Geithner Joins Warburg in Shift to Buyouts From Bailouts

As Treasury secretary, Timothy Geithner oversaw the bailouts of the country’s biggest banks, brought down by hundreds of billions of mortgage securities the lenders had bought to boost profit.

As he starts his own career on Wall Street next year, Geithner chose a buyout firm, New York-based Warburg Pincus LLC. He joins former government officials such as David Petraeus and John Snow in entering a career in private equity, where top-ranked executives typically receive higher pay than in government and companies seek to draw on their relationships and experience to find new business.

Geithner’s post-Treasury options may have been limited by his role as the most senior economic official from the Obama administration team that grappled with the worst financial crisis since the Great Depression. With his legacy at the Treasury and New York Federal Reserve tied to the bailouts of companies including Citigroup Inc., General Motors Co. and American International Group Inc., he would have faced potential for at least the appearance of conflict of interest in certain industries. Geithner views the business of private equity, where managers invest client money rather than the company’s own assets, as different from the world of banking, said a person familiar with his thinking.

“As private equity evolves and as our investing practices and funding models continue to develop, Tim’s record of leadership through economic and market complexity will be of critical importance,” said Joe Landy, co-chief executive officer of Warburg Pincus.

Crisis Years

Geithner, 52, will become president at the buyout firm starting March 1 and help manage the company, invest its funds and communicate with investors, according to a statement from Warburg Pincus. He will work with Landy and co-CEO Chip Kaye, who have led the firm since 2000.

Geithner started working in government in 1988, when he joined the Treasury Department after working as a consultant. He later joined the International Monetary Fund and then the Fed of New York, where he was president during the onset of the U.S. financial crisis. In 2009, he became Treasury secretary under President Barack Obama, a position he held until January.

His four years in office were marked by crises. In September 2008, when Geithner led the New York branch of the Fed and four months before he moved to the Treasury, the government rescued insurer AIG and allowed Lehman Brothers Holdings Inc. to fall into bankruptcy.

Pushing Regulation

Geithner then supervised the Treasury’s Troubled Asset Relief Program bailouts of companies including Citigroup and GM. Less than two-thirds of the $700 billion authorized by Congress for so-called TARP was used. As of Nov. 14, $421.6 billion was disbursed and $406.5 billion was repaid, according to Treasury data.

By the end of 2009, Europe fell into a debt crisis and Geithner became the chief U.S. liaison with European officials.

Geithner was the main proponent of the May 2009 stress tests for 19 of the biggest U.S. banks, including Bank of America Corp. and Wells Fargo & Co., that boosted investor confidence in the financial firms. In the following months he became the administration’s point man to Congress on what became the Dodd-Frank financial overhaul law. The bill created a consumer-protection bureau, toughened rules on derivatives trading, set up a liquidation process for failing banks and put under Fed supervision bank-holding companies with more than $50 billion in assets -- a group that includes Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Carried Interest

Though Geithner never planned to work for a bank, he had thought about joining an investment firm and the offers he considered were in that area, said the person familiar with his thinking, who requested anonymity to discuss private conversations.

While buyout firms such as Warburg Pincus suffered when the financial crisis froze credit markets and the value of holdings plunged, they didn’t require bailouts like banks that had used their balance sheets to load up on mortgage securities. The industry has largely avoided tighter regulation, even as taxation of the firms’ share of investment profits, known as carried interest, came under scrutiny when Mitt Romney, the former CEO of Bain Capital LLC, sought the presidency last year.

‘Restore Fairness’

Private-equity firms pool money from investors to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms use debt to finance the deals and amplify returns. They typically charge an annual management fee of 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest. Carried interest is treated as capital gains in the U.S. and taxed at a lower rate than ordinary income.

A total of 187 private-equity funds reached a final close in the third quarter, gathering $89 billion between them, according to an October report from London-based research firm Preqin Ltd. The number of funds reaching a final close in the three months declined to the lowest since the first quarter of 2010.

Throughout his tenure as Treasury secretary, Geithner called on Congress to “restore fairness to the tax code” by passing Obama’s proposed budgets, under which carry would be treated as ordinary income. Among the tax reform principles of the administration’s budget proposals was “eliminating the carried interest loophole that allows some to pay capital gains tax rates on what is essentially compensation for services,” Geithner told the Senate’s budget committee on Feb. 16, 2012, according to a transcript.

TARP Beneficiaries

Warburg Pincus, founded in 1966, oversees about $35 billion in assets and owns stakes in more than 125 companies. This year, it agreed to sell luxury retailer Neiman Marcus Inc. to an investor group for $6 billion, and it sold eye-care company Bausch & Lomb Holdings Inc. to Valeant Pharmaceuticals International Inc. in an $8.7 billion deal.

In 2010, Warburg Pincus invested in National Penn Bancshares Inc., a Boyertown, Pennsylvania-based bank holding company, which received $150 million from TARP, all of which has been returned. Sterling Financial Corp., a Spokane, Washington-based bank holding company in which Warburg Pincus invested in the same year, last year returned the $303 million it received from the government. The company is in the process of being sold to Umpqua Holdings Corp., Oregon’s biggest bank, for about $2 billion in cash and stock.

Hiring Officials

Warburg Pincus also owns stakes in Aeolus, a Bermuda-based reinsurer; Santander Consumer USA, which lends to U.S. car buyers; JHP Pharmaceuticals, which sells injectable drugs to hospitals; RegionalCare Hospital Partners, a rural-hospital operator; and several oil exploration and production companies, according to its website.

Investment firms have recruited former high-ranking government officials for roles similar to Geithner’s. Cerberus Capital Management LP, the private-equity firm run by Steve Feinberg, has employed former U.S. Vice President Dan Quayle since 1999 and former Treasury Secretary Snow since 2006, according to its website. Washington-based Carlyle Group LP counts President George H.W. Bush and former U.K. Prime Minister John Major among its former advisers.

Robert Rubin, co-chairman of Goldman Sachs before becoming Treasury secretary under President Bill Clinton, was a Citigroup board member and adviser for a decade after leaving government in 1999. He is now a counselor at investment bank Centerview Partners LLC in New York and co-chairman of the Council on Foreign Relations.

‘Spiritual Leadership’

Private-equity firm KKR & Co. in May hired ex-CIA Director Petraeus to run a division for public policy and economic research, and Blackstone Group LP the following month hired Wesley Clark, the former NATO supreme allied commander in Europe, to advise on its energy investments.

“Hopefully he can provide leadership for the firm, spiritual leadership if you will,” Howard Marks, chairman and co-founder of distressed-debt investor Oaktree Capital Group LLC, said in a Bloomberg Television interview today. “What Geithner did for our country -- to have committed this much of his life to government service -- is a wonderful thing. You can’t penalize him further by saying, ‘And now you can’t go out and get a profitable job.’”

Geithner is working on a book to be published next year by Random House Inc.’s Crown Publishing Group about the U.S. response to the global financial crisis.