view would have better served cosmic justice, but in terms of practical economic problems I’m much less sure.