Man in the Middle
During Crisis, Head of N.Y. Fed Bridges Washington, Wall St.

By Tomoeh Murakami Tse
Washington Post Staff Writer
Tuesday, August 28, 2007

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.

He has relied extensively on persuasion and personal interaction and has not sought new regulatory powers, which could come in for second-guessing if market conditions worsen.

Unlike most of his predecessors, Geithner came to the job with little experience in the private sector. Nor does he have the economics background of Bernanke, who had spent his entire career in academia before succeeding Alan Greenspan in 2006.

Instead, what Geithner brings to the table is his experience as a crisis manager. During the market turmoil, Bernanke and Treasury Secretary Henry M. Paulson Jr. have been in touch with Geithner regularly for updates on Wall Street sentiment and other matters.

Geithner, who joined the Treasury in 1988 as a civil servant, rose rapidly through the ranks, becoming assistant secretary for international affairs in 1997 and undersecretary a year later, a highly unusual move for a career staffer.

His selection for a position at the International Monetary Fund, which plucked him to head the policy development and review department in 2001, was also a surprise. The fund has been known for its well-defined seniority system, with economists rising through the ranks to positions of power.

Throughout his career, Geithner has often been the youngest person in the room. It's a fact that has not fazed him, say former colleagues and senior bankers who have met with him.

Robert E. Rubin recalled that when he became Treasury secretary, he went to a meeting presided over by his deputy, Lawrence Summers. "And at some point, a young-looking fellow at the table made some comments disagreeing with Larry. . . . And that was Tim."

Among Geithner's strengths, say those who know him, are his ability to map out several plans and his willingness to act on them despite the uncertainty of the outcome. Tellingly, a recent favorite book is "Complications: A Surgeon's Notes on an Imperfect Science," a candid look at the medical profession by a surgeon, Atul Gawande. Its three main sections are titled "Fallibility,'' "Mystery'' and "Uncertainty."

Geithner "would lay out steps that you could take, rather than a set of considerations that you could think of," Summers said.

Staff writer Neil Irwin in Washington contributed to this report.