After you read Stress Test by former Treasury Secretary Tim Geithner, you may never want to buy a bank stock again. That may be my chief takeaway from this newly indispensable book about the financial crises that plunged this country into the Great Recession. I certainly intend to ask Tim, when I sit down with him at the Barnes & Noble in Union Square after Mad Money tonight, why anyone would even contemplate investing in one of the behemoth banks that were so integral to the near-collapse of the U.S. -- not just the banking system, but the whole country.
If you are as enthralled with the turmoil of that period as I am, seeking every nuance of what went wrong, who went wrong and what was done to stem the collapse and what could have been done better, then the aptly-named Stress Test will become your quick-turning bedside reader.
They are all here: Bear Stearns, Lehman Brothers, AIG (AIG), Washington Mutual, Citigroup (C), Countrywide, Bank of America (BAC), Merrill Lynch, Wachovia, Fannie Mae (FNMA), Freddie Mac (FMCC). They're depicted not so much in living color but in stark reality -- as the true ne'erdowells of the era.
The behind-the-scenes denouement or near-death of each is detailed with an exactitude that makes me feel Geithner is a total honest broker, even as I am sure he would be the first to admit that he lacks a dramatic hero-villain flare -- not that there weren't any.
In fact, we've got bums galore. They almost seemed drawn to the industry. It's impossible to imagine a group of trucking-company executives, or retailing CEOs or healthcare professionals, systematically performing as horrendously and as heinously as these bank bosses have done. They are, at times, laughably villainous, as in one anecdote about John Thain. According to the book, in an incredibly tense meeting regarding the Troubled Asset Relief Program (TARP), Thain -- who was at that point running Merrill Lynch, and is one of the richest men in the world -- inquired about assurances on his executive compensation during a discussion of the government's program to save the financial system. Good grief!
I know Tim didn't write the book as an investors' guide to banks. But, as with any good book, you can extrapolate what you wish from the rich composite of regulators and the regulated that populate the text. For me, this has got to be one of the most cautionary tales about a subset of an asset class. Lightly buried within Stress Test are the reasons, both before and after the crisis, that bank stocks are valued as lowly as they are these days.
First, going into the Great Recession, bank financials and non-bank financials were meaningless, as we now know. Everything you saw on paper was pretty much a lie. You simply could not look at anything publicly issued by these banks and make a judgment of what they owned, what exposure they had, what they even really were.
Second, if you think you were clueless, but that the regulators had a handle on it, remember: Going into the meltdown, Tim Geithner was running the New York Federal Reserve and he didn't know, either. Whose fault was that? This is unanswered by the book. But it sure didn't help that some of the biggest and most important scofflaws in the book, like Richard Fuld, who built and rain Lehman Brothers into the ground, served on the bank board.
Third, look at the eventual consequences of that period. Coming out of the Great Recession, many of these bankers belonged in handcuffs -- and I say "belonged" because the statute of limitations has sadly run out on these ne'erdowells. Yet we know these bankers' actions were so egregious that the government, led by Geithner, had no choice but to put the whole system in handcuffs, via the aptly named "stress test" regimen that now prevails.
Put simply, I know now that banks are far more enslaved and straitjacketed than I had realized. The ability for them to earn a real return on anything other than fees and conservative lending may be gone for the foreseeable future -- the only real punishment meted out from the era. Given the boneheaded mistakes that have been made since the crisis, like the London Whale at JPMorgan Chase (JPM) or the $4 billion error just discovered in Bank of America's bond portfolio, I don't expect the rules to change any time soon.
The bottom line? The demons of the past haunt this group far more than we realize, and when you read Stress Test you might want to thank Geithner for recognizing that someone had to check the greed, or at least grade it and flunk those institutions that just don't get that the world has changed. Unfortunately, the whole class gets held back because of the errors of a few -- hence why the group is just such a terrible place to put your investment dollars.