When Tim Geithner arrived to take over the presidency of the New York Fed in 2003, he asked the staff there to give him tutorials for an hour each day on macroeconomics to enable him to learn the necessary skills as fast as he could. Although he does not possess any formal degrees in economics, this sort of preparation has helped give him an impressive grasp of the key issues.
For Mr Geithner, above all else, the idea of serving in public office is about trying to do the best job – or, as he would joke, "the least bad possible" – with whatever hand fate provides. He is not somebody, in other words, who spends hours theorising about what could or should have been done according to any policy textbook; his focus is always on results, and to get them he will collect ideas, advice and opinions from wherever he can.
Such pragmatic skills have been amply on display during the past few years. Some wondered how he would make his mark at the New York Fed given his youth and his lack of macroeconomic qualifications. And, indeed, during the first couple of years, Mr Geithner exerted relatively little influence at the Fed policy meetings – not least because these tended to be dominated by Alan Greenspan, then chairman.
However, Mr Geithner quietly sat down to boost his knowledge of macroeconomics finance and surrounded himself with a key group of advisers – men such as Gerry Corrigan, former NY Fed president, and Paul Volcker – whom he would regularly call for a "chat" and to garner ideas. He also threw himself into the task of understanding how the mechanics of modern financial markets work, right down to the level of grasping the intricacies of, say, the structure of a CDO.
That soon prompted him to express subtly different views from Mr Greenspan. Most notably, whereas Mr Greenspan was convinced that modern financial innovations had made the system safer by spreading credit risk among numerous capital market investors, Mr Geithner started to fear this process of "risk dispersion" might amplify a crisis if a big shock ever hit.
Separately, Mr Geithner also placed great emphasis on trying to understand the infrastructure of the modern financial world. He put heavy pressure on the industry to improve its back-office procedures for the credit derivatives world. However, he did that in classic "Geithner" style: instead of ordering banks to comply, he called them together and persuaded them to embark on a collective initiative.
He did that partly by persuading Mr Corrigan to lead an industry study on the matter. That study eventually called on the industry to implement exactly the changes that Mr Geithner wanted – although, by that stage, the document was perceived as a "private sector" document rather than anything produced by the NY Fed. "Geithner is brilliant at getting people to do what he wants without them even noticing," says one former colleague.
During the past year, however, Mr Geithner's skill has been tested to the limit. He realised early that the subprime losses would leave the major Wall Street banks short of capital. Indeed, a key reason why so many American institutions started to tap sovereign wealth funds late last year was that Mr Geithner himself secretly called a number of banks and persuaded them to act. Then, when Wall Street was racked by concern about the health of monoline insurance groups, he was secretly working the phones again – persuading the banks to seek some form of collective solution. "He spends hours and hours on the phone each week, just talking, talking, talking to bankers around the world," says a senior official.
Mr Geithner also played a critical role in arranging the deal that saw JPMorgan purchase Bear Stearns and avert a wider market shock earlier this year. It bore a resemblance to some of the similar structures used to conclude sales of distressed Japanese banks in the late 1990s – a period of history with which Mr Geithner is deeply familiar since he served as financial attache to Tokyo in the mid-1990s.
However, the drama about Lehman Brothers has provided a far bigger challenge. Mr Geithner and others have faced severe criticism from European policymakers for having let Lehman Brothers collapse. Separately, there has been criticism in the US of the decision to rescue AIG amid accusations that this was designed to favour some Wall Street firms.
Bankers with good knowledge of events say that, during the crisis, he always appeared more ready than Hank Paulson, the Treasury secretary, to consider creative measures to rescue Lehman Brothers, partly owing to a sense of pragmatism. However, Mr Geithner has told hearings in Washington that there was no alternative to letting Lehman Brothers fail given the legal constraints that the Fed faced at the time.
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