New York Fed's chief steers Wall Street into uncharted waters - MarketWatch

New York Fed's chief steers Wall Street into uncharted waters - MarketWatch:

WEEKEND EDITION

Bernanke's quiet skipper makes waves

N.Y. Fed's Geithner is steering Wall Street into uncharted waters

By Greg Robb, MarketWatch

Last update: 6:20 p.m. EDT March 21, 2008

WASHINGTON (MarketWatch) -- When the phone rings at 3 a.m. alerting the government to a financial emergency, the call doesn't come in to 1600 Pennsylvania Avenue but to an apartment in Manhattan.

The government's go-to guy on crises big and small is a quiet, unassuming public servant with a wife and kids, a winning smile and an aversion to the spotlight.

His name is Timothy Geithner and he's the president of the New York Federal Reserve Bank, which is the Fed's outpost on the front lines of the credit maelstrom now rocking the nation.

Geithner has been at the center of the two of the most remarkable weeks in Fed history as policy-makers worked overtime to prevent a financial meltdown.

In that time, the Fed has slashed the federal funds target rate by three-quarters of a percentage point, cut the discount rate by a full percentage point, rescued Bear Stearns Cos. by arranging an 11th-hour sale to J.P. Morgan Chase Co. and set up two unprecedented lending facilities that allow investment banks and bond dealers to borrow almost unlimited sums from the central bank.

Remarkably, Geithner (pronounced GITE-ner) has largely succeeded in avoiding the media's glare despite a resume full of high-stakes work that has already, at age 46, given him a storied career.

Although not a household name, he has been a point man on the U.S. response to almost every major financial blowup of the past decade, including the Mexican peso crisis, the Asian financial meltdown, the government's bailout of Long Term Capital Management, and now the current storm that's still raging.

Take one for the team

Those who've worked closely with Geithner over the past decade say he's most comfortable working behind the scenes, where he's succeeded in getting some of the most powerful and competitive financiers in the world to compromise in the name of taking one for the team.

Reticence is a rare commodity at the New York Fed, which has been run in the past by men with outsized egos such as Gerry Corrigan, Benjamin Strong, and Paul Volcker.

Geithner will need considerable skills to stay on top of the most incendiary financial crisis since the Great Depression. He seems unusually suited for the role, with a quick mind tempered by a knack for finding a win-win solution where others see only hopeless conflict.

The New York Fed president has the dual role of the vice chairman of the Federal Open Market Committee, the Washington-based Federal Reserve's central policy-setting arm, and is the only one of the 12 bank presidents who always has a vote on that all-important panel.

'The probability of a major crisis seems likely to be lower, but the losses associated with such a crisis may be greater or harder to mitigate.' — Timothy Geithner, from a speech in 2007

The New York Fed occupies one of the most strategic points in the financial world. Through the open-market desk, the New York Fed has its fingers on pulse of the fixed-income and currency markets. It's in constant touch with the markets through a group of large investment banks and dealers, known as the primary dealers.

While the Federal Reserve Board in the nation's capital can afford to supervise the economy from 30,000 feet, the New York Fed is down in the sewers, fixing the leaks and listening intently for the sounds of crisis.

Geithner has been listening and, at times, warning. In a prescient speech a year ago, he surveyed the vast unregulated financial system that had grown up in recent decades and declared himself to be worried.

"Broad changes in financial markets may have contributed to a system where the probability of a major crisis seems likely to be lower, but the losses associated with such a crisis may be greater or harder to mitigate," he said.

He compared unraveling all risks to "unscrambling an egg."

The Fed cannot monitor or control all the risks that have arisen, Geithner told his audience, nor can it "act preemptively to diffuse" stresses in the system. The best the Fed can hope for, he concluded, is to beef up the "the shock absorbers."

And so when today's crisis hit, Geithner knew just where to place the shock absorber that would keep Bear Stearns (BSC) afloat and prevent a chain-reaction collapse. For that, he counted on J.P. Morgan (JPM)

The still-unfolding rescue of Bear Stearns "is likely to affect the debate in other economic areas and strengthen the hand of people who are arguing for public money for families facing foreclosure," said Jason Furman, an economic analyst at the Brookings Institution.

Tax-payer money

Already, syndicated columnist Robert Novak has singled out Geithner as the architect of the Bear Stearns plan, which puts tax-payer money at risk.

Geithner is less like Austin Powers, an international man of mystery, than Jack Ryan, the intelligence hero created by novelist Tom Clancy. As in the case of Ryan, Geithner's hard work caught the eye of an influential superior and vaulted him into the highest ranks of government policy circles at a tender age.

Geithner grew up in Thailand and India. He graduated from Dartmouth College and earned a master's degree from Johns Hopkins University.

Gifted in Japanese, he joined the Treasury Department and appeared to be settling into a career at the department, eventually being assigned to the Treasury team at the embassy in Tokyo.

But Geithner was noticed by Larry Summers, who had joined Treasury as a member of the Clinton economic team and eventually took over for Robert Rubin as its chief. Geithner's star then rose like a rocket.

Soon Geithner had a seat at the inner circle headed by Rubin, who had moved to Treasury after two years in the White House. Geithner was part of the close team whose bonds were forged during the intense heat and pressure of Mexico's peso debacle in 1994.

Talented with people

The team then was tasked with taking on the "Asian contagion" financial crisis of 1997 and the collapse of the hedge fund Long Term Capital Management the following year.

In February 1999, Rubin, Summers and Alan Greenspan formed their committee to save the world, and Geithner was featured as a prominent member of the subcommittee.

In his memoir of the period, Rubin wrote that Geithner has "a talent for working with people, terrific common sense, and sound political judgment."

Ted Truman, a former senior Fed official who came to Treasury to work under Geithner for the last few years of his career, said Geithner was quietly effective.

"He was asking someone 20 years his senior to come work for him and he succeeded," Truman said. "Most people would have thought he was crazy. When I first approached me, I thought he was crazy. But he was very instrumental in persuading me and I never regretted that."

"He's a very conscientious, intelligent person and brings people together," Truman added.

Putting out feelers

When the Treasury Department was putting together rescue packages for Asian countries, Geithner put out feelers to the private sector to get a sense on whether the countries would deliver on their promises, Truman said.

"Sufficiently extraordinary times deserve extraordinary responses," Truman said.

"The question is whether in the process of that extraordinary response, you create problems for yourself down the road," he said. "We won't know the answer to that for several years."

After the end of the Clinton era, Geithner moved to the International Monetary Fund, perhaps to await another Democrat in the White House.

But to the surprise of many on Wall Street, the directors of the New York Fed tapped him in late 2003 to head the institution.

The choice of Geithner was never popular on Wall Street because of his lack of market experience. But his close ties with Rubin were seen as a plus.

Frustrating observers

Since taking over at the New York Fed, Geithner has frustrated Fed watchers by playing his cards close to the vest and mainly avoiding the topics of the day.

But a constant theme in many of his speeches was a warning to Wall Street that the era of easy credit might come to an end.

His speeches came with neither carrots nor sticks to move Wall Street and generally received little attention in the media. Behind the scenes, however, the groundwork was being laid.

Indeed, in his first public address in March 2004, Geithner warned that the good economic times were obscuring the fact that financial innovation was outpacing supervision.

In a remark that seems eerily insightful in light of the Bear Stearns collapse, Geithner warned that innovations had probably not brought an end to panics in financial markets and "they will not by themselves preclude the possibility of failure in a major financial institution."

Greg Robb is a senior reporter for MarketWatch in Washington