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Tim Geithner Has a Tough Job

Tim Geithner was back on Capitol Hill today before the Senate Banking Committee, in his unfortunate role as a prop for congressmen to make political points and distance themselves from an increasingly unpopular bailout of the banking sector. There was little of note in his prepared testimony, which served as a comprehensive overview of the Obama administration's actions to combat the economic crisis. (For a sample of the question-and-answer session, see The Ticker.)

However, we did get another look at the evolving political dimensions of the bailout. For one thing, the administration seems determined to emphasize the differences between its policies and those of the Henry Paulson Treasury - differences that many commentators have been struggling to find.

Upon taking office, this Administration reformed EESA in four concrete ways. First, we brought a new framework of transparency, accountability and oversight. Second, we redirected the program to get credit flowing again to the financial system. Third, we focused the program on the housing market, consumer business lending, small business lending, and efforts to help create a market for legacy loans and securities. Finally, we worked to ensure that our programs facilitated broader restructuring in the financial system by providing unprecedented transparency about the health of our major financial institutions, allowing investors to differentiate more clearly among banks and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government.

The administration is even trying to rebrand the Troubled Asset Relief Program, or TARP.

It's true that the Geithner Treasury has taken steps that the Paulson Treasury did not; whether they are truly a change in direction, however, is more debatable. It's true that Geithner has put forward a bigger and broader plan for aiding homeowners, although whether it will work is still up in the air. The Public-Private Investment Program to buy toxic assets is a direct descendant of Paulson's original plan for TARP. The new Capital Assistance Program is similar to the old Capital Purchase Program, except it uses convertible preferred shares instead of nonconvertible preferred shares. The stress tests were a step toward greater transparency of the banking system, but there is still vigorous debate over whether they were a sufficiently rigorous test. And the latest Citigroup and AIG bailouts in February and March looked an awful lot like the bailouts done under Paulson: more money to prop up flailing institutions in their current form.

Geithner also repeated his line that "Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators." However, he backed this up by saying that nine out of the 19 stress-tested banks need a total of $75 billion in capital (even after having negotiated down their capital needs). This would be consistent if the stress test were truly a worst-case scenario, since regulators don't routinely require enough capital to withstand a worst-case scenario. But given that everyone can see that we are already living the "more adverse" stress test scenario, that argument breaks down.

If the administration is trying to make the case that it has changed course from the previous administration and its strategy is working, the opposition is just throwing out whatever grenades it can, hoping they do some damage. For example, Sen.Richard Shelby (R-Ala.) decried a "massive waste of taxpayer dollars" and criticized Geithner for the amount of time it is taking to unwind AIG. Meanwhile, Mel Martinez criticized Geithner for interfering in company operations, notably by removing CEOs.

Guys, you can't have it both ways. If you want to fix things quickly, you have to replace the management and, ideally, restructure the company itself; if you insist on keeping companies basically autonomous and negotiating with them every step of the way, things will take a lot longer. This is basically the dilemma that has plagued the bailout every step of the way, and both Paulson and Geithner have generally opted for the latter option. Perhaps there was an opportunity for more decisive action a few months ago; at this point, with the panic receding and the economy settling into what could be a long, dreary recession, the only remaining political option may be to muddle through.

By James Kwak  |  May 20, 2009; 1:58 PM ET
Categories:  Banking  
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Comments

I hoped you were going to offer a phrase like
"long, slow recovery" at the end.

Posted by: mark_in_austin | May 22, 2009 9:10 AM | Report abuse

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