Obama's Choice

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.

Noam Scheiber is a senior editor of The New Republic.