Obama Picks Geithner, an Insider, for Treasury

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New York Federal Reserve President Timothy Geithner

If there were any left-wing rebels or right-wing reactionaries who still thought President-elect Barack Obama planned a revolution, today they got their answer. In reportedly picking New York Federal Reserve chief Timothy Geithner, 47, to be his Treasury Secretary, Obama has officially confirmed his preference for a Cabinet of qualified insiders.

At a time of economic peril, of course, that is probably a good thing. Geithner has been in the middle of efforts to mitigate the financial crisis since it began in August 2007, and he is likely to be welcomed in Capitol Hill confirmation hearings as warmly as he was on Wall Street today, where the Dow industrials rallied nearly 500 points on news of his nomination. He does carry the baggage, however, of the still unsuccessful Bush Administration's attempts to halt the crisis. (See the Top 10 Dow Jones drops.)

Functioning as the eyes and ears of the Administration and the Federal Reserve on Wall Street, Geithner's army of economists are in constant contact with world markets, moving trillions of dollars of U.S. government funds into and out of the global financial system. That has afforded him a front-row seat when things go bad, and a unique feel for the character and consequences of the crisis.

In an interview with TIME at the height of the panic last month, Geithner described the process of balancing technical indicators of market distress with the human factors affecting the crisis. "Our job is to figure out what the system can bear and mitigate the panic, and we don't depend on what people tell us about that to make those judgments," Geithner said. "But you can tell a lot from what's in someone's voice. And when you have [the leaders of] what are, without a doubt, some of the strongest, best-run institutions in the world [on the phone] and you hear that change in quality of voice, it tells you something."

For his part, Geithner has shown a solid mix of composure and creativity throughout. In testimony on Capitol Hill and in public statements he comes across as levelheaded and even soft-spoken. Says John Sexton, the president of New York University, who previously chaired the committee that picked Geithner for the New York Fed job: "I've been in conversations with Tim on critically important and time-sensitive issues, crises, and I've been struck by his ability to stay calm."

Geithner also is known for speaking his mind, sometimes forcefully, behind the scenes. In one now famous fight with FDIC chief Sheila Bair the weekend of Oct. 12, 2008, he argued in blunt terms for the need to bolster banks with FDIC guarantees even as Bair was resisting details of a plan. His current job is due in part to his reputation for standing up to powerful people, says Sexton. "[Former Deputy Treasury Secretary] Larry Summers told us that Tim was one of the very few people who, when Larry got on a roll, would sometimes take him up short and say, 'Stop, rethink that position,'" says Sexton, "and do it in a way that caused even Larry to stop and think and even occasionally change his view."

Geithner is working with a fairly well thought-out historical perspective on the crisis. He believes the U.S. government allowed the creation of a massive shadow banking system run by investment banks, hedge funds and brokerage firms over the last 30 years that rivaled the traditional system in size but lacked every one of the stabilizing pillars that had been erected beneath it after the Great Depression: deposit insurance, access to a lender of last resort, a system for orderly failure, and reasonable constraints on risk and leverage. With near bottomless funds from money-market investments and sky-high leveraging limits, the shadow system financed the bubble that is now bursting. (See "Four Steps to Ending the Foreclosure Crisis.")

Much of what Geithner, Treasury Secretary Henry Paulson, Federal Reserve Chief Ben Bernanke and Bair have done so far has been to erect ad hoc pillars in the crisis: guaranteeing money-market funds after a run began on them in October; opening the Fed lending windows wide to keep credit from freezing completely; and intervening to wind down big players with a semblance of order, without which we could have seen a retail panic against a Merrill or Wachovia or AIG. As Treasury Secretary, Geithner will play a large role in erecting the last pillar — regulating risk and leverage in the shadow banking system.

Geithner also brings a good grip on the international mechanisms at work in the crisis, having traveled the world during the financial panic of 1998. He worked for Summers in the Clinton Treasury Department at the time, and he and Summers became mutual admirers. That job also exposed him to many of the national-security issues that Treasury now handles, like cracking down on the transfer of funds across borders by terrorists, and the targeted application of sanctions against the leaders of rogue states.

But Geithner's experience does have its downside. The Administration's attempts to shore up confidence in the stock and credit markets have stumbled, and now even previously rock-solid institutions like Citigroup are in deep trouble. And if Geithner locked horns with Sheila Bair from his perch atop the New York Fed, he'll have to work even more closely with her from the Treasury building on the other side of the White House, as the two will be key players in saving any big banks that fail. They will also control the shape of any mortgage bailout for Americans who are at risk of losing their homes, an initiative many experts say is necessary if Washington is to get the economy moving again.

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