Correction to This Article
In some editions, the headline on this article says that Robert Steel, as a Treasury undersecretary, holds the No. 2 position in the department. The No. 2 position is deputy secretary.
In Times of Crisis, Treasury's No. 2 Plays Crucial Role
Go-to Guy Bridges Politics, Eases Tension

By David Cho
Washington Post Staff Writer
Tuesday, February 12, 2008

When Treasury Secretary Henry M. Paulson Jr. left the top job at Goldman Sachs to come to Washington, he took only one colleague, his former lieutenant, Robert Steel.

Steel still plays the same role. Call him the fixer.

When Wall Street banks recently had a tense tete-a-tete with New York's top insurance regulator, they turned to Steel to patch-up the relationship.

When Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., had an idea to freeze rates for distressed homeowners with subprime mortgages, she contacted Treasury through Steel, who worked behind the scenes to turn the idea into a major initiative for the Bush administration.

And when Rep. Barney Frank, the chairman of the House Financial Services Committee, needs to get the attention of Treasury, he gets Steel on the phone.

In just a year and four months since his appointment as undersecretary for domestic finance, Steel has quickly become known as Treasury's go-to guy on Wall Street's credit woes and the housing downturn. Among Treasury's senior staff, he has the unique advantage of sharing a close, Batman-and-Robin-like relationship with Paulson, fashioned over nearly 30 years together at Goldman Sachs. After Paulson was anointed the investment bank's chief executive in 1999, Steel became his vice chairman in 2001.

"I've known the secretary for a long time," Steel said during an interview last week at a financial conference in Las Vegas. "We can communicate comfortably and quickly. . . . Hank and I are in each other's offices five times every day. It's like a running conversation."

Paulson and Steel have been the architects of several high-profile plans announced by the Bush administration. Their actions may go a long way this year in determining the severity of a widely expected recession.

"The advantage of bringing Bob was I had a history of working with him," Paulson said. "He's very good at smoothing over conflicts; and when there's tensions, bringing the temperature down."

Steel's management skills and can-do approach put him on the short list of candidates when Citigroup and Merrill Lynch were looking for new chief executives last year, said several people familiar with the matter. But he refused to interview, out of loyalty to Paulson.

Steel said he is comfortable, for now, in his role as Paulson's No. 2. "I'm a team player," he said. "For me it's more important for what team I'm on than what position I have."

Steel is a Republican and, before coming to Treasury, hosted fundraisers in 2006 at his Colorado home for John McCain. Steel does not consider himself an ideologue. One of his closest allies since he came to Washington has been Frank, a Democrat from Massachusetts.

"It's a great advantage for us to have someone like Bob Steel who has the Secretary's confidence, but doesn't have the Secretary's time obligations," Frank said. "You can work interchangeably between him and the Secretary. It's a friction-free relationship."

Steel and Frank worked closely last year to craft legislation intended to strengthen the agency that regulates mortgage financers Fannie Mae and Freddie Mac. A bill passed the House in May, but the effort stalled in the Senate because of differences between Democrats and Republicans. Steel said the experience was "frustrating, challenging," a lesson in how Congress operates.

"The thing that's hard for me is the partisan aspect of politics," Steel said. "At Goldman Sachs, there was a clear process for decision-making. . . . Everyone wanted the firm to be successful for the long term. . . . Here it's not as clear. Some people have different perspectives. Some people need to get re-elected. Some guys on K Street are advocates for a perspective. And so it's just different."

Steel, like Paulson, is under intense scrutiny for the administration's mortgage relief plan. The initiative offers a five-year freeze in interest rates for a select group of subprime, adjustable-rate mortgage holders so they can refinance into less expensive loans. But some Senate Democrats doubt this will help enough homeowners avoid foreclosure.

The number of people who have been helped so far will be unveiled at the end of the month. Steel has been grilled by lawmakers and mortgage investors on what Treasury will do if that figure is too low.

Steel acknowledged in the interview that Treasury has back-up proposals in place.

"If I start talking about what we are going to do next, everyone is going to focus on that next thing," Steel said. "It takes you off track. We should be focusing on what we are trying to do now. . . . But yes, there is contingency planning."

"It would be irresponsible not to," he said.

One other major effort by Steel hasn't panned out. Last year, he helped broker a plan for banks to create a massive fund to bail out structured investment vehicles, or SIVs, which are semi-independent corporate entities set up by banks to issue debt and sell loans. These vehicles were hard hit by the problems with subprime mortgages. As banks struggled to recruit other participants, the effort collapsed in December, and the banks ended up absorbing tens of billions in losses.

Despite that stumble, Bair, the FDIC chair, said Steel is the right man for the credit crisis.

"Because he is new to Washington, maybe he's not as jaded as the rest of us," she said. "He's willing to tackle issues. He's willing to take risks. He's someone who hasn't been jaded or worn down by the town. . . . That's what you need in these kinds of economic conditions because doing nothing is not an option."

The collapse of the SIV proposal has not stopped Wall Street bankers from continuing to look to Steel for guidance in the credit crunch.

After Eric Dinallo, the New York Superintendent of Insurance, held a tense meeting in his office last month with top executives from Wall Street and demanded they aid ailing bond insurance firms, several bankers contacted Steel.

"There hasn't been a day when I haven't known that I could pick up the phone and just call him," said Robert E. Diamond Jr., president of Barclays. "For many of us at banks around the world, it' s been good to have someone who we can call and who will listen to our perspective, and we know our message is getting through."

Through a series of calls to Dinallo and the banks, Steel eased tensions between the sides. He did not get into the specifics of the rescue package for the bond insurers but urged Dinallo to hire an independent adviser, which he did.

Diamond saw Steel's ability to resolve conflicts firsthand. In 2005, after Barclays bought a South African bank, a disagreement erupted between the heads of Barclays's commercial and investment divisions over who would get the new clients. The debate continued for six months, Diamond said.

Steel, who was on the Barclays board of directors at the time, brought both division heads together over red wine and cigars at a hotel dinner in Johannesburg and resolved the dispute.

While Steel has a lot of experience operating on Wall Street, he admits his role in Washington has tested him like never before.

At a recent Senate Banking Committee, he demonstrated just how far he has come in his political education. At one point, Sen. Charles E. Schumer (D-N.Y.) asked him why President Bush had not included a foreclosure rescue package in his economic stimulus program. Steel realized he was being invited to make impolitic comments on behalf of the president.

"I really think that I don't have anything to add to the debate," Steel said. "For me to have an opinion about one ingredient in this stew, I think would be a good way for me to get in big trouble."

"That's why I asked the question," Schumer said with a grin.

"I know that," Steel said, as laughter broke out in the chamber.

"I'm impressed, Mr. Secretary," Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said, chuckling. "Normally a person spends years here before they understand the importance of that question."

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