Allison Kilkenny: Unreported

Damning Bloomberg Article Reveals Geithner As Incompetent

Posted in Barack Obama, deregulation, Economy, politics by allisonkilkenny on March 1, 2009

Yalman Onaran and Michael McKee, Bloomberg News

timothy_geithner_reutersIt was 2004 and Tim Geithner, president of the Federal Reserve Bank of New York, had a message for the Federal Open Market Committee in Washington. He told his 18 colleagues gathered around the long mahogany table that a clearinghouse was needed to monitor risks in the burgeoning $5 trillion market for credit-default swaps — the over-the-counter derivatives that would later spin out of control and help take down Wall Street.

In a move that may have foreshadowed his role as President Barack Obama’s Treasury secretary, Geithner over the next two years nudged financial firms to voluntarily clear a backlog of swap trades. They stopped short of creating a clearinghouse to bring more transparency to the market.

“Geithner was making noise on reining in derivatives, but he didn’t push hard enough,” says Jane D’Arista, a former economist at the Congressional Budget Office in Washington and a longtime Fed observer. “Maybe he’ll be more forceful now that he’s in a position with real power. But I’m not so sure.”

From his years as a Dartmouth College student and mid-level Treasury official through his stint at the New York Fed, Geithner, 47, has thrived as a backroom negotiator and conciliator. Now, as he struggles to rescue Wall Street from a crisis that happened on his regulatory watch, investors and economists question whether the 75th Treasury secretary can transform himself into a bold leader equal to the challenges ahead.

Wall Street executives have cheered Geithner’s nomination.

Brief Honeymoon

“Treasury Secretary Geithner possesses the intelligence and experience needed to partner with President Obama and his economic team to lead us to a recovery,” says Robert Wolf, head of UBS AG’s Americas unit based in Stamford, Connecticut.

The rookie secretary has already learned that the honeymoon won’t last long. After Geithner presented a $2.5 trillion financial rescue plan on Feb. 10, the Dow Jones Industrials tumbled 4.6 percent because investors found it bereft of details. Geithner also gave no indication that he would act quickly to dismantle the weakest of the banks, a move that Joseph Mason, a former bank regulator who teaches finance at Louisiana State University, says he should take now.

Japan prolonged its credit crunch and recession for almost a decade before it finally nationalized two of its biggest banks, the Long-Term Credit Bank of Japan and Nippon Credit Bank, in 1998.

“The key to all our problems is the zombie banks,” Mason says. “We’re giving them money, which is not going to solve anything. We’re repeating the mistakes of Japan, which wasted a decade by not moving decisively against its zombie banks.”

Henry Morgenthau

No Treasury secretary since Henry Morgenthau, who served from 1934 to ‘45 under President Franklin D. Roosevelt, has faced so many crises at once. After receiving $800 billion in loans, guarantees and capital injections since October, the financial industry is still hunkered down, unwilling or unable to put the wind back into the sails of capitalism. Geithner played a role in shaping the $787 billion stimulus plan, and now he and Lawrence Summers, head of the National Economic Council, must recommend to President Obama whether to give General Motors Corp. and Chrysler LLC an additional $14 billion in loans on top of the $17.4 billion Bush administration bailout or force them into bankruptcy. At the White House, the new Treasury secretary may have to compete for the president’s attention with Summers, his former mentor, and Paul Volcker, who has been clamoring for more power as chairman of the Economic Recovery Advisory Board.

Methodical Style

Geithner’s strengths — his methodical style and bureaucratic savvy — were honed over 21 years in government, as he dealt with crises from Asia to New York.

“He really understands process and decision making and how to advance an agenda,” says Michael Froman, who was former Treasury Secretary Robert Rubin’s chief of staff. “Some people are just better at it than others, not just having the big idea but breaking it down into the several dozen steps that need to make it work. That’s Tim.”

The Treasury secretary’s experience at the New York Fed from 2003 to ‘08 gave him an inside view of Wall Street that will help him choose the best remedies for today’s crisis, says Alex Pollock, resident fellow at the American Enterprise Institute in Washington and a former president of the Chicago Federal Home Loan Bank. “He’s very well qualified,” Pollock says.

‘He’s Not Change’

Keep reading…

David Kotok, chief investment officer at Cumberland Advisors Inc., says Geithner’s insider status — he selected former Goldman Sachs Group Inc. lobbyist Mark Patterson as his chief of staff –is a liability. Geithner was at the helm of the New York Fed when Wall Street ran amok, and he had a seat at the table when Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson came up with remedial measures that haven’t worked.

“He’s not change, as Obama promised, but just the same old stuff,” says Kotok, who manages $1 billion in Vineland, New Jersey. Geithner declined to comment for this article.

As New York Fed chief during one of Wall Street’s greatest bull markets ever, Geithner shared authority over some of the country’s biggest commercial banks with the Comptroller of the Currency. While the banks loaded up on mortgage-backed securities and derivatives, Geithner failed to use his power to force the firms to build adequate capital cushions and risk controls, says Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh who monitors the Federal Reserve. Citigroup Inc. led the buying frenzy on Wall Street, holding $544 billion in securities and derivatives by 2007 before unraveling under their weight.

Lax Oversight

“The oversight of Citi was shamefully lax,” says Janet Tavakoli, founder of Chicago-based advisory firm Tavakoli Structured Finance and author of books on financial risk. “If they didn’t see the problems beforehand, we don’t have the right people. If they did see them but didn’t care to do anything, then again we have the wrong people.”

By 2008, the New York Fed president was forced to face the consequences of slack regulation. As Bear Stearns Cos. neared bankruptcy, he worked closely with Paulson and Bernanke on a bailout in March, and, after Lehman Brothers Holdings Inc. died six months later, the trio came up with TARP — the $700 billion Troubled Asset Relief Program. Geithner told Congress in February that he took responsibility for not doing enough to prevent the financial crisis.

Geithner’s Conundrum

“There were systematic failures in supervision and regulation across our system,” he said. “Every supervisor and regulator as part of the system could have done more to prevent this.” He also said the government’s rescue effort so far had been inadequate. “The force of government support was not comprehensive or quick enough to withstand the acute pressure brought on by the weakening economy,” he said in announcing his new plan on Feb. 10.

While the Treasury secretary has given his initiative a new name, the Financial Stability Plan, it’s mostly an extension of TARP. The centerpiece is a $1 trillion Fed loan fund that will be used to induce hedge funds and buyout firms to purchase toxic assets from banks so they can begin lending again.

So far, banks have been unwilling to lower the asset prices enough to make them attractive to distressed debt investors. Geithner faces a conundrum: If banks trim prices, their losses will grow; if the government offers investors guarantees for assets whose value is impossible to calculate, taxpayers may pay a big price.

“It’s an incredibly difficult thing to do and to get right,” Geithner told Congress in January. “And getting it right will be central to the basic credibility of the program.”

$2.5 Trillion In Writedowns

Confronted with the same issues last year, Paulson dropped his plans to purchase MBSs.

“I get a similar feeling from the Geithner Treasury,” says Jeffery Harte, banking analyst at Sandler O’Neill & Partners LP in Chicago. “As they go through the logistics, they realize it doesn’t all work.”

Before giving more capital to banks, Geithner is sending examiners into the 18-20 biggest firms to perform newly designed “stress tests.” Nouriel Roubini, an economist at New York University, forecast in January that financial firms would write down another $2.5 trillion on top of the $1.1 trillion since 2007.

Banks that get additional funding from the $350 billion remaining in the TARP won’t be forced to lend the money, only to report on their lending activity.

No Big Steps

“Frankly, we don’t have as accurate an assessment of the situation of a number of institutions as we’d like,” Summers told Bloomberg TV in February. He didn’t rule out the possibility that some banks that fail the test might be shuttered. “U.S. policy has been the same for many years,” Summers said. “When supervisors deem it appropriate, then institutions are intervened.”

Geithner is too cautious and too protective of Wall Street to take over big banks, says Paul Miller, banking analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia.

“His philosophy is don’t wipe out the shareholders because they’ll never come back,” Miller says. “But the only way to get to the problem is to dilute shareholders away. These guys are unwilling to take these big steps.”

The government may soon boost its stake in Citigroup while trying not to take majority control of the bank. Executives and government official are discussing the possibility of converting some of the $52 billion of preferred shares the government owns to common stock to help strengthen the bank’s capital quality, according to a person familiar with the talks.

Shadow Banking

The Treasury secretary also plans to kick-start the securitization market, or the bundling of asset-backed securities for resale that inflated the credit bubble before it burst in 2008. This shadow banking system accounted for 33 percent of the credit supplied to the U.S. economy in 2007.

To resurrect the market, the Fed will expand its Term Asset-Backed Securities Loan Facility to as much as $1 trillion from $200 billion. TALF, which was scheduled to begin in February, will finance the purchase of student and auto loans and credit card and mortgage-backed debt.

“Permitting these securities to be issued got us to where we are now,” says James Galbraith, an economist at the University of Texas at Austin. “Securitization is useful, but it has to be done properly, and regulators need to be on top of it. Securitization of subprime mortgages is clearly unsafe.”

Foreclosures

Obama’s housing plan is the biggest break with the Bush administration, which refused to use TARP to curb foreclosures. The government will try to induce mortgage companies to cut interest rates on loans for about 4 million homeowners by using $75 billion to cover a portion of their losses. Under the plan, the government will buy an additional $200 billion in preferred stock in lenders Fannie Mae and Freddie Mac, giving them capital to help 5 million borrowers refinance home loans.

The Treasury also is asking Congress to allow bankruptcy judges to modify loan terms, a move that the American Bankers Association says would cripple the secondary mortgage market.

“The plan ought to help reduce the foreclosure rate,” says John Lonski, chief economist at Moody’s Capital Markets Group in New York. “But it’s doubtful that by itself it will stabilize housing. More will have to be done.”

As Geithner takes his second crack at fixing Wall Street, he has both an ally and foil in Summers. Compared with the disheveled Summers, who often appears around Washington with his shirttail untucked, Geithner is buttoned up. Solid bright ties are his one flashy touch. He’s ruthless about keeping his desk clutter free, colleagues say, a sign of the self-discipline also known to his tennis partners, including Summers.

Tennis Partners

For years, Geithner, Summers and other colleagues have gone to Nick Bollettieri’s tennis camp in Florida in March. Bollettieri has coached Grand Slam champions Andre Agassi and Boris Becker.

“Tim’s controlled, consistent, with very good ground strokes,” says Lee Sachs, a former Treasury official who goes to the camp with Geithner. This year’s trip, scheduled for March, was canceled. “For obvious reasons,” Sachs says.

Summers, on the other hand, is famous for his lack of restraint. While working at the Treasury in 1997, Summers told reporters that people who supported lower estate taxes were selfish, and the next day he publicly apologized for making the comment. Nine years later, he had to resign as president at Harvard after saying it might be worth exploring whether women lacked the aptitude for math and science.

Media Shy

Geithner, by contrast, shuns publicity. In 1997, he begged a reporter in Hong Kong not to cover his first speech as assistant Treasury secretary at an annual meeting of the International Monetary Fund and World Bank.

“He’s definitely publicity averse,” says Sheryl Sandberg, chief operating officer of Facebook Inc., who served as chief of staff to Summers at Treasury. “Tim will develop what he needs. If he needs to be more outspoken, he’ll do it.”

When Geithner served as a special assistant to Summers at the Treasury in the ‘90s, helping his boss gather research and frame issues, their different styles meshed well. Summers, who sometimes called Geithner “young Tim,” was a font of ideas; Geithner’s job was to implement them, and at times would go toe- to-toe with his boss, earning his respect, former colleagues says.

“Tim is definitely not the loud guy in the room,” says a former Treasury official who worked with both men. “He’s the guy who is more likely to steer a conversation with the occasional interjection but not try to dazzle or suck the oxygen out of things. That would be Larry. He’s kind of the anti- Larry.”

John Sherman

Now in the White House, Summers, 54, has been stacking the National Economic Council with former Treasury heavyweights, sending a signal in Washington that he’s the presidential confidant with the most sway on the economy. He hired Froman, the former Rubin deputy and Citigroup executive, and David Lipton, who preceded Geithner as undersecretary for international affairs.

While Summers was building his team in January, Geithner was defending himself before Congress for not paying his taxes. He didn’t make Social Security and Medicare contributions from 2001 to ‘04 while he was working at the IMF. In 2006, after an audit, he repaid $16,732 for 2003-04. During his vetting for the Treasury job, Obama staffers found he also owed taxes going back to 2001, and Geithner immediately repaid $31,536.

With some lawmakers skeptical of Geithner’s explanation that he’d made careless mistakes, he was confirmed 60-34, the closest recorded margin for a Treasury secretary since Rutherford B. Hayes’s nominee, John Sherman, won approval in 1877.

Rubin, Mentor

During his time at the New York Fed, which began in 2003, Geithner played a critical if largely invisible role, supervising banks in his district to ensure their solvency. The New York Fed is the most powerful of the 12 U.S. regions because of its Wall Street jurisdiction and permanent seat on the monetary-policy-setting FOMC. The regional Feds have split personalities: They are owned by the banks they regulate, and they are also partly controlled by the Federal Reserve in Washington, which appoints three of their nine board members.

Geithner’s oversight of Citigroup was made more complex because Rubin, one of his mentors, was an executive at the New York-based bank. As the Treasury secretary from 1995 to ‘99, Rubin promoted Geithner to undersecretary for international affairs, the No. 3 job at the department. Rubin and Summers, as members of the New York Fed’s selection committee, later recruited Geithner to lead the New York regulator.

‘Old Boys’ Network’

“You have the old boys’ network here,” says Chris Whalen, a New York Fed official in the 1980s and co-founder of Institutional Risk Analytics, a Torrance, California-based risk advisory firm. “So it would be unnatural for Geithner to turn around to any of these guys at Citi and say, ‘Hey, you have a problem.’”

Geithner wasn’t the committee’s first choice to replace William McDonough as president. Peter Fisher, a former Treasury and New York Fed official, and Stanley Fischer, a former deputy managing director of the IMF, withdrew from consideration for the job, a person familiar with the situation said.

The new New York Fed president stepped into a Wall Street that was making money like never before. The economy grew at a 3.6 percent rate in 2004 after Federal Reserve Chairman Alan Greenspan, dubbed the “maestro,” dropped interest rates to 1 percent after a brief recession in 2001.

Wall Street was near the middle of a five-year run in which net income for the five biggest securities firms would more than triple by 2006. The Standard & Poor’s 500 Index was on its way to its peak of 1,565 in October 2007.

Sandy Weill

The Wall Street boom was spurred partly by the anti- regulatory moves of Bill Clinton’s administration. In 1998, then Treasury Secretary Rubin and his deputy Summers fended off a proposal by Brooksley Born, who headed the Commodity Futures Trading Commission, to regulate over-the-counter derivatives. A year later, both men advocated that Congress repeal the 1933 Glass-Steagall Act, which had separated the activities of investment and commercial banks. Nine days before Congress acted, Rubin joined Citigroup as chairman of the executive committee.

Under CEO Sanford “Sandy” Weill, Citi took advantage of the deregulation, buying securities companies and building the world’s largest financial services company. Rubin declined to comment for this article.

No Clearinghouse

As early as 2004, Geithner saw that CDSs were in need of transparency. The derivatives, which guarantee payment in case a bond defaults, are used by traders to speculate on a borrower’s ability to pay off debt. Hedge funds and banks were snapping up the swaps as insurance for their bets on MBSs and corporate debt.

“The growth in the over-the-counter derivatives market has advanced much more rapidly than the speed of improvement of important parts of the infrastructure that support the market,” Geithner said in a speech at the Swift International Banking Operations Seminar in 2004 in Atlanta.

In September 2005, Geithner brought together representatives of the 14 largest financial institutions with U.S. and European regulators to devise a self-regulatory plan. One year later, the banks cleared away the backlog of unsigned derivative contracts by completing the paperwork. Geithner didn’t convince the banks to take the big step of setting up a clearinghouse.

Freeing Citi

“He started strong with the signing of the incomplete contracts, but his energy dissipated after that,” says Julian Mann, an asset-backed-bond manager at Los Angeles-based First Pacific Advisors LLC with $9 billion under management. “He could have insisted for more.”

Geithner told Congress in January that the banks made improvements that strengthened the ability of the derivatives market to withstand a shock.

“They could have had more traction, of course, and if more had been done earlier and had been more responsive to those efforts, then this crisis would have been less severe,” Geithner said.

In December 2006, the Federal Reserve, with the support of the New York Fed, lifted a reporting requirement on Citi. After the New York Fed found that the bank had helped Enron Corp. set up off-balance-sheet entities, the Federal Reserve in 2003 forced Citi to file quarterly reports documenting how it was improving risk management. The Fed ended the reporting requirement three years later, saying Citi had improved.

Bear Stearns

After a five-year sprint, Wall Street’s money machine finally ground to a halt in late 2007. The housing market’s historic plunge dragged down the value of MBSs, and Bear Stearns, which held $30 billion of these assets, was the first to disappear. Over a frenetic weekend of meetings in March 2008, Geithner, working with Bernanke and Paulson, came up with a solution: The Fed would take over $29 billion of Bear Stearns’s toxic assets — enough to convince JPMorgan Chase & Co. to buy the firm.

During that same weekend, the Fed also made loans available to the four largest remaining brokers: Merrill Lynch & Co., Goldman Sachs, Lehman Brothers and Morgan Stanley. As part of the deal, Geithner installed examiners in the firms to look at their books in detail, including mortgage-related securities activity, according to former Lehman executives. Lehman Brothers had $84 billion in troubled assets, exceeding Bear Stearns’s total.

Lehman Brothers

Geithner and Paulson pressed Lehman officials to sell part of the firm, but not the entire bank, until it was too late, in September, according to Lehman executives. By then, clients were fleeing.

“When Bear failed, Geithner and company thought they were out of the woods,” says Whalen of Institutional Risk Analytics. “So they didn’t do anything on Lehman. Forget what they knew as regulators, why couldn’t they even figure out what every trader on Wall Street understood?”

Paulson, Bernanke and Geithner each have said that the government didn’t have the authority to inject capital into Lehman, a power they say was granted a month later with the approval of the TARP in October.

“We could not force any institution to come in and buy Lehman Brothers or guarantee their obligations, and no one was willing, without the government taking a very, very substantial capital position, and we did not have the authority at that point to do that,” Geithner told Congress in January.

‘Big Mistake’

Glenn Hubbard, dean of Columbia Business School and a former chairman of the Council of Economic Advisers, says the Fed could have bought Lehman’s troubled assets as it did with Bear Stearns. “Certainly for them to say there was nothing they could do is simply false,” he says. “It was a big mistake.”

The Lehman bankruptcy dealt a knockout blow to global finance, freezing the overnight credit market when lenders realized that the government wouldn’t necessarily protect loans to financial institutions. The credit-default-swap market, the global bazaar that Geithner had tried to make more transparent in 2004, also tanked. Without a clearinghouse, institutions had to scramble for several weeks to find counterparties to replace Lehman.

The benchmark CDS Index, which shows the cost of insuring firms against default, almost doubled to 284 basis points on Nov. 20 from 152 prior to Lehman’s demise. (A basis point is 0.01 percentage point.)

AIG’s Swaps

Two days after Lehman’s downfall, CDSs claimed their biggest victim, American International Group Inc. Paulson, Bernanke and Geithner changed course and rescued AIG with an $85 billion Fed loan. They said the failure of the insurance giant, which couldn’t pay its swap obligations, would devastate financial firms globally.

Starting in mid-September, Geithner spent 43 consecutive days on the job without any break, according to people who know him. He slept many nights in a small bedroom in the New York Fed building. Never a big eater, he lived on soup, sandwiches, carrots and yogurt during his sometimes 20-hour workdays.

When Justin Rudelson, his former classmate at Dartmouth College, asked him how he was holding up, Geithner told his friend: “We live for this kind of emergency. This is when we feel most important, most needed as a central banker, regulator. It’s the crises that make our jobs worthwhile.”

In November, in nominating Geithner to lead Treasury, Obama praised his unique insights into Wall Street’s failures. Days before the nomination, Geithner, still wearing his New York Fed hat, was cleaning up another mess at Citigroup. He took part in discussions with Paulson and Bernanke that led the government to guarantee $306 billion of Citi’s troubled mortgage assets and inject an additional $20 billion into the firm following the first TARP bailout in October.

Citi Breakup

In January, Citi said it would sell majority control of its retail brokerage unit to Morgan Stanley and break itself in two, dumping the money-losing assets and non-core units into a separate entity. Rubin, 70, also announced his resignation that month, after getting paid more than $150 million during his 10 years at the bank.

Geithner offered a mea culpa for dropping the ball on Citi. “Citigroup’s supervisors, including the Federal Reserve, failed to identify a number of their risk management shortcomings and to induce appropriate changes in behavior,” he told Congress in January.

Timothy Franz Geithner has public service in his bloodlines. His maternal grandfather, Charles Moore, served as a speechwriter for Republican President Dwight Eisenhower in the late 1950s. Jonathan Moore, an uncle who worked as a state department diplomat, advised Republican presidential hopefuls Nelson Rockefeller and George Romney, in the late 1960s.

Following Dad

Geithner’s father, Peter, worked in Africa for the U.S. Agency for International Development and for the Ford Foundation as an Asia specialist, raising his family overseas. Before he turned six in the mid-1960s through high school, Geithner learned to negotiate his way through different cultures in present-day Zimbabwe, India and Thailand.

He visited refugee camps in Cambodia, taking black-and- white photographs of people displaced by Pol Pot’s campaign of genocide. Geithner graduated from the International School Bangkok, where he studied with children of expatriates from around the world.

With his enrollment in Dartmouth in 1979, Geithner followed the same path as his father, grandfather and uncle — all of whom graduated from the Ivy League school in Hanover, New Hampshire. He majored in government and Asian studies, his dad’s field, and was known for his sobriety, spending nights with friends dissecting the unilateral foreign policies of President Ronald Reagan rather than drinking at fraternity parties, classmates say.

Fluent In Chinese

On campus, Geithner displayed his internationalist bent, wearing a traditional Thai sarong around the waist at freshman orientation. He studied Chinese for four years and became fluent, says his former Chinese professor, Susan Blader.

“He was always the guy in class who did unbelievably well,” says Robert Boorstin, who studied the language with Geithner in an overseas program in China and later worked with him at Treasury.

Last year, Geithner sent an e-mail to Blader, saying he was proud to be able to speak the language with China’s prime minister.

Geithner’s knack for diplomacy surfaced in the midst of student demonstrations over affirmative action. The Dartmouth Review, a student biweekly, was edited by Dinesh D’Souza, a social conservative who later rose to prominence with books attacking multiculturalism and feminism.

‘Natural Mediator’

The Review lambasted what it called Dartmouth’s liberal bias and its minority admission policies, riling many students. During gatherings in which some students said D’Souza should be attacked, Geithner calmed them down, proposing that they start an alternative publication, says Rudelson, the former roommate. Geithner kept his distance from the new publication, called the Harbinger, occasionally taking photos for it.

“He was always the natural mediator,” Rudelson says. “He had this amazing ability to listen to people, no matter how extreme their views might be.”

After Dartmouth, Geithner followed his dad’s lead once again, entering a master’s program at the Johns Hopkins School of Advanced International Studies in Washington. He studied international economics, East Asia and the Japanese language. Within a month of graduating in 1985, he married his Dartmouth sweetheart, Carole Marie Sonnenfeld, who worked at the nonprofit group Common Cause. His father was the best man. Today, his wife is a clinical social worker.

Kissinger Associates

Kissinger Associates, the consulting firm that’s employed former White House luminaries such as Brent Scowcroft, gave Geithner his first job out of grad school. He worked as a researcher and writer for three years before taking a mid-level, $40,000 job in the Treasury’s trade and investment policy division in 1988.

Two years later, Geithner won a promotion to the U.S. embassy in Tokyo to serve as its deputy financial attache. He worked on a bilateral treaty with Japan, and his ability to converse in Japanese made him more popular than most U.S. officials in Tokyo, says Eisuke Sakakibara, then a Finance Ministry official who now teaches at Waseda University in Tokyo.

“You could say he has a bit of an Asian negotiation style,” Sakakibara says. “He expresses his opinions, but he also tries to reach a consensus.”

Promoting Geithner

Geithner returned to the U.S. in 1991 for a job given to the department’s up-and-comers: special assistant. He served David Mulford, the Treasury’s undersecretary for international affairs, now the ambassador to India.

“Tim had the right temperament,” says Mark Dow, a former Treasury colleague. “He never let you see him sweat.”

The election of Democrat Bill Clinton in 1992 would help propel the young Republican to the top job at the Treasury. Clinton chose Summers, then the World Bank’s chief economist, to replace Mulford, and the new official inherited Geithner as his assistant.

“The two of them got along not so much because Tim would stand up to him, but Tim would say unexpected and interesting things that were good on the merits rather than just pandering to Larry,” says Anna Gelpern, Geithner’s former special assistant at Treasury. “But Larry stimulated Tim to think in bigger ways.”

After Rubin took over at Treasury in 1995, Congress approved Summers to be his deputy secretary. Summers had elevated Geithner to deputy assistant secretary a year earlier. During a get-acquainted meeting, Rubin asked his new staff to describe their backgrounds.

Meeting Rubin

After some economists listed their impressive achievements, the youthful-looking Geithner noted he had been in junior positions at Treasury for a few years.

“Before that I was in high school,” Geithner added, cracking up the room, according to Dan Israel, a former Treasury spokesman.

Summers recommended Geithner for his first political appointee post, assistant secretary for international affairs, in 1997. He switched his party to Independent from Republican after his appointment, former co-workers say, a job that required a presidential nomination and Senate confirmation.

“He has no overt political philosophy,” says Boorstin, the former Treasury official.

Man of Action

He took the oath of office from Rubin in a hotel room in Hong Kong just as Asian currencies were melting down. In Thailand, Indonesia, Malaysia and the Philippines, investors were fleeing as a mounting pile of bad loans engulfed their economies, leading their currencies to collapse.

For months, Geithner and other Treasury officials shuttled across Asia, helping to contain the panic. During one long absence from home, Geithner told acquaintances that his two children, Elise and Benjamin, had looked up his picture on the Treasury Department Web site to remind them of what he looked like.

In Tokyo, Geithner worked with the IMF to negotiate a $16 billion loan package for Thailand. The IMF and U.S. had demanded that it close insolvent banks and cut spending in exchange for the funds.

“Tim’s value was the ability to get things done, to translate broad ideas into actual action,” Froman says.

As Treasury secretary, Geithner now has the chance to lead the biggest overhaul of the financial architecture since Roosevelt created the Federal Deposit Insurance Corporation in 1933 and the Securities and Exchange Commission the following year.

Volcker’s Ideas

“We need a fundamental redesign,” Geithner told lawmakers in January. “We will seek to improve the regulatory structure in a way that provides the safeguards we need without creating undue burden on financial market participants.”

Administration officials, lawmakers and lobbyists have already begun fighting over how best to control Wall Street. Volcker, whose group is charged with providing Obama with an outside perspective on regulation, is pushing the most-far- reaching proposals.

The former Fed chief, 81, says commercial banks shouldn’t be permitted to trade in capital markets. The proposal, which amounts to a partial resurrection of Glass-Steagall, would stop a major revenue stream for banks. At the end of 2007, about 40 percent of Citigroup’s and JPMorgan’s balance sheets consisted of trading assets.

“Paul is a man who has his own ideas and is a strong proponent of them,” Carnegie Mellon’s Meltzer says. “He and Geithner are likely to clash.”

Lynch Mob

While Geithner and Volcker agree the current system of multiple and overlapping banking regulators should be streamlined to increase accountability, they disagree over who should have the power. Geithner, as the New York Fed president, favored giving the authority to the central bank. Volcker told Congress in February that such a move might distract the Fed from making monetary policy. Volcker declined a request for an interview.

The Treasury secretary wants to strengthen banks’ capital requirements — the amount of cash they keep to offset risks.

“Perhaps most important from the perspective of financial stability was the failure of risk management,” Geithner testified in January. “Ensuring that U.S. banks maintain adequate capital reserves is a critical component of a well- functioning banking system.”

The financial services forum, which comprises the chief executive officers of 17 big commercial banks, securities and mutual fund firms and insurers, is already lobbying to fend off mandated risk management procedures and other regulations.

Better Solutions

“Our members fear a lynch mob mentality on Capitol Hill,” says John Dearie, the Forum’s policy director and a former New York Fed official. “There are a lot of committees on the Hill we’re spending a lot of time educating.”

Geithner’s long push for a derivatives clearinghouse is finally making progress. In October, with prodding from the Fed, dealers and Intercontinental Exchange Inc. agreed to create one. But the difficulty in pricing some of the infrequently traded contracts has delayed final approval by the government.

The future shape of Wall Street rests to a large degree with Geithner, whose early stumbles, along with those of his superiors in Washington, left investors uneasy.

“There have been many mistakes made,” says Joseph Stiglitz, winner of the 2001 Nobel Memorial Prize in Economic Sciences. “The big question is to what extent will the mistakes help Geithner figure out the right things to do in his new job. He has some important skills, such as listening to different viewpoints. Let’s hope he can use those to come up with better solutions.” As the recession in the U.S., Japan and Europe deepens, the world is rooting for the protege to prove that he can lead.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net ; Michael McKee in New York at mmckee@bloomberg.net

One Response

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  1. Jack Black said, on November 7, 2009 at 7:41 pm

    He’s not change, as Obama promised, but just the same old stuff..


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