I just finished reading Stress Test: Reflections on a Financial Crisis by Tim Geithner. The book is a fascinating inside look at the financial crisis that started in 2007. The intriguing history alone makes it worth the read. However, I enjoyed the book for more than its entertainment value. I learned lessons about crisis management that I can apply to my role as a CFO and business leader.
The book starts with a brief autobiography from Geithner’s birth to his 2003 appointment as President of the Federal Reserve Bank of New York. This history gives the reader context around the events that prepared him for his central role in the crisis. He lived overseas for most of his childhood before attending college in the US and beginning his life-long career as a civil servant. He was intimately involved with many financial crises around the world in the 90’s and 2000’s, which taught him first hand the effectiveness of various crisis responses.
From there the books slows down and provides a detailed account of the events leading up to, during, and following the crisis. As I read, the following crisis management lessons stood out to me:
1. Accept complexity and uncertainty. By definition, the outcome of a crisis is unknown. Sometimes your actions determine that outcome, and sometimes you’ll find there’s nothing you can do. In these situations I find it helpful to consider the worst case scenario.
During the financial crisis, Geithner and his colleagues needed to identify which banks needed capital and how much. They came up with the idea of a stress test, but they were afraid the tests would reveal a hopeless situation, creating financial panic and meltdown. They realized that the worst case scenario would only confirm what the public already believed, and better results would create confidence.
They were correct; the banks weren’t as bad off as everyone feared, and information gained from the tests allowed them to take the first informed steps toward recovery.
2. Ignore your critics. It’s important to gather as much information as possible given the circumstances, which may include giving critics a chance to speak their mind. However, ignore your critics after determining what you and your supporters believe is the best way forward.
Every crisis is unique, but Geithner's experience with previous crises gave him confidence in the midst of severe criticism from less informed critics. The TARP program was hugely unpopular, but taxpayers ended up with large gains on the investments made in banks at the time.
It may help to examine the reasons behind criticism. When Geithner was nominated by President Obama to be Treasury Secretary, he faced intense opposition from Republicans. During the confirmation process some Republicans privately said they supported him and would vote for him if they needed to. In public they criticized him and withheld their vote because they didn’t want to be seen as supporting the newly elected President Obama.
3. Don’t neglect presentation. In the midst of a crisis, optimistic and confident communication can be as important as a quality solution. Stakeholders’ confidence, or lack of, can become a self-fulfilling prophecy.
In February 2009 Geithner gave his first speech as Treasury Secretary. It was supposed to outline the roll-out of the Obama administration’s solution to the crisis. Geithner severely botched the speech, causing the stock market to drop 5% and sparking severe criticism of the administration and him personally. The plan, including TARP as mentioned above, was ultimately successful, but better presentation could have reduced pain the meantime.
Experience is the best teacher. If we can learn from others experiences, we will be more prepared to face the crises that we will inevitably face as leaders.
Question: What lessons have you learned from managing crises?