The Education of Timothy Geithner

Tim Geithner can't stop smiling and laughing—he's actually relaxed, in fact. The new Treasury secretary has just come off the biggest week in his life, though when asked about it he adopts that sober, intense look the public knows so well, insisting he's not over any hump. "Sure, it's nice, but I know how fickle this stuff is. I'm going to be doing all sorts of unpopular things for a long time," he says, sitting in his office late last week under the stern eye of Alexander Hamilton's portrait.

It's the first time, maybe, that Geithner feels really at home here. For two months the smart newcomer with the boyish demeanor seemed to stumble again and again as Obama's point man on the financial crisis. Part of the problem was stagecraft: he lacked the deep voice or the gray hairs of a Washington wise man, and he stared at teleprompters as if he'd never used them before. But he also disappointed markets and pundits with what seemed like hesitant half-steps. The attacks on him grew ever more savage. Bill Maher put up photos of Geithner alongside a deer in the headlights and suggested that President Obama ought to just hire the deer. Bloggers began comparing him to Macaulay Culkin, joking that he was "home alone" at the undermanned Treasury. "Quite simply, the Timothy Geithner experience has been a disaster," Republican Rep. Connie Mack announced at one point, calling for his resignation "for the good of the country."

You probably won't hear that again, at least for a while. Last Monday, March 23, Geithner delivered the long-awaited details of his scheme to save the banking system. While it remains controversial, the promise of a payday "dazzled" Wall Street, The New York Times reported. ("We hadn't seen that word before," noted one bleary-eyed but satisfied Treasury aide.) A few days later Geithner revealed the most dramatic plan for regulating finance since the Glass-Steagall Act of 1933 (the dismantling of which a decade ago may have contributed to the crisis). Among other things, he called for broad regulation of derivatives trading, nonbanks and hedge funds—precisely the kinds of reforms that, the last time Geithner was in Washington in the '90s, the Treasury Department avoided. Most of all, Geithner seemed, at long last, to take charge: even his congressional testimony sounded more assertive.

There seemed to be a feeling of relief all around. That was certainly true for Geithner's father, Peter—whose career as an international-development expert started Tim on his path to Washington while he was growing up in Africa, India and Thailand. "We all hope the corner has been turned," Peter Geithner said. "It's not easy to read the papers every morning." There was also relief at the White House. "The fever broke," White House chief of staff Rahm Emanuel told NEWSWEEK. And at the Fed, Ben Bernanke, in a rare interview, gave Geithner a lot of credit for the change in mood. "He's extraordinarily intense, extremely competent and insightful. He knows a huge amount about the markets," says Bernanke, who added that he respects Geithner's "equanimity under fire."

Obama senior adviser David Axelrod calls the last two months Geithner's "learning period." The 47-year-old Treasury secretary is the same age as the president and has 20 years of experience taking on crises, but he had never before been fully in the spotlight, certainly not in the middle of a catastrophe like this. "He hasn't played the center ring until now," Axelrod told NEWSWEEK. "There is a bully pulpit, a

theatricality to the role that is unlike any role he's held before." Others note that past Treasury secretaries didn't gain their aura of omniscience—whether deserved or not—until they had proved themselves in crisis. Geithner himself says that he stays sane by focusing on just that: getting things done, making hard choices and knowing that he'll be judged not by the day-to-day yelps and cries of critics, but by what he's accomplished once his decisions take effect.

Geithner started off badly in January—and things just seemed to get worse from there. The straitlaced civil servant was forced to admit within days of Obama's inauguration that he had failed to pay all his taxes. He won confirmation by a vote of 60–34, but it was the closest tally for any Treasury secretary since World War II. That put Geithner—who is publicity-shy even in normal times—at a moral disadvantage when he should have been a dominant voice dictating policy to Washington and Wall Street. "Because of the tax issue, he couldn't come off being too strong-voiced," says a former senior official at the New York Fed who knows Geithner well, but asked for anonymity when giving a personal assessment of him. "The problem was, by treading softly people said he didn't have the gravitas."

He was also plagued by what many critics say was a tendency to overpromise. In interviews, he invoked his experience in Tokyo as a Treasury attaché in the early '90s—pledging to avoid the timid response of Japan after its bubble burst, and to apply "overwhelming force," an economic Powell doctrine. The markets were underwhelmed when they didn't see a big, detailed plan right away. Geithner now argues that if you add up all Treasury's programs, along with the record $890 billion stimulus plan, he's used as much force as he could, and just about as fast as he could.

Geithner and his frazzled staff say they're amazed they've gotten as much done in 60 days as they have. "What is it? Six weeks? Eight weeks? It's eight weeks, OK," says Geithner, who is trim, fit and a little wired. "Just look at what we've done." Among other things, he cites the stimulus, as well as the huge amount of financing provided to the markets.

Out of view of the cameras, Geithner prides himself on proceeding methodically—the markets be damned. He's dismissive of critics who rail against the more controversial aspects of his plan for a public-private partnership creating government-backed "funds"—which by this summer are supposed to conduct an auction for bad assets. Among those critics is columnist Paul Krugman, who says the plan is another rich giveaway to Wall Street that won't make banks more solvent. Geithner scoffs at their proposed alternative, what he calls "preemptive nationalization of the big institutions," saying his critics have no idea what they're talking about. One big problem, Geithner says, is that the government doesn't have the resources to do more now, not with political outrage so high. And Washington cannot just take over banks that are not technically insolvent yet. "We would end up killing the institutions and having the government assume right away all those basic losses … There's no feasible way we could get in and out quickly."

Geithner says AIG, which the government effectively took over last fall, is a good example of how difficult nationalization is today. "The government took 80 percent of the thing as a condition for initial intervention. They replaced management, changed the composition of the board—they might call that nationalization. We did that because they couldn't operate. They were on the brink of default. Look at what's happened. They've had the [healthy aspects of their] business bleed away." At the same time, senior Treasury and Fed officials concede they may still have to make substantial investments in a couple of major banks when the "stress tests" are completed sometime in April. But that won't mean "nationalization." "You can't solve it that way," says Geithner.

Emanuel and Axelrod say Obama has stood by Geithner the whole way. From their first meeting last year, the two men bonded over their mutual experience growing up in Asia—and the president prizes Geithner's even-temperedness under pressure, a quality Obama shares. When Obama went to Phoenix in February to announce his housing-rescue plan, Geithner and the president had a long talk on the plane back. Obama told Geithner he understood the "constraints" the Treasury secretary was dealing with in taking time to develop a plan. It was one of many private conversations the two have had over the last two months, and Geithner often feels more in sync with Obama than with others in the administration.

Still, Obama undercut his Treasury secretary when the president declared on Feb. 9 that Geithner would the next day announce "some very clear and specific plans" on how to solve the bad-debt problem on Wall Street, and that the Treasury secretary was going to be "terrific." According to administration officials, Geithner knew at the time that the vagueness of his still-evolving framework would upset the markets, but there was nothing he could do about the president's premature enthusiasm. "We all recognize that we probably didn't handle the run-up to that speech properly, and that includes all of us," Axelrod says now. He added: "This president is not going to throw someone out for the amusement of the peanut gallery. This guy was appointed a general and was dropped in the middle of a full-scale war. It takes a little while to get your bearings. I think he has."

As Geithner himself acknowledges, however, he has a long way to go. This week he travels to London for a meeting of the G20 group of major nations, where he will encounter a new round of criticism. And even some of his firmest supporters say the mood could turn against him easily enough again. "He's probably safe for 2009," says the former New York Fed official who knows Geithner well. Still, if the economy doesn't turn around in 2010, and government auditors find waste and fraud in the trillions in Wall Street subsidies, "there might be pressure on Obama to deliver up a sacrificial lamb. He's the obvious choice." Geithner, asked whether he ever has any doubts about the rescue he's put in place, laughs and says: "I have them all the time." But he adds: "If you spend your time scared by and deterred by the critics on both sides, you will never act." At least now, nobody can doubt him on that.