Inside Treasury's nerve center

By Brady Dennis
Saturday, November 27, 2010; A10

Two years after the harrowing days of the financial crisis, Michael N. Pedroni still draws wary looks when he heads upstairs to the third floor of the Treasury Department, which houses the offices of Secretary Timothy F. Geithner and other top brass.

"When I walk through the halls, people are like, 'Oh no, here he comes!' " Pedroni said.

He's able to joke about the suspicious stares now. But in the frantic days of fall 2008, the markets room operation that he runs played a critical role as Treasury officials wrestled with the calamity unfolding in the financial sector.

Tucked away in a former carpentry shop inside the bowels of the Treasury building, the markets room's small staff plays a key role in monitoring the world's financial markets, spotting emerging trends and providing detailed analysis day after day to Geithner and other senior policymakers.

"I think we are known as the front line," said Pedroni, 38, a former International Monetary Fund economist and Federal Reserve Bank of New York employee who has spent time at a Wall Street research firm. "Our analysis is meant to be very candid, very quick, very unvarnished."

The modest markets room resembles a miniature version of a cubicle-free Wall Street trading floor. Its new space - the staff moved down a floor last month - features a large, central desk with a dozen workstations. Employees stare intently into their computer screens, analyzing trends in the mortgage markets, monitoring developments in global interest rates and foreign exchange markets, or eyeing stock exchanges in the United States, Europe and Asia, with a particular focus on the banking sector. A handful of flat-screen televisions flicker overhead, tuned to CNBC and other business networks.

According to department officials, the markets room originated in 1999 under a directive from then-Treasury secretary Lawrence Summers, who is a top economic adviser to President Obama. Before that, two offices had largely shared responsibility for monitoring global financial markets - an office of foreign exchange operations that had been around since the 1960s, and a domestic finance markets room that had been in place since the 1980s. Summers merged the two.

In 2003, officials said, the markets room was dismantled to free up funding for an office that worked on identifying terrorists' assets and freezing them.

Henry M. Paulson Jr., the former Treasury secretary who had served as chief executive of the investment firm Goldman Sachs, reestablished the operation in 2007, just as the housing boom began to sour.

He said it was inconceivable for the Treasury not to have a markets room. "To be totally reliant on calling others to find out what was going on - it just didn't make sense. I had come from a firm where you always had that information," Paulson said in an interview.

The Treasury eventually hired Pedroni to lead the fledgling staff. He arrived in mid-August 2008, just before the government placed mortgage giants Fannie Mae and Freddie Mac into conservatorship. Then came the collapse of Lehman Brothers, followed by the bailout of insurance giant American International Group.

"We were in the midst of crisis mode right away," Pedroni said. "There was no time to adjust and slowly get started."

In those frantic days, the markets crew worked seven days a week, like many other Treasury employees. They studied the capital structures of Fannie and Freddie and scoured the bond and equities markets to see how major buyers of U.S. securities responded to the terms of the government conservatorship. With each government action that followed, the staff gauged how the markets were reacting and interpreted the meaning behind those movements for Paulson and other administration officials.

Often, the markets room was Paulson's first stop when he arrived at Treasury just after dawn. "They could give me a briefing and say, 'Here's how Asia traded, here's how Europe traded, here's what's happening.' Then I knew whether I needed to dig deeper or not," he recalled.

On the day President George W. Bush signed the bank bailout program into law, he accompanied Paulson to the markets room to see how the markets were responding.

Sometimes, Pedroni and his colleagues headed upstairs to Paulson's office to break bad news.

"During the day, whenever I saw people from the markets room standing at my door, I knew it wasn't going to be good. I would call them right in and sort of steel myself," Paulson said. "I didn't have to wait for someone an hour later to call me from Wall Street. They could tell me not just what was happening, but why it was happening."

These days, the crisis atmosphere is gone but the staff remains busy. Each morning, an analyst arrives before dawn to prepare a briefing note for Geithner, followed by a daily staff meeting at 8:45 a.m.

On a recent morning, staffers were trying to figure out whether European banks needed to raise new capital and how the markets were reacting to new capital requirements being debated by international regulators in Basel, Switzerland. The staff, for instance, has also been trying to gauge how widespread problems in the foreclosure practices of the nation's mortgage lenders could affect financial markets.

Geithner still checks in almost daily, sometimes multiple times a day, enough that staffers recognize his office and cell numbers on the caller ID. There's a daily call with officials at the Federal Reserve Bank of New York, which has a far larger markets room at its disposal. A team member also puts together a one-page summary of the day's activities as part of the daily economic briefing for Obama.

"It's the hardest document we write, because it's got to be smart, and it's got to be in depth, but it can't be technical," Pedroni said. "Avoiding getting superficial is the big challenge. Sometimes the weeds have to be there, because the weeds matter."

Although the environment in some ways resembles a Wall Street trading floor, Pedroni says the staff has an altogether different goal.

"At the end of the day, for us it's not about profit and loss," he said. "It's going to be about good policymaking."

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