In Crucible of Crisis, Paulson, Bernanke, Geithner Forge a Committee of Three

Gallery

Wall Street in Turmoil

Global stocks have experienced wild fluctuations this week in the wake of the U.S. government's seizure of insurance giant American International Group, the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company and reports the U.S. government will set up a government entity to take on bad debts from financial institutions.

» LAUNCH PHOTO GALLERY

When Geithner engineered the rescue of failing investment bank Bear Stearns in the middle of a cold March night, he had Paulson and Bernanke on the phone to get their input and blessing.

Paulson took the lead on the government takeover of Fannie Mae and Freddie Mac, but Bernanke advised him closely, and Geithner played a supporting role in calculating the impact on the financial markets.

And within the past week, all three were deeply involved in the decisions to throw AIG one lifeline and deprive Lehman of another.

* * *

In many ways, the collaboration is a throwback to the relationships among President Bill Clinton's Treasury Secretaries Summers and Robert Rubin and former Fed chairman Alan Greenspan. That troika, once dubbed the "Committee to Save the World" for its efforts to prevent overseas financial crises from spilling over into the U.S. economy, also had a deep intellectual connection and similar résumés. (Rubin was a former Goldman Sachs chief executive, Summers a longtime academic and Greenspan an experienced government operative). Like Paulson, Bernanke and Geithner, the original committee to save the world frequently called one another on the fly, openly debated issues and buried their egos when they interacted.

There are differences, though. For instance, the New York Fed was less intimately involved in that collaboration than Geithner is now. (Geithner made a cameo appearance in the earlier incarnation, appearing as a member of the Treasury's "brain trust" in the Time magazine article that popularized the phrase "the Committee to Save the World.") But the current upheaval has been centered on Wall Street, and Geithner, as head of the New York Fed, is the government's emissary.

The current circle is too tight for some critics, who say the closely guarded independence of the Fed may be threatened by Bernanke's intense collaboration with Paulson.

"The Federal Reserve is in the game in a lot of respects right now because it is the only really flexible entity in Washington. The Fed can make decisions more quickly than the political system can," said Vincent Reinhart, an American Enterprise Institute scholar and former senior Fed staff member. "But I'm not so sure that independence is fungible, that in terms of reputation, we're now getting to where the Fed is being viewed as too close to political decision-makers."

New Jersey Gov. Jon S. Corzine (D), Paulson's predecessor as the head of Goldman Sachs, raised a second concern, faulting the new troika for being inconsistent in its responses to recent crises.

"There's no ability for the markets to have a strategic understanding of what's expected out of the Treasury and the Federal Reserve," said Corzine.

Whenever Paulson, Bernanke and Geithner have talked to lawmakers or delivered tough messages to executives of companies such as Bear Stearns or AIG, the three men have put up a united front.

But among themselves, at times, they've disagreed.