Rutherford Moves From Cornfield Crisis Maven to U.S. Debt FunderIan Katz
Matthew Rutherford played a key role as the Treasury navigated the global financial crisis, the first downgrade of U.S. government securities and a record budget deficit. What lies ahead for him will be much subtler.
The 35-year-old assistant secretary for financial markets oversees $12.6 trillion in U.S. bonds, notes and bills, and advises Secretary Jacob J. Lew on the gyrations in markets from Ukraine to Brazil. Since 2008, the Federal Reserve has boosted demand, adding $1.8 trillion in Treasuries to its portfolio to keep long-term borrowing costs low.
As the Fed scales back bond purchases, and with market interest rates forecast to creep up, Rutherford’s role is shifting from crisis responder to government liaison charged with balancing the nation’s financing needs while keeping the taxpayers’ costs as low as possible.
The Fed’s bond-buying program “certainly made funding the government easier because you had a very ready buyer soaking up lots of Treasury supply,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. With China and Japan purchasing a growing portion of U.S. bonds abroad, “managing the relationship with our foreign partners” will be the most crucial part of financing the debt, he said.
Rutherford, who grew up in suburban Chicago, has been a confidant to three Treasury chiefs. Timothy F. Geithner relied on him for advice during debt-limit standoffs with Congress, so much that Rutherford once spent six hours in a Nebraska cornfield -- the only place where his mobile phone got a signal -- making calls to help his boss while on a family vacation.
“It’s my wife’s family’s favorite thing to make fun of me about,” he said.
Henry Paulson dreaded his briefings bearing bad news during the 2008 market meltdown, when Rutherford was on loan from the Federal Reserve Bank of New York.
“He was funding the government at the most dramatic expansion in deficits and overall debt burden that we had seen since World War II, at a time when the world was in crisis and many people had found their faith shaken in America’s basic stability,” Geithner said in an interview.
In 2011, as the Treasury’s deputy assistant secretary for federal finance, Rutherford took phone calls from Standard & Poor’s executives on the impending downgrade of U.S. debt and relayed the bad news to Geithner. Though the downgrade by S&P, the world’s largest credit rater, contributed to a global stock-market slump, U.S. government debt lost none of its attraction for investors.
Now Rutherford must look ahead to the likelihood that interest rates will rise and increase the cost of servicing the debt. The annual average yield on 10-year Treasury notes is forecast in the Obama administration’s budget to increase to 3.5 percent next year from 3 percent this year and 2.3 percent in 2013.
Treasuries due in 10 years yielded 2.79 percent late yesterday, down from 4 percent in April 2010. The security rallied after the S&P downgrade in August 2011, as yields dropped 57 basis points, the biggest monthly reduction in borrowing costs since December 2008, and touched a record-low 1.38 percent in July 2012.
“If you look at what he’s had to deal with, it’s a huge variety of issues,” said Timothy Bitsberger, who was in Rutherford’s job during the George W. Bush administration and is now a managing director at BNP Paribas SA in New York. “It’s kind of a read-and-react job.”
The Treasury is projecting that falling net borrowing needs in the second quarter may produce the biggest pay-down of government debt since the second quarter of 2007. The next quarterly refunding announcement, at which Rutherford typically holds a press briefing, is scheduled for April 30.
Other than those appearances, the former guard on his high-school basketball team rarely gives speeches or testifies on Capitol Hill. He has witnessed some of the tensest moments at the Treasury since joining from the New York Fed in 2008 and moving to Washington the following year when President Barack Obama took office.
Paulson wrote in his memoir “On the Brink” that during the financial crisis he “came to dread” Rutherford’s appearance at his door because “it almost never meant good news.”
The pressure on Rutherford and Fiscal Assistant Secretary Richard Gregg heats up when Congress delays raising the debt ceiling and the Treasury is forced to use accounting moves to ensure the U.S. has enough money to pay its bills.
That has happened four times in the past three years, most dramatically in 2011 and in 2013, when a government shutdown left Rutherford with a reduced staff that had to rotate between two 12-hour shifts a day. Some Treasury staffers worked till 5 a.m. to make sure they knew the timing of payments going out and coming in.
“Matt’s sort of Steve McQueen-like in his cool-headedness -- utterly unflappable,” said Mark Patterson, who was Geithner’s chief of staff, referring to the late actor known for his roles in the movies “Bullitt” and “The Great Escape.”
Congress agreed in February to suspend the limit until March 2015, allowing Rutherford to focus on something other than a possible U.S. government default. When that issue was resolved, the topics of his staff briefings turned to new threats to global financial stability, including Russia’s incursion into Crimea, and a slide in the Chinese currency.
Through the market’s ups and downs, Rutherford helped oversee the debut of floating-rate notes, the Treasury’s first new debt instrument in 17 years. Floaters offer investors a short-term security that’s a hedge against a potential rise in interest rates.
The department’s strategy isn’t universally admired.
“The floating-rate notes will be a huge mistake,” said Jim Bianco, Chicago-based president and founder of Bianco Research LLC. “You’re issuing floaters that give the taxpayer a liability for future rate hikes. The best time to issue a floater is when interest rates are very, very high. Not when interest rates are zero and they only have one place to float.”
The Treasury’s release in January of floating-rate notes has been met with high demand from investors looking for new ways to buy U.S. government debt. The U.S. sold $13 billion of floaters on March 26 at a bid-to-cover ratio, which gauges demand by comparing the amount of bids with the amount of securities offered, of 4.67, higher than the 2.9 average of fixed-rate debt sold this year by the government. It was the third sale since the inaugural auction on Jan. 29.
The Treasury has increased the average length of maturity of debt outstanding to 67 months as of last September from 49 months at the end of 2008, according to data compiled by Bloomberg. Bianco said the department should think “more radically” and take advantage of low interest rates to issue 50-year or 100-year bonds.
Rutherford argues that the Treasury is satisfying long-term demand through 30-year bonds and that the floaters have “gone off well.”
“It’s an example of us working closely with the markets to develop a product that benefits taxpayers and helps us achieve our debt management objectives,” he said in an interview.
Rutherford’s job in the next few years may be scaling back debt sales. The Congressional Budget Office in February projected the federal deficit will decline to $514 billion this year, the smallest in six years, from a record $1.4 trillion in 2009.
Rutherford has helped finance an “incredible variance in the budget deficit,” said Tom Simons, an economist in New York at Jefferies Group LLC. “When Congress puts roadblocks in the way, protracted arguments over the debt ceiling, over government shutdown threats, it makes it just that much more difficult.”
At the New York Fed, where he started in 2005, Rutherford was a Treasuries market analyst, a debt-management adviser and the bank’s liaison to the Treasury.
In 2008, at the age of 29, he was detailed to the Treasury to work for Paulson and help build up the department’s monitoring of financial markets. Geithner, who was president of the New York Fed from 2003 to 2009, became Obama’s first Treasury chief and kept Rutherford with him and promoted him to assistant secretary in 2012.
Rutherford’s job doesn’t require a hard sell for Treasuries, historically the world’s safest bonds. Still, he frequently talks with foreign investors and officials to answer their questions about the U.S. economy.
On a trip in January to Beijing, Hong Kong, Tokyo and Singapore, Rutherford met with government officials and discussed the Obama administration’s desire to increase spending on infrastructure such as bridges and roads. Sovereign wealth funds in Asia are increasing investments in alternative assets such as real estate and infrastructure.
Though Rutherford has never worked at a Wall Street bank, he can “speak trader” like those who do, said Patterson, who was an executive at Goldman Sachs Group Inc. before joining the Treasury. For Rutherford’s swearing-in ceremony, Patterson did a friendly parody of Rutherford briefing senior Treasury officials.
“There were a lot of mentions of risk-off market, basis points and yield curves, and we strung it all together,” Patterson said. “He has a potential future as a Federal Reserve governor because he can speak in elliptical finance jargon with the best of them.”