Geithner Cajoled Banks to Help Each Other, Too Late for Lehman

By Rich Miller

Sept. 16 (Bloomberg) -- In late 1997, facing the risk of an economic meltdown in South Korea, a young Treasury official named Timothy Geithner pushed a novel idea: cajole banks into keeping credit flowing to the country as part of an overall rescue package. The banks cooperated and the plan worked.

Geithner, now president of the New York Federal Reserve Bank, tried the same strategy -- with some of the same banks -- this weekend, arguing it was in their interest to band together to contain the impact of the collapse of Lehman Brothers Holdings Inc. The results this time aren't clear. While the banks refused to collaborate on a Lehman bailout, they did put together a $70 billion fund to help each other out in the crisis.

As head of an organization that acts as the Fed's eyes and ears on Wall Street and regularly trades securities with dealers there, the 47-year-old Geithner is at the center of efforts to combat the financial turmoil that began in August 2007. He is in close contact with Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson, often talking to the latter numerous times a day.

``He's been very much in the middle of handling the crisis,'' said Peter Kretzmer, senior economist at Banc of America Securities and a former New York Fed official. ``And with his experience, he's been well-suited to the job.''

It isn't only experience that Geithner's admirers tout. They also talk of his ability to handle pressure -- a close associate who talked to him yesterday described him as calm and thoughtful -- and praise his knack for tackling complex problems.

Different Perspectives

``He doesn't have a closed mind about anything,'' said Edwin Truman, who worked with Geithner on the South Korean rescue and is now at the Peterson Institute for International Economics in Washington. ``That allows him to examine issues from a variety of different perspectives.''

Dino Kos, who was at the New York Fed with Geithner from 2003 to 2007, said that the policy maker's background at Treasury helps him in advising Paulson.

``Tim knows better than most people the pressures Paulson will be confronting in Washington and tailors his advice accordingly,'' said Kos, now managing director of Portales Partners in New York. ``Tim won't waste his time with an idea -- no matter how good -- if it's not going to fly politically.''

Such skills have some supporters of presidential candidate Barack Obama talking about political independent Geithner as a potential Treasury secretary should the Democrat win the November election.

Fears About AIG

That may hinge on how the financial crisis pans out. Geithner's efforts over the weekend didn't prevent stocks from plunging yesterday, partly on fears about the future of American International Group Inc. The Standard & Poor's 500 Index suffered its steepest drop since the September 2001 terrorist attacks, falling 59 points, or 4.7 percent.

As president of the New York Fed, Geithner enjoys a special status at the central bank. He is vice chairman of the Federal Open Market Committee that convenes regularly to decide on interest rates and holds such a meeting today. He votes at every FOMC meeting, unlike the presidents of the Fed's other 11 member banks, who take turns voting.

The institution he leads makes almost daily transactions with Wall Street securities dealers to keep interest rates in line with the Fed's target and is the conduit for the Treasury's rare interventions in foreign-exchange markets.

When Geithner was first tapped to take over the New York Fed almost five years ago, it was bit of a surprise. The boyish- looking technocrat lacked the stature of some of his predecessors including E. Gerald Corrigan, now with Goldman Sachs Group Inc. and Paul Volcker, who went on to become Fed chairman.

Gravitas

``He was very young and he speaks very softly,'' said Blackstone Group LP co-founder Peter G. Peterson, who headed the search team that chose Geithner. ``The question was, `Does he have the gravitas, the strength and the personality to make the tough decisions?'' The answer, he added, has turned out to be yes.

Geithner is neither an economist nor a banker. And his only private sector experience is three years at Kissinger Associates from 1985 to 1988 before joining Treasury.

But he has what his former boss and ex-Treasury Secretary Lawrence Summers called ``a doctorate in financial policy'' gained from his 13 years at Treasury and two years subsequently at the International Monetary Fund putting out economic fires.

Government Role

Critics charge that it was Geithner's predilection for government action that led him to put $29 billion of the Fed's balance sheet on the line to back the takeover of Bear Stearns Group by JPMorgan Chase & Co. in March.

The Fed's loans to Bear Stearns were ``a rogue operation,'' said Anna Schwartz, who co-wrote ``A Monetary History of the United States'' with the late Nobel laureate Milton Friedman. ``The Fed had no business intervening there.''

The central bank and Treasury took a different tack when it came to Lehman Brothers, refusing to kick in any government money to help with a rescue.

While Kenneth Rogoff, who worked with Geithner at the IMF and is now a professor at Harvard University, praised the move, he warned that further tough choices lie ahead for the New York Fed chief and his fellow policy makers as other financial firms run into trouble. ``This crisis is far from over,'' he said.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net