Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In rejecting the Swedish option, President Obama had gestured to America’s “thousands of banks.” At the time the president spoke there were, in fact, 6,978 commercial banks operating in the United States. But those never mattered to Geithner or Bernanke. They were the province of the FDIC. What mattered for systemic stability were the nineteen major banks with assets in excess of $100 billion, c. $10 trillion in total. Subjecting those massively complex institutions to thorough scrutiny would have been a labor of Hercules. The stress tests were something more tactical and fast moving. In a crash effort, a scratch team of two hundred bank examiners, supervisors and analysts ran through the books.24 The disaster scenario they applied was far from apocalyptic. They assumed that GDP would fall by only 2–3 percent, unemployment would rise to 8.5 percent and house prices would fall by between 14 and 22 percent. That turned out to be optimistic. But even starting from those numbers and the default probabilities they implied was enough to generate sobering conclusions. On top of the losses of $350 billion already recognized by the spring of 2009, under the stress test scenario the banks might expect to suffer a further $600 billion in write-downs and charge-offs by the end of 2010. This, then, posed the truly critical question: How much capital would be required to make the banks safe and restore market confidence? This was a matter of judgment. The Treasury and the Fed weighed a ...

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