Nov. 21 (Bloomberg) -- President-elect Barack Obama picked Timothy Geithner, head of the Federal Reserve Bank of New York, to be his Treasury secretary, with Lawrence Summers getting a senior White House role, a Democratic aide said.

Obama is also likely to nominate New Mexico Governor Bill Richardson as commerce secretary and to announce his picks on Nov. 24, the person said on condition of anonymity.

Geithner has helped lead U.S. efforts to combat the deepest financial crisis in seven decades, helping oversee the decisions this year to take over American International Group Inc., rescue Bear Stearns Cos. and leave Lehman Brothers Holdings Inc. to fail. Summers was Bill Clinton‘s last Treasury secretary and is now a professor at Harvard University.

Both Geithner and Summers are veterans of managing financial turmoil, having worked together on the Asian financial crisis of 1997-98 and helping prevent a Mexican default earlier that decade. They will be charged with shepherding Obama’s plans for a fiscal stimulus to cushion an economy that analysts say is in its deepest recession in a quarter century.

Stocks rallied after news of Obama’s Treasury choice, with the Standard & Poor’s 500 Stock index rising 6.3 percent to 800.03 at the close in New York. The index is still heading for its biggest annual decline since 1931.

‘Resounding Yes’

“It’s a resounding ‘yes’ from Wall Street,” said Peter Kenny, managing director for institutional sales at Knight Equity Markets in Jersey City, New Jersey. “There’s confidence in a person who is up and coming and recognized as an authority on a very complex problem. There’s confidence in what he’s displayed so far, in terms of his leadership and management skill.”

Geithner, 47, served as an undersecretary for international affairs under Summers, 53, and has been at the helm of the New York Fed since November 2003.

Kevin Warsh, a Fed Board governor, is a leading contender to succeed Geithner at the New York Fed, a U.S. official said on condition of anonymity.

Obama’s nominations would need to be confirmed by the Senate after he takes office on Jan. 20. President George W. Bush‘s Treasury secretary, Henry Paulson, has pledged to work with his successor during the transition. Summers, along with former Fed Chairman Paul Volcker, were cited as candidates for the Treasury job by people close to the Obama camp earlier this month.

As head of the New York Fed, Geithner has served as the central bank’s top liaison with Wall Street. Geithner oversaw meetings at his bank to attempt to head off Lehman’s failure in September, later hosting gatherings on how to resolve AIG.

Washington Veteran

Geithner is no stranger to Washington or the Treasury. Before taking over the New York Fed in 2003, he spent most of the previous 18 years working in the nation’s capital, first at Kissinger Associates, then at the Treasury and finally at the International Monetary Fund.

During that time, Geithner earned what his one-time mentor Summers called a “doctorate in financial policy.” He also developed a skill-set his supporters say makes him well suited for his new job: calmness under pressure, an ability to see many sides of a problem and a sense of the politically possible.

“During the Mexico crisis, some of us would occasionally be emotional about something,” said Jeffrey Shafer, who served with Geithner at the Treasury from 1993 to 1997 and who is now vice chairman of global banking for Citigroup Inc. in New York. “Tim was the calm guy in the room who made sure we looked at all sides of the issue.”

Asian Interests

Geithner, who has studied Japanese and Chinese and has a Master of Arts in international economics from Johns Hopkins University, also played a key role in the Treasury’s dealings with the Finance Ministry in Tokyo. He was less inclined to intervene in currency markets than some other officials at the time, according to Shafer.

Dino Kos, a former New York Fed official, described Geithner as a “pragmatist, not an ideologue” who has a good sense of the political dynamics in Washington and the need to keep lawmakers in the loop about what’s going on. That has been especially important in the current crisis as the Fed has taken extraordinary actions to limit the financial fallout, including its rescue of insurer AIG in September.

“If you’re going to push the envelope -- as the Fed has been doing -- you need to keep legislators informed about what you’re doing and why you’re doing it,” said Kos, who’s now a managing director at Portales Partners in New York.

Summers, an adviser to Obama during the campaign, earlier this week urged a fiscal stimulus package big enough to spur the economy for the next two to three years.

Economic Slump

The U.S. economy shrank at an annual rate of 0.3 percent in the third quarter, and economists surveyed by Bloomberg News anticipate the longest contraction since 1974-75.

The next Treasury secretary will have unprecedented powers, in charge of overseeing a $700 billion rescue program that was enacted last month and designed to prevent a financial collapse. Paulson has allocated $250 billion to buying stakes in banks and used another $40 billion for AIG.

Geithner would also inherit a record budget deficit. The bond dealers that advise the Treasury this month forecast a $988 billion shortfall for the financial year ending in September 2009. Paulson this week said the government will issue $1.5 trillion of debt.

Summers said Nov. 17 at a forum in Washington with Paulson and former Treasury Secretary Robert Rubin that ballooning debt isn’t a major issue for now because there’s “excess demand” for Treasuries rather than excess supply, as investors flock to government debt as a haven.

‘Two Fronts’

“The next secretary is going to have to be a crisis manager and plan for the future,” Rubin, who preceded Summers at the Treasury, said in an interview before today’s news. “He’ll have to operate on two fronts at the same time.”

As president of the New York Fed, Geithner has enjoyed a special status at the central bank. He is vice chairman of the Federal Open Market Committee, which convenes regularly to decide on interest rates. He votes at every FOMC meeting, unlike the presidents of the Fed’s other 11 member banks.

The institution he’s led makes almost daily transactions with Wall Street securities dealers to keep interest rates in line with the Fed’s target and is the conduit for the Treasury’s rare forays in foreign-exchange markets.

When Geithner was first tapped to take over the New York Fed five years ago, it was a bit of a surprise. The boyish-looking technocrat lacked the stature of some of his predecessors -- including E. Gerald Corrigan, now with Goldman Sachs Group Inc., and Volcker, who ran the New York Fed before becoming chairman of the Federal Reserve Board in 1979.

‘Gravitas’ Question

“He was very young and he speaks very softly,” said Blackstone Group LP co-founder Peter G. Peterson, who headed the search team that chose Geithner. “The question was, ‘Does he have the gravitas, the strength and the personality to make the tough decisions?’” The answer, he added, turned out to be yes.

Geithner spotted potential problems in the more-than $47 trillion credit-derivatives market early on in his tenure at the New York Fed and began pressing banks in 2005 to reduce trading backlogs that could prove dangerous should a crisis hit.

He also warned that year that Fannie Mae and Freddie Mac needed more capital to offset the risks that they were taking in the mortgage market. They’ve since been taken over by the government after being ruled insolvent by their regulator. Paulson said yesterday it will be up to the Obama administration to decide the future of the two companies, which account for more than half of U.S. home-loan financing.

Fed Criticism

Some experts, including monetary economist Anna Schwartz, have condemned the Fed for putting $29 billion of its balance sheet on the line to back the takeover of Bear Stearns by JPMorgan Chase & Co. in March. Geithner in particular has been singled out, amid accusations that his time at the Treasury made him more prone to government interference in the economy.

Others, including University of California at Berkeley professor Barry Eichengreen, have faulted the Fed and Treasury for failing to prevent the bankruptcy of Lehman, which triggered renewed turmoil in the markets in September.

In his new position as Obama’s Treasury secretary, it will be up to Geithner to spell out the administration’s financial and economic policies to the public. It’s not a role he is used to playing.

“Moving into that office would involve an adjustment to being more in the public eye, to being the guy on the firing line,” Kos said, though he noted Geithner has gotten a flavor of that over the past year as New York Fed chief.

It will also fall to Geithner to take the lead in revamping financial-services regulation in the wake of the market meltdown of the past year.

“The crisis exposed very significant problems in the financial systems of the U.S. and some other major economies,” Geithner said in a June 9 speech in New York. “We can do better, and I am reasonably confident we will.”

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

Last Updated: November 21, 2008 17:16 EST