Geithner Decision to Stay Gives ‘Continuity’ Amid Market Turmoil

Timothy F. Geithner’s decision to stay on as Treasury secretary allows the Obama administration to maintain continuity in economic policy amid investor concern that the two-year-old expansion may be stalling.

Geithner, the last remaining member of President Barack Obama’s original economic team, will continue at least through the 2012 election, according to an administration official who wasn’t authorized to comment publicly.

Geithner, 49, made his announcement after months of speculation over his future. He told White House officials this year that he was considering leaving once a deal to raise the nation’s borrowing limit was reached. Obama signed an increase in the limit on Aug. 2.

“We can’t afford the loss in continuity at this stage,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “We’re on the brink of another financial crisis.”

Standard & Poor’s cut the U.S. AAA credit rating on Aug. 5 for the first time, trimming it one level to AA+ and criticizing lawmakers for failing to reduce spending or raise revenue enough to lower record budget deficits. The S&P 500 Index of stocks slumped 7.2 percent before the announcement to 1,199.38 last week, the biggest weekly drop since November 2008. Meanwhile European financial markets were roiled by their governments’ inability to manage the region’s debt crisis.

The Group of Seven nations, including the U.S., said yesterday in a joint statement that they would take every action necessary to stabilize financial markets. Members agreed to inject liquidity and act against disorderly currency moves should those steps become necessary.

Welcome Decision

“The President asked Secretary Geithner to stay on at Treasury and welcomes his decision,” Jay Carney, the White House press secretary, said in a statement yesterday. Geithner told Obama on Friday, according to another administration official who isn’t authorized to speak publicly.

In an interview with NBC and CNBC television yesterday, Geithner said he decided to remain in his job because “I believe in this president,” and “if a president asks you to serve, you have to do it.”

Geithner also said that U.S. government securities are the “strongest” place to invest and the S&P downgrade “changed nothing.”

“Everyone can be confident, both here and around the world, that Treasuries are the most liquid, the strongest place to put your money at a time like this,” Geithner said, adding that he thinks China will continue to be “strong investors in the U.S. going forward.” China has accumulated $1.16 trillion of Treasuries and is the largest individual foreign holder.

Bank Bailouts

As Treasury secretary since January 2009 and president of the Federal Reserve Bank of New York for more than five years before that, Geithner helped lead efforts to stabilize the financial system and pull the U.S. economy out of the worst recession since the Great Depression. He was a central figure in the U.S. government’s bailouts of Wall Street banks including Citigroup Inc. and Bank of America Corp., and in the negotiations with Congress to raise the debt limit.

“He handled the debt-ceiling crisis with great skill, and we certainly don’t need the disruption of a change of leadership at Treasury adding to current uncertainties,” said Alice Rivlin, former President Bill Clinton’s budget director who served on a fiscal commission Obama set up last year.

Obama’s administration probably wanted to avoid a fight in the Senate, which would have to approve a new Treasury secretary, said Brian Gardner, senior vice president of Washington research at New York-based Keefe, Bruyette & Woods.

“It would have been very tough to confirm a successor,” Gardner said.

Treasury’s Challenges

The Treasury secretary’s challenges for the rest of Obama’s term include increasing employment, overhauling the housing-finance system, working with Congress to further cut the budget deficit and helping European leaders contain their debt crisis.

Geithner may find himself in another round of debt-limit debates. The agreement reached in Congress requires that a group of 12 lawmakers submit savings in November involving all parts of government. Geithner also will be tackling the future of Fannie Mae and Freddie Mac, the housing-finance companies that have received about $130 billion in taxpayer support since they were seized by the government in 2008.

Geithner had previously signaled to White House officials that he was considering leaving once the months-long debate over raising the $14.3 trillion federal debt limit was settled. The Senate gave final approval to the legislation on Aug. 2, the date the Treasury gave as the deadline when the U.S. would exhaust its borrowing authority.

Start Commuting

Geithner said in June he would start commuting to Washington from New York because his son was returning there to finish high school.

Choosing to remain in office “is the right decision for him and the markets,” Chris Rupkey, chief financial economist in New York at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an e-mail yesterday. “He has not finished the job yet, as the economic recovery remains fragile and the trillion-dollar deficits have not been tamed. There is no obvious immediate replacement waiting in the wings.”

During his term, the U.S. has suffered what Geithner referred to last month as “unacceptably high, terribly high” unemployment. The jobless rate has stalled around 9 percent since April 2009, according to Labor Department data.

“In the middle of this crisis, Geithner probably doesn’t want to roil markets any more than they have already been, so it’s best to just say you’re staying for now, even if you are ultimately planning on leaving,” Dan Greenhaus, chief global strategist at BTIG LLC in New York, said in an e-mail.

‘Replace Him’

Some Republican lawmakers would have liked for Geithner to go. After the S&P credit-rating downgrade, U.S. Senator Jim DeMint, a South Carolina Republican, wrote on his Twitter account that Obama should fire Geithner and “replace him with someone who will focus on balancing our budget and letting private sector create jobs.”

Republican presidential candidate Michele Bachmann of Minnesota also called on Obama to dismiss Geithner during an interview with Fox News after the downgrade was announced.

Banking lawyer H. Rodgin Cohen, senior chairman at Sullivan & Cromwell LLP, disagreed. Describing himself as an “unabashed fan” in a telephone interview yesterday, New York-based Cohen said Geithner’s decision is positive. It “removes numerous uncertainties overhanging the market,” he said.

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