Back From the Brink

This feels a little like one of those boldelection-night calls. The returns are barely in. All sorts of things could still go wrong. But barring something completely unforeseen—a big "but," granted—I think it might be just about time to call the American economy for Tim Geithner.

That call may be against conventional wisdom, for plenty of good reasons. The markets could make me look stupid. The real economy is going to suffer for a long time to come, perhaps well beyond the end of 2009. Geithner, our all-too-boyish Treasury secretary, still looks to many market players like a guy rehearsing for his high-school play. He steadfastly refuses to address critical questions to which Wall Street wants answers—like whether private-equity and hedge funds might find their future compensation packages encumbered by Washington. Key pundits like Paul Krugman have already declared Geithner's private-public partnership plan for distressed assets a failure. Populist outrage is still raging, especially as it becomes clear that his plan to clear the toxic assets off banks' balance sheets will mean another big government-guaranteed payday for Wall Street.

But—and here's the big positive "but"—over the last three weeks the markets have pulled back from the precipice. As Geithner and the Obama administration have laid out most of their plans, we have gone from a desperate and pervasive fear that bank stocks might drop out of sight altogether—leading to a depression after all—to a steady rebound in financial securities. Whereas a month ago there was a real danger the major banks would all collapse at once and become government wards, today even the massively mismanaged Citigroup is no longer a pathetic penny stock (it's soared to the $3 range).

After two months of wondering and waiting, the major elements of Geithner's and Obama's vision for recovery are in place: the $895 billion stimulus; the Term Asset-Backed Securities Loan Facility (TALF) scheme to resurrect the securitization market; the housing-mortgage rescue. And now we finally have details of Geithner's public-private partnership to create government-backed "funds," which by this summer are supposed to conduct an auction for toxic assets (recently euphemized by the Treasury as "legacy" assets). "We've seen the various pieces of the puzzle finally coming together," said Abby Joseph Cohen, the widely respected economist from Goldman Sachs (of course!), on CNBC Tuesday morning. "The reaction to the new sheriff and his posse is finally turning positive."

Also under way are the stress tests of the 19 major banks that command 80 percent of the nation's banking assets ("test" is something of a misnomer, since no one will "fail"; they'll simply get more capital). Directed by the Fed and a team of about 300 regulators representing the Office of Comptroller of the Currency, the FDIC and the Office of Thrift Supervision, the stress tests are scheduled to be completed sometime in April. The officials who are conducting them evince a quiet confidence. "People have in some ways overdone the composition of problem assets on banks' balance sheets," says one senior U.S. banking official who is involved in the stress tests. "By and large, the overwhelming amount of assets are not distressed or toxic: 96 percent of people with mortgages are paying them."

And let's be fair to Geithner. He's become the fall guy for all sorts of fudging, fustigating and flip-flopping by his boss, Barack Obama. While the president has stood by him all along, it was Obama who first set Geithner up for a fall in early February, raising expectations to absurd levels over the Treasury secretary's as-yet-unseen rescue plans. Geithner, Obama declared jovially on Feb. 9, would the next day announce "some very clear and specific plans for how we are going to start loosening up credit once again." According to administration officials, Geithner knew at the time that the vagueness of his still-evolving scheme would upset the markets, but there was nothing he could do about the president's premature enthusiasm. More recently, as he sought to bring in hedge funds and private-equity firms to bid for toxic assets, Geithner found himself undercut once again by Obama, who sought to get ahead of the outrage over AIG's bonuses by ripping into Wall Street and ordering his Treasury secretary to find a way to recover them.

Fortunately for Geithner, one stalwart figure who's not even part of the administration has had his back all along: Ben Bernanke. Though his interest-rate toolbox is all but empty, the Fed chairman has in recent days managed to find yet new ways of acting with striking speed and force. Bernanke is basically printing money on a large scale to fortify the financial sector, committing himself to buying $300 billion of Treasurys and committing an additional $750 billion to mortgage-backed securities. On Monday, Bernanke made another dramatic move, announcing for the first time that the Fed would provide loans to investors willing to buy toxic assets. Geithner may be badly undermanned at Treasury, but the financial rescue has become the Tim and Ben show.

Geithner still has a rough road ahead as he confronts Congress and the public over what to do about Wall Street's future. Despite the rollout this week of the administration's new regulatory scheme, including a plan to cap compensation and bring hedge funds and other parts of the huge unsupervised financial sector under a "resolution authority," there remains lingering anger on the left. To many critics, the Treasury secretary and other members of the Obama team are still in the tank for the old "Wall Street-Treasury complex," seeking "an easier way out," as Krugman wrote on Monday. Geithner is working on the theory that the financial system is still functional and solvent, while many critics on both sides of the political aisle say he and Obama have been adopting half-measures in deference to Wall Street when all along they needed to do something much more forthright like nationalization. The Obama team may be creating a huge "moral hazard" by rescuing Wall Street without dismantling its biggest culprits or demanding changes in management. If little more is done, what's to stop Wall Street from indulging in some new out-of-control mania down the line?

That's Tim Geithner's next big test. But he may have already passed his first one.