Man in the Middle

During Crisis, Head of N.Y. Fed Bridges Washington, Wall St.

NEW YORK -- For years, Timothy F. Geithner has worked behind the scenes as a policymaker during times of financial chaos. As a senior official in the Treasury Department, he helped shape the Clinton administration's response to the Asian markets' collapse.

But now, Geithner, 46, president of the Federal Reserve Bank of New York, is very much at the controls as market players turn to the central bank to stabilize a credit market on fragile footing. Like his boss, Fed Chairman Ben S. Bernanke, Geithner is facing his first big test as point man between the powerful global firms in the world's financial capital and the policymakers who oversee them from Washington.

For years, he was Wall Street's "worrier in chief," warning about the risks posed by the exploding numbers of new financial products and lending practices. Now he is at the center of efforts to minimize the fallout from the mess in credit markets that they have helped cause.

Last week, Geithner played a crucial role, those familiar with the situation say, in nudging major Wall Street firms to go to the Fed's discount window, where banks borrow directly from the central bank, not the capital markets. The move by the firms was largely symbolic, meant to reduce the stigma associated with borrowing by distressed banks and establish the window as a credible backstop should conditions deteriorate.

Those who know Geithner say he has a natural instinct for dealing with people, understanding that every financial crisis is a crisis of human behavior. He seeks ideas from not just the big investment banks but also commercial banks, institutional investors and hedge funds. This is key at a time when complex financial instruments and an increasing amount of capital -- and debt -- are in private hands. In this environment, rumor and speculation can spook the financial system enough to hurt the U.S. economy.

"I think his modus operandi is to really always learn what's going on and trying to understand it from several points of view so that when he gets involved in making policy, he's really done his job about how it will affect different constituencies and what they think about it," said Jamie Dimon, chairman and chief executive of J.P. Morgan. "He's completely discreet. I don't worry about him sharing what I say with anyone else."

Geithner took the helm of the New York Fed in November 2003, when skepticism about the central bank's role as regulator of banks and its capacity to calm capital markets was on the rise. A growing proportion of financial transactions were occurring between organizations like hedge funds outside the Fed's jurisdiction.

In speeches and behind the scenes, Geithner has talked about systemic risks in a rapidly changing global financial system. One of the areas he has focused on is the multitrillion-dollar credit derivatives market, a Wall Street innovation that allows different kinds of financial risk to be traded and spread around the world.

"These changes . . . could in some circumstances work to magnify rather than mitigate stress," Geithner said in a speech in New York early this year. He declined to comment publicly for this article. "Central banks, supervisors and those running the major private financial institutions need to continue to work to ensure that shock absorbers in the financial system -- capital, liquidity and the operational infrastructure -- are sufficiently strong and robust to withstand economic and financial conditions more adverse than we have seen in the recent past."

To that end, several years ago, Geithner encouraged financial institutions to improve their infrastructure for credit derivatives trading, which had a big backlog of unconfirmed trades. He feared that the system could break down in times of financial stress.

Rather than impose strict guidelines, regulators led by Geithner urged market players to take the lead. The group, which is still working on the matter, reported back a year later that it had significantly reduced the backlog.

Led by Geithner's bank in New York, U.S. regulators have been working with banking supervisors in other countries to push global financial institutions to improve their risk management.