Geithner: Obama's Likely Treasury Choice

The president of the New York Federal Reserve Bank would be the Obama Administration's man in charge of tackling the financial crisis

President-elect Barack Obama appears set to nominate New York Federal Reserve Bank chief Timothy Geithner as his Treasury Secretary, proposing to put in the critical post a professional bureaucrat who hasn't worked for Wall Street but has a record of working closely with it, earning the respect of the industry, as well as that of many lawmakers and regulators.

The announcement could come as soon as Monday, Nov. 24, along with other members of an Obama economic team.

As word of the decision spread, the stock market began a steady climb, closing up more than 6%. It had been slightly down for the day when NBC reported around 3 p.m. Eastern time that Geithner would get the nod.

"As much as you want some fresh ideas in there, I think at this point in time, having some continuity in there is a good thing," said Frederick Cannon, chief equity strategist at the research firm Keefe Bruyette & Woods. "The main thing the markets need is confidence."

Vulnerable to Criticism

Geithner has been deeply involved in virtually every step of the federal government's response to the financial crisis, from the subsidized sale of Bear Stearns last spring to the rescue of American International Group (AIG) this fall.

That experience could stand him in good stead as the Obama Administration takes office amid what is likely to be a bad recession, and possibly a continuing financial crisis. At the same time, it also opens him to criticism by those who say the government's response has been tepid, chaotic, and poorly conceived.

Widely described as low-key and even-tempered, yet a man of action who isn't afraid to make bold moves or take responsibility for them, Geithner is also young—at 47, his birthday is two weeks before Obama's—and lacks both the years of experience on Wall Street or in corporate boardrooms, and the advanced training in economics that has prepared many of his predecessors.

Kudos from Kissinger

Former Secretary of State Henry Kissinger, for whom Geithner did research early in his career, was previously quoted in The New York Sun as calling the New York Fed president "extremely intelligent," and someone who "prevails with the power of his argument" rather than by charisma alone. Some believe his polish and credibility could help him avoid what have been perceived in many quarters as missteps—errors of presentation if not of policy—by Treasury Secretary Henry Paulson. Among those who have lauded him: Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Brad Setser, a former Treasury official who worked briefly for Geithner both there and at the International Monetary Fund, said he has "a great deal of confidence that Tim can communicate effectively with a broad public." Setser, who is a fellow at (and blogs for) the Council on Foreign Relations, said Geithner is particularly skilled at thinking ahead, "anticipating where the world will be in three or six months' time" and how policy can help.

Market participants were strong in their praise for Geithner as the news of his likely nomination pushed stocks up on the afternoon of Friday, Nov. 21. "I expect he will treat the current situation with the urgency that it deserves," says Ward McCarthy, principal at Stone & McCarthy Research Associates, an economic and fixed-income research firm. "I also expect him to be far more creative than Treasury Secretary Paulson."

Part of the System

Peter Cardillo, chief market economist at Avalon Partners, credits the rally at least in part to the fact that Geithner is steeped in the financial rescue to date and is likely to continue those efforts, but there is also hope he will improve on some of Paulson's missteps. "If you look at the rally it's pretty solid, and even some of the bank stocks are coming off their lows," says Cardillo. "He has a lot of experience and certainly he knows the canyons of the financial markets."

Still, Geithner's key role in the government's response to the financial crisis in recent months has garnered him his share of criticism. Take, for example, this passage from the recent issue of Institutional Risk Analyst, an influential newsletter written by managing director Christopher Whalen of Institutional Risk Analytics: "We have only two things to say about Tim Geithner, who we do not know: AIG and Lehman Brothers. Throw in the Bear, Stearns…fiasco for good measure. All of these 'rescues' are a disaster for the taxpayer, for the financial markets, and also for the Federal Reserve System as an organization. Geithner, in our view, deserves retirement, not promotion."

But Bill Larkin, fixed-income portfolio manager at Cabot Money Management, said it will be tough to criticize the choice too much. The Treasury pick "had to be someone who is currently in the system," because a fresh newcomer wouldn't understand the players and couldn't hit the ground running, he says.

Stepping Out from Summers' Shadow

Especially with Paulson's jarring decision last week that the Treasury wouldn't buy troubled assets, knowing that Geithner is likely to take over the job will be reassuring to the markets, Larkin says. "We're going to get more information about the transition," he says. "That will build confidence."

Geithner was in some ways a prot&eacutegé of one of his chief rivals for the Treasury Secretary's job in Obama's Cabinet: Lawrence Summers, the former Clinton Treasury Secretary and Harvard University's former president. But having stepped out from under Summers' wings and "proved able to manage on his own," says Setser, "he's no one's prot&eacutegé anymore."

With a bachelor's degree in government and Asian studies from Dartmouth College and a master's in international economics from Johns Hopkins, Geithner may not be an academic economist or an ex-Wall Street banker or corporate executive, a break with the recent past. At the same time, he is no stranger to handling economic crises that are international in scope.

Former Under Secretary of the Treasury

After doing research for Kissinger, he joined the Treasury in 1988, in its international division. Later, he became a top aide to then-Treasury Secretary Summers, where he was a behind-the-scenes player in the government's response to the Asian economic crisis in 1997 and 1998. The following year he was named under secretary of the Treasury, a position usually reserved for political appointees.

In 2001, he became director of the IMF's Policy Development & Review Dept. He took his current job with the New York Fed in the fall of 2003.

Last spring, he was instrumental in the Federal Reserve's efforts to find a buyer for Bear Stearns as it neared collapse, and in arranging financing for JPMorgan Chase (JPM), the acquirer. He also played a role in the Fed's decision to open its discount window to investment banks to maintain liquidity in the financial system.

Cleaning Up Credit Default Swaps

Critics warned that the move could encourage greater risk-taking by financial firms newly confident of a government bailout should they falter. Joseph Mason, an associate finance professor at Drexel University, told American Banker in May that the deal "opened a Pandora's box" and Geithner's role suggested that he is prone to "ideas that are just not always completely articulated or thought out." Geithner, however, has been unapologetic about his actions last spring. He has said the distress sale was the "only feasible option."

Although not as active as a public speaker as Treasury Secretaries typically must be, Geithner has spoken out strongly in favor of stronger regulation in the financial sector. He has helped lead efforts to establish a central clearinghouse for credit default swaps, securities that offer a kind of insurance against corporate failure and that have been blamed for exacerbating instability in the market.

In June 2007 he called for a tighter focus on the "level and concentration of risk-taking." At the time, he particularly singled out firms writing mortgages with insufficient capital.

He has argued that regulatory policy should explicitly be designed "to improve the capacity of the financial system to withstand the effects of failure and to reduce the overall vulnerability of the system." At the IMF in April, he urged officials to "find a better balance between market discipline and regulation…efficiency and innovation and resiliency and stability."

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE