S. Martin Shelton

Retired U.S.Navy Captain, Novelist

BOOK REVIEW: Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Stress TestRating- Three Stars

Geithner weaves a complicated and compelling insight into the management of large scale financial crises. A great deal of the book is dedicated to the financial collapse of 1987. Economists and other gurus in the “money business” averred that this crisis was the worst since the 1930’s Great Depression. Soon it was a world-wide financial meltdown that spread to Europe and Asia.

Some of Wall Street’s most prestigious financial intuitions and big-name manufacturing corporations were on the verge of bankruptcy including Merrill Lynch, AIG, Carlyle Capital Corporation, Freddie Mac, and Fannie Mae. The 85-year old investment bank Bear Sterns was saved from bankruptcy by an infusion capital from the federal government and JPMorgan Chase. The storied Lehman Brothers, founded in 1847, could not find a savior, went bankrupt and closed its doors.

The world’s largest insurance company, American International Group (AIG) was near collapse. The government and the financial community feared that if the firm were to bankrupt it would cause the world banking system to fail—resulting in a world-wide depression of monumental proportions.  A massive infusion of federal funds saved AIG.

This financial upheaval was attributed in part to the mid-1980 the United States housing market which had exploded into sky-high prices. Complaints from the ACLU and other progressive groups claimed that minority groups were being excluded from home ownership. Such exclusion was not based on wealth but on race, they claimed.

The US Department of Housing and Urban Development (HUD) investigated the claim and concluded that the disparity between mortgage holders varied dramatically and had nothing to do with wealth but the color of the mortgage applicants’ skin. This scheme was known as “redlining” minority neighborhoods.

Actually, such discrepancy had all to do with wealth. The lenders were mandated by the federal government to make loans only to those who where financially able to fulfill their mortgage requirements to avoid another savings and loan crisis. Nonetheless, the federal government solved the problem with its neo-liberal economic orthodoxy. The Clinton administration under the Community Reinvestment Act cajoled Freddie Mae and Freddie Mac and other lending institutions to increase lending to minorities and low-income home buyers–a high-risk policy.

The financial gurus knew of the risks and started to bundle these high-risk loans into derivative packages and selling them at a discount. When the home mortgages started to default the entire system spiraled downward in a closed loop, ergo the financial crisis of 1987-88.

Stress Test is a detailed guide far beyond the interest of most “Joe Six-Packs.” Geithner’s tome is not for the proletariat to read in a comfortable chair in front the fireplace. Rather, it’s a research book for the financial cognoscenti and for government bureaucrats.

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