The New Republic

In early 2003, Bill McDonough, the longtime president of the Federal
Reserve Bank of New York, announced he was stepping down after ten
years at the helm. The New York Fed presidency is one of the most
powerful positions in government, rating behind only the Treasury
secretary and Fed chairman in influence over the economy. This made
the departure of the widely respected McDonough, who had led a
rescue of the financial markets in 1998, a mournful event in
itself. But, when the two leading candidates to replace him
abruptly withdrew, the anxiety in some quarters became palpable.It was then that Robert Rubin, the onetime Clinton Treasury
secretary, put forth a former colleague named Tim Geithner.
Geithner had obvious assets. He'd spent the 1990s in a series of
high-ranking Treasury jobs, where he worked alongside Rubin and his
successor, Larry Summers, to stave off one financial crisis after
another. Geithner also enjoyed a warm rapport with Fed Chairman
Alan Greenspan, who could effectively veto the appointment.

Still, there were question marks. Officially, the New York Fed is
one of the country's top bank regulators; unofficially, it's the
Federal Reserve system's "eyes and ears" on Wall Street. Geithner
had neither a banking nor a Wall Street background. There was also
the matter of his youthfulness. New York Fed presidents have
traditionally been a grizzled, dyspeptic sort. At 43, Geithner was
svelte and baby-faced, with teen-idol locks and a boyish voice to
match. Who would take this man-child seriously?

It was the latter question that weighed on Pete Peterson, the
private-equity magnate and then chairman of the bank's board. "He
looks young, he's quiet, soft-spoken, a bit--diffident," Peterson
recently told me. "I wanted to be sure the soft-spokenness, the
diffidence, didn't translate into a lack of courage." What
eventually put Peterson at ease was a conversation he had with
Summers. "I told Larry what my concerns were, and Larry burst out
laughing. He said, 'Don't worry about that, Pete. He's the only
person who ever worked with me who'd walk into my office and say to
me, 'Larry, on this one, you're full of [it].'"

Indeed, if not for Geithner's periodic assertiveness, the '90s might
have looked very different. At Treasury, Geithner often cast the
deciding vote between Rubin and Summers, who was Rubin's deputy
through much of the Clinton era. Summers was a restless type, prone
to intervening aggressively if there was a chance it could succeed.
Rubin, on the other hand, deferred decisions as long as possible
and erred on the side of caution even then. As Summers once
explained to The New York Times, Rubin believed "that there is
something worse than Country X going down, which is Country X going
down and taking our credibility and $10 billion of our money with
it.''

In this mix, Geithner often made action possible by setting Rubin's
tortured soul at ease. When, for example, the collapse of the
Korean financial system in 1997 triggered a global crisis, Summers
recommended an overwhelming response--a U.S.-sponsored bailout on
top of an accelerated IMF package worth tens of billions. But the
idea gave Rubin agita. It was Geithner who, according to one
colleague, nudged Treasury toward a successful middle ground.
Summers himself viewed Geithner as such a crucial counterweight
that, the following year, he helped make Geithner Treasury's top
international official.

In recent weeks, another financial crisis has ushered Geithner and
Summers onto center stage. Geithner has helped guide the
government's response from his perch at the New York Fed; many see
him as the most pragmatic voice in a trio that includes Fed
Chairman Ben Bernanke and Treasury Secretary Hank Paulson, two men
skeptical of market interventions. "The idea that the Fed did as
much as it did--with new facilities, new ideas--the breadth of it
is stunning," says one former Fed official. For his part, Summers
has become one of Barack Obama's most valued economic advisers,
regularly weighing in on conference calls, even appearing at the
senator's side.

Geithner might have been the leading candidate for Treasury
secretary in any typical applicant pool. His even-keeled presence
and conciliatory style--his Obama-like qualities, in other
words--could prove a tonic for our financial angst. In this case,
though, his long-time friend is a rival. In terms of sheer
brainpower, Summers is off the charts. His activist instincts may
also suit the moment, when dithering could prove catastrophic.

But, whether or not he gets promoted, Geithner will almost certainly
see his influence rise under Obama. Thanks to his relationship with
Summers and a sympathetic White House, Geithner would take the lead
in reforming Wall Street even without the top job in Washington.

Tim Geithner was a rising star in the civil service when he met
Larry Summers in 1993. Summers, a Harvard professor and former
World Bank chief economist, had just taken over Treasury's
international arm. He effectively inherited Geithner from an
outgoing Bush official, for whom Geithner had served as special
assistant.

Geithner assumed his tour as Summers's special assistant would be
temporary and began casting about for a new post. He found one
within a few months-- deputy in the office of international
monetary policy, a plum assignment for someone barely into his
thirties--and the promotion was announced internally. But Geithner
never took the job. Colleagues later learned that Summers had asked
him to stay on as his consigliere.

Summers's brilliance made him simultaneously exhilarating and
exhausting to work for--a whirlwind of intellectual energy fueled
by an endless supply of Diet Coke. "I remember once giving him a
memo that was three pages long," recalls Steve Radelet, a onetime
Harvard economist who worked for both Summers and Geithner. "I'd
worked on it for days and days. He read it in a minute and a half.
He looked at me, saying, 'I don't agree with your argument. But, if
I were making your argument, I could have made it better. Here's
how.'"

In Geithner, Summers recognized the perfect complement. Geithner was
razor- sharp, but had an easy way about him. He was a talented
softball player who seemed to glide around the diamond, and his
workplace demeanor was similarly effortless. This was particularly
handy in navigating the political aspects of the job--not always
Summers's strong suit.

After about a year, Geithner landed in the position of deputy
assistant secretary (DAS)--which, among other things, meant he was
overseeing the same office he'd only recently applied to work in,
along with a few more like it. (Around this time, he also
registered as an independent, having been a moderate Republican.)
The new role made Geithner Treasury's first-responder to foreign-
currency emergencies, like the kind that plagued East Asia
throughout the decade.

Geithner was not just highly competent, but exquisitely attuned to
the sensitivities of being a thirtysomething in a job many
bureaucrats spend their entire careers aspiring to. At meetings
with subordinates, he'd rarely sit at the head of the table. In
fact, he'd rarely sit at all, preferring to pace around the room
prompting people for input. When he briefed a higher-up, Geithner's
habit was to bring along the bureaucrat who'd worked with him on
the issue.

One of Geithner's fellow DASs was a man named Bill Barreda, who'd
hired him at Treasury in the late '80s. At the time Geithner was
promoted to DAS, everyone from that level up received a parking
space in a small area between the White House and Treasury
building. Except that, one day, an uppity assistant secretary
bought a car so big it seemed to require new lines. The odd man out
once all the paint had dried was Barreda, who found himself exiled
to a less convenient lot. It was a trivial thing--surely invisible
to anyone unaffected--and Barreda was prepared to suffer quietly.
But, a few days later, Geithner stopped by his office: "Tim ...
comes to me and says he feels really badly about this. Please take
his parking place, he'll take mine outside by the White House."
Barreda was floored.

As Geithner and Summers rose within Treasury, Summers increasingly
involved him in the most sensitive issues to cross his desk. When
proposed aid packages came back from the IMF, Summers's chief of
staff often found herself chasing down Geithner because, according
to one colleague, "Larry wanted to know what Tim thought about it"
before he'd sign off. When currency crisis deliberations
degenerated into esoteric grad-school seminars, someone would
invariably turn and ask, "Well, what do you think, young Mr.
Geithner?" In effect, Geithner had become a check on the
bandwagon-jumping Summers's intellect could inspire--and which
Summers, to his credit, reflexively resisted. "When you're talking
to the Treasury secretary or the under secretary, there's a strong
tendency for everybody to leap on what that person is saying and
agree," says one co-worker. "Tim's fundamental function was to
interrupt that process."

Geithner accomplished this with his usual light touch. "He would do
this thing: 'I'm not that good at math, I don't know anything about
this but ...' and whack you with these awesome questions that made
clear he understood the issue better than anyone in the room," says
another former colleague. Within the building, Geithner became
legendary for his self-deprecating humor. Shortly after taking over
at Treasury in 1995, Rubin convened a meeting with his senior
officials and asked them to introduce themselves, prompting an arms
race of resume embellishment. Finally, it was Geithner's turn.
"Well, I've mostly been in high school," he cracked. Everyone
doubled over in laughter.

Geithner could be every bit as diplomatic in, well, diplomacy. Jeff
Lang, a former deputy trade representative, recalls traveling with
Geithner to Thailand in 1997. The two had come to pry open the Thai
banking sector to foreign competition. But they had the misfortune
of arriving days after the United States balked at a bailout for
the country's cratering financial sector. The Thai finance
minister, says Lang, "knew a lot about politics, but nothing about
banking." He proceeded to harangue them about America's abandonment
of its allies. When he was finished, Geithner calmly explained that
he understood, but that bank liberalization could actually help
Thailand attract new capital. "The country was about to blow up,
but Tim was just terrific," Lang says. The Thais eventually came
around.

In 1999, Summers took over as Treasury secretary while Geithner
ascended to under secretary. By this point, the two men had
perfected a kind of global good cop/bad cop routine. Summers was
the bad cop--the outspoken sheriff with strong views about how to
structure the international financial system. Geithner was his
antidote--a master of process and protocol and Treasury's ambassador
to global forums like the G-7. At one point, after a series of
rapid-fire bailouts by the IMF, the Europeans began agitating for
checks on the organization's ability to dispense money, something
Summers strongly opposed. In response, Geithner hinted that the
United States might start relying on other institutions--like the
newly formed G-20 group of industrialized and emerging
economies--to respond to financial crises. The Europeans were highly
sensitive about the status of the IMF, where they had outsized
influence. They quickly backed down.

Geithner generally gets high marks for his stewardship of the Fed
over the last five years, particularly his longstanding calls for
reforms that, in his words, would strengthen the system's "shock
absorbers" and make it less prone to crises in the first place.
Among other things, he has repeatedly urged greater transparency in
the use of complicated financial instruments, like derivatives
(essentially bets on the price movements of assets like stocks and
bonds). And he has called for scrutiny of the way Wall Street
creates and sells asset-based securities, which have generated huge
losses in recent months.

Geithner also won solid reviews for his handling of the Bear Stearns
meltdown in March, when he greased JP Morgan's purchase of the
failed investment bank by insuring it against up to $29 billion in
losses on Bear's dowry of toxic assets. As the economist Brad
DeLong has written, Geithner seemed to strike the right balance
between preventing a crisis (by effectively saving Bear's
bondholders and counterparties) and discouraging irresponsible
risk-taking (JP Morgan's bargain-basement purchase-price saddled
Bear's stockholders with huge losses). Though some complain that JP
Morgan itself made out too well, few disagree with the deal's basic
contours.

Still, for the purposes of his own future, if not the global
economy's, the more relevant judgment may concern Geithner's role
in the collapse of Lehman Brothers in September, a collapse that
was arguably the proximate cause of the recent financial turmoil.
In the aftermath, critics wondered why the feds would bail out Bear
and not Lehman, which, owing to its greater size and complexity,
was more likely to bring the financial markets down with it.

While the deliberations among Geithner, Paulson, and Bernanke remain
opaque, there is a growing consensus on Wall Street and in
Washington that Geithner would have been more reluctant to let
Lehman go if left to his own devices. Perhaps more importantly from
the perspective of Geithner's career, this is the view that holds
sway in Obamaland. "I don't know anyone who doesn't think the
Lehman decision was a terrible error," says one Obama confidant.
"But there is some sense ... that Geithner would have handled it
differently. ... That, in terms of understanding and pushing on the
severity of the problem relatively early, Geithner was strong that
way." This person relates a recent conversation between an
associate and a Fed official, in which the latter complained,
"Christ, Geithner wants to save everybody."

To the extent there's a black mark on Geithner's record, it may have
to do with the banking system more broadly. As early as last fall,
there were hints that U.S. banks were undercapitalized--which is to
say, they didn't have enough money to absorb potential losses on
all the loans in circulation. In April, the IMF released a report
suggesting the shortfall could be in the hundreds of billions of
dollars. Which raises the question: As one of the nation's top
banking regulators, why wasn't Geithner more forceful in urging the
banks to raise money--or, if that was impossible, in making the
case for government support?

Geithner's defenders argue that estimates like the IMF's are
overstated and that the problem arose fairly abruptly in recent
months. Prior to September, grouses a former New York Fed official,
"[i]f one went to the Congress with that information and said, 'We
have to pass a law so you can provide governmental capital to
banking institutions,' they would have been laughed out of town."
Even those who believe the problem was evident earlier concede
there was little Geithner could have done to browbeat banks,
because the mandate of the New York Fed is to work closely with
them.

As a practical matter, the biggest obstacle to Geithner landing at
Treasury may be his old mentor Summers. In 2006, Summers stepped
down as president of Harvard after a sometimes turbulent five-year
run that culminated with charges of gender insensitivity. In the
last two years, however, Summers has largely rehabilitated himself
as a public intellectual, opining on some of the more vexing
economic problems of the day. His monthly column in the Financial
Times has won praise from centrists and liberals alike and has
become a must-read during the financial crisis. Recent columns have
advanced the case for ambitious federal stimulus and vigorous
regulation of Wall Street.

Friends say Summers wants the job he held for the last year and a
half of the Clinton administration. Obama aides--who rave that,
along with Rubin and former Fed chairman Paul Volcker, Summers was
indispensable to the campaign-- say they, too, sense he'd like
another crack at Treasury. And, in truth, it's hard to begrudge him
that. Geithner himself would be the first to concede Summers's
sterling credentials. "My guess is that Tim would like Larry to be
secretary," a friend of both told me recently. "He's the type of guy
that, if Obama calls and says, 'I want you to be secretary of
Treasury,' it's not at all implausible he would say, 'Mr.
President, you should pick Larry.'"

What Obama thinks of this is an open question. Several Obama
insiders told me the senator has warm feelings toward both men.
"Put it this way," says one. "They are both highly regarded. Very
highly regarded. Very, very highly regarded." It's possible to see
Obama's personal biases cutting either way. On the one hand, the
president-elect has a well-known dislike of "drama," which could
tilt the calculus toward Geithner. On the other hand, Obama has an
equally strong preference for expertise, which could favor Summers.

Substantively, the differences may be slight. Summers, like
Geithner, would likely have preferred more robust action in the
case of Lehman Brothers and a more systematic approach to the
financial crisis generally. Being less politic by nature, it's
possible he would have piped up publicly had he been in Geithner's
position, or bent Paulson and Bernanke to his will. But it's also
possible that such pressure would have backfired. Markets don't
generally respond well to conflict among policymakers. If Summers
ends up with the Treasury job, it's more than a little reassuring
that he'd still have Geithner at the New York Fed--telling him when
he's full of it.

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