House Attacks Fed, Treasury

Actually some on House panel, not the House itself, attacked the Fed and the Treasury.

At the Joint Economic Committee, a couple of House Republicans called for the resignation of Mr. Geithner, who, as president of the Federal Reserve Bank of New York, played a major role in last fall's moves to prevent the collapse of the financial system. "The public has lost all confidence in your ability to do the job," said Rep. Kevin Brady, Republican of Texas.

The public? Who the hell is the public? I'm part of the public, and I haven't lost confidence in Secretary Geithner. I have a lot of confidence in him. Whom I don't have confidence in is a Representative who thinks that by grandstanding and demagoguery he can strongarm fiscal policy.

Mr. Geithner, in an unusual public display of pique, fired back. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he told Mr. Brady.

Exactly. While Geithner is not perfect, by any means, he is dealing with the mess left by the tram of Bush and Greenspan, the most severe economic crisis in three quarters of a century.

Although several Democrats defended Mr. Geithner at the hearing, some liberal Democrats have been complaining that the Obama administration isn't doing enough to combat unemployment. Rep. Peter DeFazio (D., Ore.) called on Mr. Geithner to resign this week, and said in an interview that Mr. Geithner is too close to Wall Street.

Whom would he have? Paulson?

Treasury chief Geithner faced a House Republican who told him, 'The public has lost all confidence in your ability to do the job.' He shot back: 'What I can't take responsibility is for the legacy of crises you've bequeathed this country.'

You go, Timothy.

The House Financial Services Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron Paul, vociferously opposed by the Fed, that would direct the congressional Government Accountability Office to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. The Fed says the provision threatens its ability to make monetary policy without political interference.

43 plus 26 means there are 69 members in the committee. What in hell could 69 politicians possibly get done? Less than nothing is what.

Not worth THAT much

Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.

Driving a hard bargain is not nice when they're on the short side, apparently.

The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase & Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.

The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.

Let the market determine value. Seems reasonable.

The disagreement between banks and the Treasury indicates that the banking sector, despite being pilloried for its role in the financial crisis, is becoming increasingly confident in its dealings with Washington. Some banks have begun pushing back against some government initiatives, a move fraught with political risk.

AIG bonuses furor? One can imagine how it'll look when a source close to the Secretary speaks on background to reporters about the hardball tactics banks are playing, refusing to cooperate fully with the Treasury.

It also is an indication of how tricky it is going to be for the government to extricate itself from its unprecedented investment in the financial sector. The U.S. has flooded the financial sector with hundreds of billions of dollars, most of which is expected to eventually be repaid and, possibly, create a profit for taxpayers.

Possibly? It had better.

Some banks argue they shouldn't have to pay much, saying the government's investment was essentially a short-term loan they accepted under duress to help stabilize the financial sector.

Under duress? Quite a stretch to interpret it that way. It isn't as if the banks could have gotten through without being bailed out.

Others argue that the government shouldn't be draining bank capital at such a fragile time. At least one bank has argued it shouldn't have to pay the government anything at all.

Nice. Nothing at all? One wonders who that genius is.

But the Treasury is under pressure to extract as much money as possible for the warrants and avoid seeming to favor Wall Street over taxpayers. Lawmakers and the bailout's independent overseers have warned the Treasury against settling for too low a price and robbing taxpayers of a richer return.

The banks are tone-deaf, politically deaf, if they can't see the word robbery.

Treasury officials are cognizant that their actions will be highly scrutinized, with likely congressional hearings and reports, and are taking a firm line.

Geithner could not possibly allow a high-profile embarrassment to happen, by approving a low price.

While banks could bid on their own warrants through a public auction, some are reluctant to go that route since it could drive up the price for the warrants and let them out of their control.

And that's the point: they want to get their warrants on the cheap, not a market price: they do not want to buy their warrants in a market, but at an arranged, low price.

Treasury’s Got Bill Gross on Speed Dial

Appearing on TV and bending the ear of the White House, Bill Gross of Pimco has emerged as one of the nation's most influential financiers.





Months ago, before the election, he wrote an open letter to then-candidate Obama (whom he predicted would become president, proving his prescience and instinct yet again), outlining what he saw as the right course to take in tackling the job of fixing the national economy. [See especially post of 1 July2008, and others, including one of 20 January 2009]
Every day, Bill Gross, the world’s most successful bond fund manager, withdraws into a conference room at lunchtime with his lieutenants to discuss his firm’s investments. The blinds are drawn to keep out the sunshine, and he forbids any fiddling with BlackBerrys or cellphones. He wants everyone disconnected from the outside world and focused on what matters most to him: mining riches for his clients at Pimco, the swiftly growing money management firm.

How I wish I had that power, even if for a few minutes, to have people shut off their electronic devices and rely on their own brain.

Such nationalization [as advocated by Nouriel Roubini and Paul Krugman, to temporarily nationalize zombie banks], Mr. Gross insists, would be an unmitigated disaster. “There are two grand plans,” he said this spring at a meeting of his firm’s investment committee. “One is the Krugman-Roubini plan. They think the banks have so much garbage they are beyond hope. The other side is the administration’s side. That’s the one we’re on. If the other side should ever gain credence, then we’ll have something to worry about.”

Timothy F. Geithner, the treasury secretary, wants investors like Pimco to work with the government to buy some bank debt.





Mr. Gross is hardly a disinterested observer. Pimco, owned by the German insurer Allianz, is jockeying to be picked by Mr. Geithner to relieve the likes of Bank of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage debt so they can start lending freely again. Mr. Gross calls the plan a “win-win-win” for the banks, taxpayers and Pimco investors.

Disinterested observer, if they exist, woul dnot understand things as well as Bill Gross --and, just what the heck IS a disinterested observer?
The government is planning to announce soon which money managers will participate. A spokesman for the Treasury Department would not say whether Pimco would be one of them.

Well, I'd put a few bucks on Bill gross being chosen.
IN many ways, it is perfectly logical for the White House to turn to someone like Mr. Gross at such a time. Few investors understand the mortgage market better. As co-chief investment officer, he personally manages Pimco’s flagship, the Total Return fund, which has $158 billion in assets. As of the end of May, he had invested 61 percent of the fund’s money in mortgage bonds.

61% of 158 billion is more than 90 billion bucks ($96.38, in fact); a lot of money, anyway it's counted.

Battles Over Reform Plan Lie Ahead

“Our system failed in fundamental ways,” Mr. Geithner told the House Financial Services Committee. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”



March 27, 2009
Battles Over Reform Plan Lie Ahead
By EDMUND L. ANDREWS

WASHINGTON — Outlining a far-reaching proposal on Thursday to rebuild the nation’s broken system of financial regulation, the Treasury secretary, Timothy F. Geithner, fired the opening salvo in what is likely to be a marathon battle.

“Our system failed in fundamental ways,” Mr. Geithner told the House Financial Services Committee. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”

On the surface, both the lawmakers who listened to the Treasury secretary and the financial industry’s lobbying groups made it sound as if they completely agreed with Mr. Geithner’s call for what he described as “better, smarter tougher regulation.”

But in fact industry groups are already mobilizing to block restrictions they oppose and win new protections they have wanted for years. Even though Mr. Geithner carefully avoided specific details, laying out mostly broad principles for overhauling the system, financial industry groups are identifying issues they plan to pursue and lining up well-connected lobbyists and publicists to help make their cases.

If history is any guide, Mr. Geithner’s proposals will start an equally intense battle among the regulatory agencies themselves — including the alphabet soup of banking regulators, the Securities and Exchange Commission and the Federal Reserve — to stay in business and enhance their authority.

It took years to complete past efforts to overhaul regulation of the financial industry — replacing the Depression-era laws that separated commercial banks from investment banks, for example, and knocking down barriers between the telephone and cable television industries.

And those efforts were in some ways easier than the task confronting President Obama and Congress today. Many of the past overhauls were really about deregulation, knocking down legal barriers that had prevented different segments of an industry from competing with each other.

By contrast, Mr. Geithner’s plan marks the first attempt in decades to drastically tighten the restrictions on industry. It would create a new still-unidentified “systemic risk regulator” that would have the authority to scrutinize and second-guess the operations of bank holding companies like Citigroup or JPMorgan Chase, insurance conglomerates like the American International Group and other financial institutions that are deemed too big to fail.

Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the S.E.C. and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

Mr. Geithner’s most specific proposal, which Democratic lawmakers hope to pass in the next few weeks, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system.

In the months ahead, Mr. Geithner said, he will unveil more detailed proposals to set up a new regime for tighter regulation of most segments of the financial services industry. He has also said the government should more actively regulate executive compensation, not just at companies that are receiving federal bailout money, but at all companies that might be providing incentives for excessive risk-taking.

“The days of light-touch regulation are over,” said Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee.

Mr. Frank said the financial and economic catastrophes of the last 18 months had created a new political consensus in favor of tighter financial supervision. Mr. Frank said he hoped to pass a bill “very soon” to give the federal government “resolution authority” to seize control, restructure and shut down troubled financial institutions.

And he said he hoped to pass a much broader bill along the lines of Mr. Geithner’s plan by the end of this summer.

But administration officials acknowledged that enacting broad financial reforms would provoke political battles that are almost certain to drag on for months, if not years.

President Obama and his economic team are already trying to navigate between the deep popular anger over reckless financial practices and the pragmatic need to coax support from the financial industry for regulations they almost reflexively oppose.

On Friday, Mr. Obama will meet with executives from the nation’s biggest financial institutions. Bank executives said they expected Mr. Obama to try to sell them on his ideas, and perhaps to encourage them to keep participating in the Treasury Department’s Troubled Asset Relief Program, or TARP. Goldman Sachs has signaled that it wants to return the government’s money that the Treasury loaned it under that program.

On Thursday, most industry lobbying groups held their fire and reacted to Mr. Geithner’s proposals as if they agreed with him entirely.

The Securities Industry and Financial Markets Association said on Thursday that it “has been advocating for many of the same reforms” and that it “looks forward” to developing specific legislation.

The Private Equity Council, which represents firms like Kohlberg Kravis Roberts and the Carlyle Group, praised the Obama administration for its “plan to comprehensively address systemic risk.” The American Insurance Association declared that “we agree with Secretary Geithner” that the new rules should “encourage high standards and a race to the top.”

But industry lobbying groups are pushing their own agenda. Edward L. Yingling, president of the American Bankers Association, said he hoped to use the meeting with Mr. Obama to make the case for relaxing mark-to-market rules, which require financial institutions to value their investment securities at current market prices. Banks have argued that the rules are hurting their financial positions.

Many insurance companies, for their part, are hoping to free themselves from the oversight of 50 separate state insurance regulators. Lobbyists for the retailing and restaurant industry, meanwhile, are hoping to use the banner of financial reform to persuade Congress help reduce the fees that credit card companies charge for processing customer transactions.

Edmund L. Andrews reported from Washington, and Louise Story from New York. David Stout contributed reporting from Washington, and Michael de la Merced and Zachery Kouwe from New York.

Some optimism, some pessimism

Some initial reactions to the Geithner plan:

The public seems to be proving more optimistic about Treasury’s toxic-assets plan than economists were this morning.

• Bill Gross of Pacific Investment Management Co. said, “This is perhaps the first win-win-win policy to be put on the table and it should be welcomed enthusiastically…We intend to participate and do our part to serve clients as well as promote economic recovery.” Gross added, “From Pimco’s perspective, we are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer.”
• Curtis Arledge, co-head of U.S. Fixed Income in BlackRock’s Fixed Income Portfolio Management Group, expressed similar optimism. “There will be large amount of capital that is going to come in to buy these assets which will change the equation,” he said. “Giving investors capital to buy these assets is going to improve their pricing.” Alredge added: “In the big picture, the government is trying to restore economic growth…More capital is needed than the government can supply. We trust them. We also think they are very intelligent about how they think about this issue.”
• Ron D’Vari, co-founder and chief executive of New Oak Capital in New York said, “We would definitely be interested in the asset classes that have been identified for the program.” He continued, “Clearly these assets aren’t going to be sold at par…They are held on banks’ balance sheets and held to maturity, which means if they were Triple-A rated securities they will have been held at par and not written down.”
• Meantime a Bank of America spokesman offered a somewhat supportive response: “We are in favor of the concept but are studying the details.”

There’s still some skepticism, though.

• Kevin Hebner, strategist for global macro investment fund Third Wave Global Investors said: “Traders and portfolio managers don’t want to be investing with career bureaucrats.”
• David Trone, an analyst from Fox-Pitt Kelton Cochran Caronia Waller, said, “Some private investors may not want anything to do with this plan at any price because of the way the government has become radical in changing rules.”

Inside Obama’s Economic Brain Trust

What greeted Geithner in the capital was a full-blown firestorm. Republicans were howling and screeching, calling for his head on a pike. Some Democrats privately agreed. On Wall Street, meanwhile, where Geithner’s stock has been falling precipitously for weeks, a prominent Democratic banker (and Obama backer) told me, “It’s not that everyone here thinks he should be fired. It’s just that there’s no one who would stand up right now and publicly throw their support behind him.”

He is the eye of the hurricane.

A budget session in the White House Roosevelt Room in February. From left, Gene Sperling confers with OMB director Peter Orszag as Tim Geithner talks with Larry Summers.




That Obama would defend Geithner on AIG comes as no great shock. According to the president’s chief of staff, Rahm Emanuel, Obama regards the bonus imbroglio as a “distraction” from more urgent economic priorities; his goal is to move past it and allow Geithner to get back to the business of rescuing the financial system. Yet AIG will not be so easily brushed aside, for it has brought to a boil the simmering doubts about not just Geithner but also his partner Larry Summers, director of Obama’s National Economic Council, and the economic approach they are fashioning and advancing for the administration.

It is a distraction, but it has traction, and has become an important issue. Of course, their honeymoon lasted about a week, if that long. Republicans can't figure out what to do except howl, and the IGA imbroglio has given them something specific to howl about.

When Obama appointed Geithner and Summers back in November, the reaction in Washington and on Wall Street was the same: first relief and then elation. (The day the news of Geithner’s selection leaked, the Dow rose 6.5 percent.) They were brilliant, experienced, crisis-tested, market-minded but progressive, a kind of economic-policy dream team. Since then, they have worked side by side along with Fed chair Ben Bernanke to quell an economic crisis as monstrous as any since the Great Depression—while formulating an economic agenda as ambitious as any since FDR’s. They’ve unveiled big plans, talked big talk, and crafted and shepherded into law the biggest fiscal-stimulus package in American history.

The 'market' wanted Geithner, approved of him, and a 6.5% rise is substantial. But the market is schizophrenic, and its attention span is exceedingly short.

But Obamanomics represents something even bigger than all that. At a moment when the fundamental precepts of market capitalism and government’s relationship to the economy are up for grabs, the Obamans are attempting nothing less than a redefinition of progressivism, which could alter the terms of political engagement and the ideological balance of power for decades to come. With their budget, they have laid out a vision that, as former Labor secretary Robert Reich puts it, “reverses and repudiates the economic philosophy that has dominated America since 1981.” Obamanomics isn’t merely the end of Reaganomics, in other words. It’s the end of Rubinomics, too.

Good riddance to both.

An agenda this transformative is bound to stir up criticism, and so it has—from the left and the right, Wall Street and Main Street, arch-Establishmentarians and hot-eyed populists in roughly equal measure. The complaints of these factions vary wildly, but they share a point of agreement: that the administration so far has badly mishandled the banking crisis; that it’s dithered, dawdled, and dinked around instead of delivering bold, decisive action. For Obama, confronting this issue poses a vexing dilemma. Saving the banks is the sine qua non for the country’s emergence from its ever-deepening miasma, but in doing so, Obama risks incurring a tsunami of bailout rage. If, on the other hand, he appeals too much to populism, he risks driving elites away. Either outcome could deny him the support he needs for the rest of his agenda. Getting the economics right may be devilishly difficult—but the politics are even trickier, and just as crucial.

Everybody hates it, so it must be good. And it is. It signals a new age, and it will be very difficult to get done. But it is important to get it done. The politics will be difficult. Yet I have faith in this President.


By the time you read this, in all likelihood, Geithner will finally have unveiled his plan, developed with Summers, for rescuing the banks. The stakes could not be higher. To no small extent, Obama is betting his presidency on their ability to help him pull this off. Their skills, brains, and dedication are not in question; for all the brickbats being hurled their way, they are laboring tirelessly, even heroically, against a nightmare not of their making. The question is, will that be enough?

Throughout his career—from becoming, at 28, one of the youngest tenured professors in Harvard’s history to his brief and inglorious tenure as the university’s president—much has been made of Summers’s abrasiveness and regard for his own candlepower. “Larry Summers is to humility what Madonna is to chastity,” The Wall Street Journal editorial-page editor Paul Gigot once wrote. But unlike most intellectual bulldozers, Summers enjoys people who fight back, even invites them to. He also has a fine sense of humor about himself. After reading Gigot’s gibe, Summers told his then-wife, “Well, it’s not as bad as it could have been: He could have said that I’m to chastity what Madonna is to humility."

Emphasis added, joke enjoyed.

Under the topic of could-have-been, file Geithner's selection as Treasury Secretary, rather than Summers: The decision would prove fateful. Whatever difficulties Summers might have encountered during the confirmation process, it’s hard to believe they would have been more acute—or lastingly debilitating—than the controversy that arose over Geithner’s taxes. To start with, Tom Daschle would likely have been able to survive his own l’affaire IRS. And perhaps more consequentially, the tax-compliance flyspecking that has made filling the senior posts under Geithner so difficult might have been avoided.


The passage of the stimulus package was, no doubt, a significant victory for Obama, Summers, and the rest of the economic team. But for Geithner, the triumph coincided with the start of what would be for him a long and brutal stretch. For on the same day that the Senate passed its version of the stimulus, thus essentially guaranteeing its enactment, Geithner delivered his maiden speech on the Obama plan to save the banks.

“Tim and Barack might have been able to get away with ‘Trust me on the details’—except that they were following Paulson, who asked to be trusted so many times and then changed directions that no one was going to trust any Treasury secretary on the details,” remarks a senior executive at one of Wall Street’s biggest banks. “And then here comes Tim and says, ‘Trust me on the details.’ Oy vey.”

What had happened was that Geithner, after weeks of working on the plan, changed his mind late in the game and decided to pursue a different path. Without time to craft fully the new strategy, he concluded that vagueness was preferable to providing details that might have to be altered later. One problem, though: Apparently no one told Obama.

Apparently? What kind of stuff is that? And changing his mind at the last minute? Improvising is good in jazz and football running backs and point guards, but not in steering the federal government during a financial disaster. Oy vey.

To some in the White House, the sight of the financial world turning hard against Geithner is curious, even baffling. What the Obamans thought they were getting in him was Wall Street’s guy. “They don’t get it,” says one name-brand Democratic banker. “Geithner was a $500,000-a-year guy. He was the regulator. People knew him, liked him fine, but he was never a member of the club.”

I guess he means only 500 thoussand. Pity that.

A longtime Geithner ally in Washington comes to a different conclusion. “A lot of the pushback he’s getting from Wall Street is about their lack of self-awareness about how the world has changed, how they’re not the Masters of the Universe anymore,” this person argues. “They feel marginalized and put-upon by the administration’s rhetoric about the greedy bankers. They are way behind the curve about where the public is and how much pressure the administration is feeling. They don’t like what the new environment means for how they run their business. They see their taxes going up and their compensation going down. And what they don’t do is go to the New York Times and say, ‘My feelings are hurt. I don’t like what the new president is saying about our character and our competence.’ What they say is, ‘These guys are incompetent, we need a real policy, the Treasury secretary has got an unsteady hand—he’s not up to the job.’ They’re thinking one thing and saying something quite different.”

It sure depends how you look at it; two people can arrive at two different conclusions, depending on their persepctive.

And, where is Paul Volcker in all of this?

In the worlds of finance and business, few figures are held in higher esteem than the towering, stoop-shouldered, marble-mouthed Volcker. So it has hardly gone unnoticed that he has lately seemed, ahem, less than thrilled with Team Obama.

I've noted his absence.

He has privately complained that Summers has frozen him out of the policy-making process. He has publicly criticized the sluglike pace of filling top jobs at Treasury as “shameful.” With the White House meeting, Obama had a chance to make Volcker happy—and in the process use him as a piece of photo-op arm candy, sending the message that the chairman remains standing, literally and figuratively, beside him.Was Volcker placated? Maybe only momentarily. “He wants to have a real role,” says someone who knows him. “If they’re gonna call him an Obama adviser, he wants to really advise. He has no interest in just being window dressing.”

Ah, office politics, bruised egos, intrigue.

Even (or especially) absent details, nobody has the faintest clue whether the plan will work. But everyone believes that, even if it does, the cost will be stratospherically high—likely upwards of $1 trillion, comprised of the $250 billion still in the kitty from Paulson’s original tarp program plus the $750 billion that the Obama budget warned Congress might be needed. The problem, politically speaking, is that the public appetite for ponying up for further bailouts is small and shrinking by the day, thanks in no small part to the depredations undertaken by AIG.

The AIG imbroglio cost Barack Obama a lot of political capital. A lot. The political will to undertake significant efforts to solve the financial crisis is dwindling, with the Republicans working to whittle it further.

The only way that the electorate is going to sign on to the level of spending necessary to keep the financial system from imploding is if there is some tangible upside for the taxpayer—as opposed to the current bailout paradigm, which Krugman refers to as “lemon socialism: Banks get the upside, but taxpayers bear the risks.”

Krugman doesn't like a lot of things. That doesn't mean he's wrong, but he is a sour puss.

There are those who believe that the administration grasps the point perfectly well. That nationalization is where it’s headed, slowly but surely. That the stress tests are really just a backdoor way into temporary government ownership of the current zombie banks—a means of providing a sense of order, consistency, and due process necessary to make nationalization seem an empirically based act of last resort.

Some have forecast nationalization, including Dr. Doom.

“All I can tell you,” says one administration official, “is that Larry seems quite happy with this part of the policy portfolio being known as the Geithner Plan.”

More office intrigue.

The truth, in the end, is that whatever emerges will be perceived as the Obama plan. And the president is apparently deeply uncomfortable with nationalization.

Not a socialist? How about that.

Two months into the Obama era, however, it’s hard to detect many traces of the Rubin doctrine in what the new president and his people have done or are planning to do in the future. The administration proposes to run a $1.17 trillion deficit in 2010. It intends to reregulate the financial industry. The reduction of income inequality is at the core of its tax and spending proposals. Its budget plan reflects “the largest commitment [to public investment] in 40 years,” notes Bob Reich. And it imagines a level of direct government involvement in the market (and particularly in the banking sector, nationalization or no) that would have Rubin spinning in his grave—if he weren’t still kicking, that is.

A variation on Ralph Kiner's phrase.

The balancing act that Obama must therefore pull off is a hell of a party trick. He must court the elites without pissing off the masses and soothe and provide catharsis for the masses without alienating the elites. His political advisers, seeing his poll numbers beginning to slip, are applying their war paint and preparing to do what they do best: pick a fight with the Republicans. (Rush Limbaugh, anyone?) But however tempting this might be, Obama would do well to rein them in. Not because there’s any inherent virtue in bi-partisanship or kowtowing to Republicans. But because picking fights during a national crisis looks small, unserious, and faintly oblivious to the severity and significance of what’s occurring around us.

Mac: give Tim time

McCain Defends Geithner: Give Him A Chance To Succeed is the headline of a story in the Huffington Post, which in turn quotes a story in the Financial Times (London).

The Post:

An unlikely figure has come to the defense of embattled Treasury Secretary Tim Geithner: Sen. John McCain.

Geithner "should be given a chance to succeed," McCain said on Friday, according to the Financial Times, which notes that the former presidential candidate was one of the few Republican senators to support Geithner's nomination, and likely the first to "speak up in Mr Geithner's defence amid growing calls for his resignation."

"Everyone acknowledges he needs help," said Mr McCain, in reference to the Obama administration's difficulty in recruiting nominees to the Treasury department, where Mr Geithner remains the only official to have been confirmed.

FT:

McCain speaks up for Geithner
By Edward Luce and Demetri Sevastopulo in Washington
Published: March 20 2009 21:00 | Last updated: March 20 2009 21:00

Tim Geithner, the embattled US Treasury secretary, should be given a chance to succeed, says John McCain, the former presidential candidate, who is the first prominent Republican to speak up in Mr Geithner’s defence amid growing calls for his resignation.

Resignation? Nonsense.

Speaking to the Financial Times, Mr McCain said that the “perfect storm” over AIG “has been as explosive in a short period of time as anything I have seen”.

It has been some heck of a powder keg.

Mr McCain, who was one of the few Republican senators to vote in favour of Mr Geithner’s nomination after revelations of tax arrears, was speaking at the end of a week in which the Republican Party has targeted Mr Geithner amid mounting public anger over Wall Street bonuses.

The Republicans -- and, by the way, where the heck is Michael Steele? At a hip-hop party? -- want to tie AIG to Geithner and then to Obama, trying to obstruct and damage the Administration at every turn.

“Everyone acknowledges he needs help,” said Mr McCain, in reference to the Obama administration’s difficulty in recruiting nominees to the Treasury department, where Mr Geithner remains the only official to have been confirmed.

Mr McCain also distanced himself from Republican “righteous indignation” over Mr Obama’s budget tactics. Many of Mr McCain’s colleagues fear Mr Obama will use the congressional “reconciliation” process, which enables the majority to circumvent an opposition filibuster, to smuggle through healthcare reforms and energy cap and trade in the budget.

Smuggle? Curious choice of words.

Mr McCain said that a congressional short-cut could be employed by the administration that had been devised by Republicans and used by George W. Bush to push through tax cuts. “Republicans invented this,” he said. “I don’t like it but there are chickens coming home to roost.”

Amen, Senator.

Headlines and Stories

Pope in Africa reaffirms "no condoms" against AIDS Putz. That is almost criminal.

"It (AIDS) cannot be overcome by the distribution of condoms. On the contrary, they increase the problem," he said in response to a question about the Church's widely contested position against the use of condoms.

The disease has killed more than 25 million people since the early 1980s, mostly in sub-Saharan Africa, and some 22.5 million Africans are living with HIV.

Recession-weary Americans outraged by AIG bonuses The excuse is that they were contract stipulations that couldn't be abrogated. But the auto workers had to renegotiate their contracts in order for GM and Chrysler to get government money. False outrage by politicians diverts the true question: how come the white collar types got their money? Didn't Geithner know? And if he didn't, why not?

Army puts Madagascar opposition leader in charge

The Associated Press - ‎55 minutes ago‎

ANTANANARIVO, Madagascar (AP) - Military leaders in Madagascar say they have handed over control of this Indian Ocean island nation to the president's rival.

Opposition given Madagascar reins Aljazeera.net

Spending More Than $800 Billion Is the Easy Part

Last night, on ABC News, Paul Krugman and George Will were interviewed, discussing the idea of whether the Stimulus Package is large enough, or too large. George Will quoted Secretary of the Treasury Mongenthau, FDR's Secretary, to the effect that all the stimulating did not lift the economy. Yes, 70 years ago.

“There’s a real danger in looking at Japan, or even our own experience during the 1930s, for what works or doesn’t work,” said Jeffrey E. Garten, a professor at the Yale School of Management who helped develop the Clinton administration’s economic strategies for Asia.

Does analyzing what happened 20 years, or 70 years, ago help?

“Those problems arose at a different moment in the history of the global economy, when banks around the world were not so intertwined and when the financial sector wasn’t so critical to global growth,” Mr. Garten said. Japan’s troubles, he said, barely affected international trade.

“The challenge is a political one: with the government putting a lot of funds into the banking system, Congress wants to see results, tangible results,” said Laurence H. Meyer, who served on the Federal Reserve from 1996 to 2002 and is vice chairman of Macroeconomic Advisers.

“But you don’t want the government in the position of deciding on loans,” he said, “because they are not going to be any better at that than the private sector was last year.” Moreover, once the government is involved in the decision there will be enormous pressure to lend to borrowers who might not be creditworthy, perpetuating the problem that triggered the problem.

“The fact is,” Mr. Meyer said, “there are a lot fewer creditworthy borrowers now than there were a year ago,” thanks to job losses and the erosion of assets.

Mr. Meyer and other economists, however, say they are encouraged by the Obama administration’s exploration of ways to draw private investors back into the market for “toxic assets.” If the price of those assets drops low enough, and the government is willing to guarantee investors against losses, “I think there is a lot of money on the sidelines that may come in to buy these up,” Mr. Meyer said. “There’s a great profit opportunity here.”

How bad is it?

January 21, 2009, 4:00 pm - Should Obama Seize Citigroup?
By Eric Etheridge (New York Times, 21 January 2009)

This is probably not a news story that a new president wants to read on his first full day in office. Bloomberg.com reports: U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."

Roubini got it right; back in 2005 he rained on Greenspan's parade, and even Summers criticized his conclusions. He can not be dismissed.

Last week’s bad news from Citigroup and Bank of America had already prompted a round-robin discussion in the blogosphere on the wisdom of nationalization. With tongue somewhat in cheek, John Quiggin blogged at Crooked Timber on Monday:

All reasonable commentators now agree that nationalisation of big banks like Citigroup, Bank of America and Royal Bank of Scotland must take place soon, explicitly or otherwise. As I said at just before the second (failed) Citigroup bailout, banks like Citi are not only too big to fail, they’re too big to rescue with any of the half-measures that have been tried so far.

Why didn't TARP get used to buy troubled assets? Thank goodness Hank Paulson is gone from Treasury.

Others were wary of this solution: At his New Yorker blog, The Balance Sheet, James Surowiecki wrote the same day, “I think that as the ‘nationalize now’ meme has taken hold in the blogosphere, people are talking about nationalization ‘awfully casually.’ . . . [T]he idea that most of Barack Obama’s Presidency will be spent presiding over a government-run banking system is a daunting thought.”

Nationalizing banks would be a bear (pun intended).

And at Marginal Revolution, Tyler Cowen listed his concerns about how a nationalization strategy would play out:

How many years of profits are needed to create the cushion of capital which is required for re-privatization? And how many years of government ownership will be needed to generate that many years of profits? Will banks owned by the government be allowed to pursue profits, rather than lending to troubled industries in the districts of influential Congressmen? Or will government just stick money in the bank and hope they have thereby created a sound enterprise?

The idea of nationalized banks is enough to make one shudder. The idea of banks not being nationalized makes one shudder.

Quiggin’s argument is that current rescue efforts — especially including leaving current bank managers in place — simply won’t work. Blogging today in response to Surowiecki and others, Quiggin writes:

Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.

He has no doubts, does he?

In Britain, where the banks and the pound are collapsing, and the government announced its new, just-short-of-nationalization rescue plan on Monday, Financial Times blogger Willem Buiter is leading the charge for going all the way.

Yesterday he laid out his thinking in a long post, which began with a comparison of the recent banking excesses in Iceland and the U.K.:

Both countries allowed the unbridled growth of banks that became too large to fail. In the case of Iceland, the banks also became too large to rescue. In the UK, the jury is still out on the ‘too large to rescue’ issue, but I have serious and growing concerns. Incrementally, the British authorities have guaranteed or insured ever-growing shares of the balance sheets of the UK banks. And these balance sheets are massive. RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

Look at this figures:

RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

RBS has a bigger balance sheet than the UK's GDP? With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. Amazing.

Buiter goes on to argue that the near-nationalization rescue plans will only make things worse:

In the name of preventing a collapse of the UK banking system, we are witnessing the socialisation — at first gradual, but now quite rapid — of all balance sheet risk of the UK banks by the UK government. This is risky and, in my view, unwise. The manner in which it is done also seems designed to maximise moral hazard. The good news is that it is unnecessary for restoring and maintaining the flow of new credit in the the British economy. . .

Socialization, er, socialisation of bank balance sheet risk.

My belief that the UK government should take over all UK high street banks (on a temporary basis) is based on the simplification this would provide as regards the governance of these institutions under extreme circumstances, when private ownership and governance have clearly failed, and on its positive effect on incentives for future bank behaviour (’moral hazard). When the public interest and the interests of the existing private shareholders and the incumbent managers and boards of directors diverge as manifestly as they do in this crisis, the sensible thing to do is to buy out the existing shareholders (as cheaply as possible). That way the failed and failing management and boards can be restructured (fired without golden parachutes) and the new owner can insist on and enforce an open, verifiable valuation of toxic and dodgy assets, on and off the balance sheet of the bank.

That makes sense.

He then lays out his four-point plan:

(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.

(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.

(3) Don’t issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.

(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new ‘bad bank’. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won’t call them ‘good’ banks) and the bad bank, the valuation does not matter.

Back in the States, watching Tim Geithner’s confirmation hearing today, Kevin Drum seizes on this remark by the soon-to-be Treasury Secretary:

The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist … then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system … In a crisis of this magnitude, the most prudent course is the most forceful course.

Well, I barely understand some of what the professor is saying, but how can we go ahead ignoring existing assets whether they are toxic, dodgy or merely doubtful? What happens to them? Creating a bank to assume bad assets is a good idea, indeed. What are "high-street banks", I wonder?

Drum’s conclusion?

Nationalization fans should rejoice at hearing this. More and more, that includes me, by the way. The news out of Britain is beyond grim right now, and [throughout] this financial crisis the U.S. has never been more than a couple of months behind the UK. If that stays the case, nationalization of at least a couple of big banks will hardly even be a debatable option a few weeks from now.

The Closest of Frenemies

Were the idea, having coming this far and become this public, to fall apart now, the ensuing humiliation would be grievous and mutual for Obama and Clinton. Too grievous and too mutual, that is, for them to let it happen.

That was exactly what I felt soon after word was leaked: it would not have been made public if there were doubt on either side. And every pundit has an opinion, and confidence therein, as to what the appointment means: a disaster, a stroke of genius, little in between.

But what strikes me as most interesting about it—along with the other appointments Obama has made so far—is what it suggests about the president-elect, from his conception of his embryonic administration to the size and contours of his ego.

It strikes me that most commentators are so sure of their opinions, that they are not taking time to reflect. This commentator does some reflecting. After outlining the commentary of Tom Friedman, David Ignatius and David Broder (many at MSNBC and CNN quote Friedman as if he were a sage, rather than a columnist), he posits the strengths of the appointment.

But for Obama and his inner circle—notably Rahm Emanuel, his new chief of staff, whose fingerprints are all over the Clinton gambit—Hillary brings an array of strengths to the table, and many of what critics see as her problematic qualities can be viewed instead as assets. Her existing relationships with world leaders and her global star power would allow her to walk into foreign capitals and deal with the president or prime minister on level footing. And in the face of a cratering economy likely to consume the first year (or more) of Obama’s term, handing off the foreign-policy legwork to a savvy, tough, high-profile surrogate with roundly acknowledged expertise on the relevant issues holds no small appeal.

And more:

Then there are the more subtle advantages to picking Hillary. Foreign policy is prone to internecine conflict in any administration, with the secretaries of State and Defense, the national-security adviser, and often the vice-president all jockeying for position. And Obama’s regime—with Joe Biden in the building and Robert Gates likely to remain atop the Pentagon—will be no exception. But Clinton is much closer to Biden than most people realize; that campaign gaffe of his about her making a better V.P. than him was more like a Freudian slip. And Gates, like many Republicans, is said to respect Hillary immensely; indeed, no Democrat is regarded more highly by the opposition and the generals.

Good points about Clinton and Biden. Fascinating, and, to me, surprising how highly regarded she is.

Little of this, it should be noted, is true of the other shortlist candidates to run State. John Kerry and Bill Richardson are both fine men, qualified on paper for the job. But Senator Pompous has long had an intensely competitive relationship with Biden (“They’re like brothers—in every sense,” reports a Biden confidant) and is unbeloved by the GOP. And does anyone really think that Governor Doofus (or, if you prefer James Carville’s formulation, Governor Judas) possesses anything close to Clinton’s candlepower? Or gonads, for that matter? You can bet your last dollar that Emanuel, for one, does not.

Kerry? Mistake. And I love Bill Richardson, but I can see the points made.

Finally, there’s the Machiavellian angle: Obama playing the prince by pulling the old king and queen close. As Dee Dee Myers observed, her former boss is sure to cause Obama heartburn whether he is in the huddle or on the sidelines, musing about the new president’s (inevitable) missteps. “The question is not how to keep him at arm’s length,” she blogged, “but rather how best to harness his prodigious talent in service of shared goals, rather than political mischief.” The odds of doing that—and, incidentally, banishing any stray fantasies of a nomination challenge in 2012 from HRC’s mind—go up by putting his wife on Team Obama.

Bubba won't be disrespecting the Obama Administration too much if Hillary is part of it. Very good point. One Chris Matthews is too hysterical to consider, let alone think of.

The obvious question is why Hillary would do it. What’s she thinking? What’s her game? No doubt part of the reason her people began leaking word that she’s not certain she wants the gig was to cushion the blow in case the Bubba vet turned ugly.

Spin is a Clinton game, and they play it well.

Assuming that Clinton and Obama get to yes, Eric Holder is a go for attorney general, and the Gates assumption holds, the upper echelon of Obama’s Cabinet will be nearly full: only one of the big four, Treasury, remains an unleaked mystery. The Clinton choice matters here. With Obama already catching flak from his base for being too Clinton-centric, Hillary at State probably reduces Larry Summers’s chances of winding up at Treasury. The more likely pick seems to be Jon Corzine, whose stock has risen despite some mildly hairy vetting issues, as Obama transition officials have come to think that public-communications skills are key to the job in a time of economic chaos. (“See Hank Paulson? That’s what we don’t want,” says one person involved in the transition.)

Treasury didn't seem such a mystery: Gaithner or Summers. And Gaithner is it. Summers is inside the White House. So the assumption about Corzine was wrong.

So what do all these and Obama’s other appointments tell us? First, that the “team of rivals” meme is vastly overdone. Maybe Obama will appoint one more Republican (Chuck Hagel as U.N. ambassador?), but by and large his administration will be filled with politically like-minded folk. His White House will be chockablock with players (David Axelrod, Pete Rouse, Valerie Jarrett, Jim Messina) central to his campaign, his Cabinet heavy with elected officials (former senator Tom Daschle for Health and Human Services, Arizona governor Janet Napolitano for Homeland Security, Kansas governor Kathleen Sebelius for Labor) who endorsed him early in the primaries.

The liberals bought that meme, as did pundits. Obama underestimates what Lincoln faced; why bring in Hillary? Missed the point.

The thread that binds these names together isn’t ideology but a devotion to a kind of hard-nosed, even ruthless pragmatism. Moreover, Obama’s appointments to critical posts reflect an inclination toward people with deep institutional expertise and major-league political chops, who can effectively drive or implement an agenda.

Rather than a Marxist, a socialist, a lightweight or naive, Obama is proving he is shrewd, and a great politician. While Palin is speaking in front of a turkey processing station, he is organizing his government.

Picking Emanuel was all about mastering Congress, Daschle about actually passing health-care reform (as opposed to think-tanking the perfect, elegant policy solution, à la the Clinton effort in 1993–94). Keeping Gates is about getting out of Iraq without letting the country descend into chaos. The putative Clinton pick carries hints of a similar raison d’être. You can easily imagine Obama telling Hillary: A deal between the Israelis and the Palestinians—go bring that sucker home.

If she does bring it off, her name goes into the history books, for having accomplished something even President Bubba could not and did not.

But choosing Hillary demonstrates more than merely get-her-done, mission-driven hardheadedness. It demonstrates that Obama has finally learned the political power of magnanimity—or least the perception thereof.

See also Lieberman, Joseph, Senator.

It demonstrates strength, whereas selecting her as his running mate would have displayed the opposite (the stories would all have been about how he did it because he had no choice). And it demonstrates a level of self-confidence remarkable even in someone who just won the presidency.

Shrewd: to make a choice because he wanted to, not because it seemed right. Shrewd: astute: marked by practical hardheaded intelligence.

One of the cardinal rules of the Beltway is that you never appoint a subordinate who, for all practical purposes, can’t be fired. Colin Powell was very nearly such an appointment, and George W. Bush came to regret it. Hillary Clinton would be another. Obama is wagering that Clinton will do his bidding and not pursue her own agenda because she will see that her future—in electoral politics, in how she’s treated in the history books—will be bound up with his success. He’s not just bringing her inside the tent; he is making her a tent-pole. This strategy is either shrewd or delusional. But timid it is not.

Obama leaks

At 3.37pm, this headline appears:

US Stocks Rally on Report Geithner to Be Treasury Secretary

Bloomberg - 13 minutes ago

By Eric Martin Nov. 21 (Bloomberg) -- US stocks rose and the Standard & Poor’s 500 Index rebounded from an 11-year low as NBC News reported President-elect Barack Obama will nominate New York Federal Reserve Bank chief Timothy Geithner to head the Treasury.

Over at the NY Times, this headline appears:
Clinton Decides to Accept Post at State Dept., Confidants Say

By PETER BAKER 5 minutes ago Hillary Rodham Clinton will give up her Senate seat and accept the nomination for secretary of state after talks with President-elect Barack Obama about her role, two confidants said.

Why did she accept? Mrs. Clinton came to her decision after additional discussion with President-elect Barack Obama about the nature of her role and his plans for foreign policy, said one of the confidants, who insisted on anonymity to discuss the situation.

After what is described as a general first meeting, a second meeting had more substance, and she felt good about it, said one of two Clinton confidants.

A second Clinton associate confirmed that her camp believes they have a done deal. Senior Obama advisers said Friday morning that the offer had not been formally accepted and no announcement would be made until after Thanksgiving. But they said they were convinced that the nascent alliance was ready to be sealed.

As secretary of state, Mrs. Clinton will have had a powerful platform to travel the world and help repair relations with other countries strained after eight years of President Bush’s policies. But at the same time, she will now have to subordinate her own agenda and ambitions to Mr. Obama’s and sacrifice the independence that comes with a Senate seat and the 18 million votes she collected during their arduous primary battle.

There are those 18 million votes again; conventional wisdom. Obama got more, and he got elected President.

As for Geithner:

“This news could really give the stock market a badly needed shot in the arm,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, wrote in an e-mail to clients. Geithner is a “fantastic choice to help lead the financial markets out of the wilderness.”

Not too bad.