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Belmont Club

Loss of lift

March 24th, 2009 - 1:26 am

The NYT, in an editorial, categorically rejects Geithner’s bank rescue plan. It is an unswerving rejection of Treasury’s assumption that the auction system through which it proposes to dispose of the troubled assets will value them properly. But more importantly, it reflects a lack of faith — even among the converted — in the ability of government to keep from playing favorites where such sums are concerned. Geithner’s bank rescue plan, coming on the heels of the AIG scandal, had to be both financially sound and politically viable to keep the administration’s credibility from cracking. With liberal economists like Krugman already against Geithner’s plan, the categorical rejection of Geithner’s plan by the NYT implies that the Obama administration is running out political places to hide. The NYT wrote:

President Obama’s long-awaited plan to revive the banks could work if certain assumptions about the future are right. But there is not much, beyond faith, to believe those assumptions will pan out — and even if there were, it is hard to see how the plan is the best way to go. …

The first assumption is that those battered assets will recover handsomely, thus allowing the government loans to be repaid with interest. There has, however, been no independent assessment of the assets or their underlying collateral, so there’s no way to know that they will recover by much, if at all from their beaten-down state. …

And even if you assume that the sums put up by the government are enough to cleanse the banks entirely, restoring the banks to health by throwing money at them — even with a sheen of private capital — would not be fair. It would be one big transfer of wealth from the government to bank investors. That would be better than an apocalyptic crash, but it is a near complete socialization of losses, with little value flowing to taxpayers. …

A better way would be to base the rescue on current reality, not assumptions about the future. What would an examination of the banks’ assets reveal about their value? What is the size of the hole in the banking system? In the absence of good-faith measurement, taxpayer-financed purchases of bad assets could court huge unnecessary risks.

Only three months into his Presidency, Barack Obama is failing the most important test of his life. His team can’t come up with a plan to pull the American economy out of a tailspin. More importantly he is losing public confidence in his ability to come up with one. It is in the universal interest for Obama to succeed. But somehow, even those who are predisposed to favor him — like Krugman and the NYT — cannot for the life of them sign off on the plans. Meanwhile as the crisis mounts, and although it is of little importance to the overall situation, the search for Fall Guys has begun. The instinctive reaction of the administration has been to find scapegoats for everything: from his predecessor to the preacher he didn’t listen to, to the appointees he didn’t know and to the bill he didn’t read. Now the habit is catching. The American Spectator reports that unnamed sources familiar Treasury complain that Timothy Geithner is being set up to take the blame for Rahm Emmanuel and his superiors. The finger-pointing has begun.

Over the past ten days, as the furor over AIG retention plan bonuses has focused on Sen. Chris Dodd and Secretary of the Treasury Timothy Geithner, the White House has undertaken a PR offensive to protect the highest ranking Obama Administration official who was involved in the House and Senate negotiations over the stimulus bill, in which the AIG waiver language was inserted.

“Right now, you get the feeling this is all about protecting [White House Chief of Staff] Rahm Emanuel,” says a former Treasury Department lawyer, who worked in that department’s counsel’s office on the Troubled Asset Relief Program (TARP) before joining a D.C.-based law firm in February. “At the time, we were led to believe there were basically three or four people from the Administration at the table when the final deals were cut and one of them was Emanuel.”

Informal advisers to Geithner are growing increasingly frustrated, they say, that Geithner is being held up as the straw man for the public anger over the bonuses. “Just over the weekend you saw a new guy added to the target list, [White House economics adviser Larry] Summers,” says a longtime Geithner colleague at the New York Fed. “You have Dodd, Geithner, Summers, but there were other, more senior political people involved in this mess, and their names aren’t being mentioned. Why isn’t anyone asking Rahm Emanuel, ‘What meetings were you in?’ ‘What did you and the President know and when did you know it?’ Tim has some culpability, but he’s not the guy who signed off on the Dodd language. He wasn’t that empowered to do something like that.”

Meanwhile, certain senior executives at AIG are leaving their jobs. Maybe they too are tired of being the usual suspects or want to make themselves scarce before even more fireworks light up the sky. At any rate they are outta there.

NEW YORK (Reuters) – A handful of senior executives working within American International Group Inc’s controversial financial products unit have resigned, said a company spokeswoman late on Monday. … The spokeswoman declined to specify the exact number of resignations, noting they were expected to be “manageable,” and said there were indications that more will follow.

A leader who keeps throwing people under the bus and finds his subordinates emulating him will soon discover what the definition of a rout is: a headlong retreat where neither bonds of discipline nor loyalty stay the flying feet. Who will stand when the King hides?

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