By Dan Froomkin
12:35 PM ET, 02/11/2009
President Obama finds himself at a disadvantage today when it comes to defending the bank-bailout plan announced by his Treasury secretary yesterday.
At the very least, as Frank James blogs for Tribune, Obama oversold what Timothy Geithner ended up delivering.
At his Monday night press conference, Obama said Geithner would "be announcing some very clear and specific plans for how we are going to start loosening up credit once again..... It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward."
But as David Cho and Lori Montgomery write in The Washington Post, "the lack of detail in [Geithner's] plan dismayed lawmakers and investors, triggering a steep sell-off on Wall Street....
"The Treasury Department provided only the most general descriptions of how struggling homeowners and small businesses would be helped. And officials said they have yet to design a program that is a core part of the plan: A public-private initiative that would encourage investors to buy up the toxic assets now weighing down the books of banks and threatening to overwhelm the firms with losses.
"Cleansing the financial system of these assets, which are backed by failing mortgages and other troubled loans, has vexed officials since Congress approved the $700 billion rescue package in October. But financial analysts said Geithner, who took a strong hand in casting the new plan, appeared to have no better grasp on a solution than his predecessor, Henry M. Paulson Jr."
Neil Irwin writes in The Washington Post: "In rolling out his overhaul of the financial rescue yesterday, Treasury Secretary Timothy F. Geithner lambasted the Bush administration's response to the crisis over the past year.
"'Policy was always behind the curve, always chasing the escalating crisis,' Geithner said, criticizing his predecessor, Henry M. Paulson Jr. 'The emergency actions meant to provide confidence and reassurance too often added to public anxiety and to investor uncertainty.'
"But yesterday, Geithner seemed to be following the Hank Paulson playbook, according to a wide consensus on Wall Street, in Washington, and beyond."
In Geithner's defense, he's trying to solve an enormously complicated problem in a challenging political environment.
Jim Puzzanghera and Maura Reynolds write in the Los Angeles Times about the "double bind for the Obama administration.
"Fixing the financial system has turned out to be a bigger, harder and much more expensive challenge than expected, potentially requiring billions more in additional federal commitments.
"But the political climate has turned so sour that Congress, enraged by what it sees as irresponsible excesses by Wall Street executives, is unlikely to approve more funding, at least for now.
"As a result, the administration is moving toward approaches that reduce the government's financial risk and require no new congressional action. But those constraints mean the plans are taking longer to design and implement."
Deborah Solomon writes in the Wall Street Journal: "A senior Treasury official said the administration explored 'quite a few alternatives' but concluded it was a 'challenge' to have the government set a price for the bad assets. Instead, they believe their structure will allow the private sector to value them."
In his interview with ABC News's Terry Moran yesterday, Obama didn't seem overly troubled at Wall Street's negative reaction to the Geithner plan.
"Well, you know, Wall Street, I think, is hoping for an easy out on this thing and there is no easy out. Essentially, what you've got are a set a banks that have not been as transparent as we need to be in terms of what their books look like," Obama said.
"And we're going to have to hold out the Band-Aid a little bit and go ahead and just be clear about some of the losses that have been made because until we do that, we're not going to be able to attract private capital into the marketplace. And so, you know, I think that you have two choices in this situation: You can prolong the agony and shareholders will be happy until they're not happy, and that could be a year from now or two years from now, or, in the case of Japan, eight years later.
"Or you can just go ahead and acknowledge that, yeah, there's a lot of work that has to be done to put these banks back on a firmer footing."
Obama also explained why he thinks nationalizing banks -- the increasingly preferred solution of many left-leaning economists -- wouldn't make sense.
Moran: "There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?"
Obama: "Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called 'The Lost Decade.' They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn"t see any growth whatsoever.
"Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [He laughs.] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn"t make sense. And we also have different traditions in this country."
New York Times columnist Paul Krugman responds in his blog: "Yes, we have thousands of banks — but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the 'stress test' is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.
"And the argument that our culture won’t stand for nationalization — well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out.
"Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie."