Timothy Geithner's realm grows with passage of financial regulatory reform

By David Cho
Saturday, July 17, 2010; A01

Half a year after some predicted he would be booted from the Obama administration, Treasury Secretary Timothy F. Geithner stands to inherit vast power to shape bank regulations, oversee financial markets and create a consumer protection agency.

Few Treasury secretaries have had such sweeping influence over such a wide realm as Geithner will wield once President Obama signs the new financial overhaul legislation passed this week by Congress.

The effort to dramatically expand financial regulation bears the stamp of no one more than Geithner. The bill not only hews closely to the initial draft he released last summer but also anoints him -- as long as he remains Treasury secretary -- as the chief of a new council of senior regulators. The legislation also puts him at the head of the new consumer bureau until a director is confirmed by the Senate, allowing Geithner to mold the watchdog in coming months. And it will be up to him to settle a raft of issues left unresolved by the bill -- for instance, which financial derivatives will be subject to the tough new trading rules and which risky activities big banks will be required to spin off.

The legislation "will help restore the great strength of the American financial system, which -- at its best -- develops innovative ways to provide credit and capital, not just for our great global companies, but for the individual with an idea and a plan," Geithner said to reporters shortly after the bill was approved. Obama will sign the bill in the middle of next week, according to White House officials.

It has been a remarkable turnaround for the 48-year-old Treasury secretary, who endured repeated calls for his head from lawmakers a few months ago. Anger over the Treasury's bailout of troubled banks was high. The unemployment rate was soaring. In a January interview, Geithner called the hubbub over his job security "a price of this office."

In the wake of the bill's passage, there is recognition within the administration as well as on Capitol Hill that Geithner is not going anywhere anytime soon. White House officials said the speculation earlier this year about his tenure misunderstood his standing within the administration.

These officials said Geithner endeared himself to Obama and senior White House advisers by advocating a response to the financial crisis that later proved correct. Geithner vigorously resisted calls by some lawmakers and financial experts to nationalize the nation's largest and most troubled banks during the most perilous days. Instead, he helped get the financial system back on its feet, in particular by pressing for stress tests of big banks. The results of these tests showed that nearly all the banks would be able to weather the financial storm and quickly restored investor confidence.

The campaign to win passage of the financial regulatory bill has been driven primarily by the Treasury, showing that Geithner has gained significant latitude within the administration, a far cry from the early days when senior White House officials kept close watch over his public statements and sought to burnish his image.

"This is a very substantial victory for the president, and it is a credit to Tim's leadership that we have achieved so comprehensive a reform so quickly," said Lawrence H. Summers, director of the National Economic Council and a senior adviser to Obama.

Geithner has not won every battle over the legislation. Notable losses include measures added by lawmakers that would exempt auto dealers and banks with less than $10 billion in assets from new consumer protection rules. These firms represent a significant proportion of the financial industry.

But the bill broadly reflects his faith in regulators and his overriding belief that large financial companies can be protected from upheaval if they set aside large enough capital reserves. His has been a middle course, rejecting the era of deregulation that preceded the financial meltdown but also dismissing proposals to fundamentally restructure the financial industry, for instance by cutting the nation's biggest banks down to size.

In an interview last summer, as his team was drafting its version of the bill, Geithner said the heart of any financial reform effort must consist of "three things: capital, capital, capital."

That statement reflected Geithner's evolution from the time he was president of the Federal Reserve Bank of New York, starting in 2003. The New York Fed allowed Citigroup to create massive pools of mortgage loans and other assets worth more than $2 trillion, but it also allowed the company to hold a relatively thin cushion in its capital reserves to cover losses in case those investments went bad.

The New York Fed pressed Citigroup to raise its capital levels in the fall of 2007, just as the financial crisis was gathering steam, but by then it was too late for the company. When its portfolio blew up, Citigroup ended up needing $45 billion in direct aid and federal guarantees on $335 billion of its worst assets -- a bailout exceeding that of any other bank.

The legislation passed this week does not specifically set new capital levels for banks but directs U.S. regulators to work with their counterparts in other countries to set international standards. Geithner is leading this effort -- just one of the ways he will be able to put his imprint on the banking industry.

Some Treasury officials sought to play down the influence Geithner will have.

One aide said the bill merely details the authority that Treasury secretaries could exercise during a crisis -- powers that Geithner's predecessor, Henry M. Paulson Jr., largely made up on the fly as the financial world teetered in 2008.

"It essentially enshrines their ability to handle this stuff," the official said. "In the middle of a crisis, now you have real, defined responsibilities."

The official added that "in the near term, Tim has a lot of new powers, but I don't think he'll use them."

But government analysts say the bill greatly enhances the Treasury secretary's role within government.

"The Treasury Department and the Treasury secretary in particular pick up significant influence compared to what they formally had in the past," said Douglas Elliott, a financial analyst at the Brookings Institution.

Geithner's influence might go beyond what is delineated in the law, Elliott noted. As head of the Financial Services Oversight Council, the Treasury secretary will be able to use the bully pulpit to shape the thinking of other agencies on matters such as capital reserve levels at banks. In theory, these agencies are supposed to work independently of any political actor, such as Cabinet secretaries.

Sen. Christopher J. Dodd (D-Conn.), who shepherded the financial overhaul package through the Senate, said it wasn't his preference to put the Treasury secretary in charge of the new council. He said he would rather have a member of the Fed board fill that role. Still, he said, having a member of the president's Cabinet in charge could make the council "more politically responsive."

"It gives you some accountability," Dodd said.

Staff writer Brady Dennis contributed to this report.

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