Next! Or Not?

In politics, when the sh#t hits the fan, and when it is a very, very big piece of sh#t, somebody big has to take the fall. When Congress, the American people and even the business sector itself lose confidence… and President of the United States is about to take the blame, time to find the goat! But who can that be? An elected Senator from Connecticut who can’t be fired? Can’t be a Federal reserve Chairman who can’t be fired… hmmm…. who could it be? We need someone who can be fired, who is an appointee who serves at the “pleasure” of the President. Who is it that will have AIG on his face?

How about senior political appointee who almost didn’t get confirmed because he didn't pay Social Security and Medicare taxes for several years while he worked for the International Monetary Fund and employed an immigrant housekeeper who briefly lacked proper work papers?

Would that include the Indispensable Man who suddenly became the Indecipherable Man who never really did flesh out that Obama administration-macro-economic-rescue-plan explanation in a speech made on February 10^th as the world looked to the U.S. government to explain with some focus exactly what was their path to fixing the financial markets? A speech, where the “stress test” was first mentioned that was so short on specifics that it managed to disappoint Wall Street and Main Street in one breath? Could a new presentation of a new plan save the day?

How about a senior government official who claimed that he didn’t know about the AIG bonuses until March 5, at which point he immediately tried to stop them (well not exactly immediately)… in spite of this little piece of information in the March 19^th New York Times: “Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged e-mail messages about the A.I.G. bonus program as early as late February, according to a person familiar with the matter. A.I.G. itself revealed the bonus plan in regulatory filings last September.”

How about a government appointee who also claimed even when he found out about this bonus plan, he really didn’t know how big it was: “I was informed by my staff of the full scale of these specific things on Tuesday, March 10… As soon as I heard about the full scale of these things, we moved very actively to explore every possible avenue — legal avenue — to address this problem.”

I’m thinking about an Obama administration official who admitted (on CNN, March 19^th) that his department had asked legislative sponsor, Democrat Chris Dodd (chairman of the Committee on Banking, Housing and Urban Affairs who initially denied that he had done so… but had a change of recollection), to add a loophole in the stimulus bill to let AIG-like bonuses to be paid out by companies who received government bailout cash. This official explained: “We wanted to make sure [the bill] was strong enough to survive legal challenge.” And these words: “You know, it's my responsibility… I was in a position where I didn't know about those sooner, I take full responsibility for that."

Well, if you work on “the Street,” and if you are a betting man or woman, chances are you’ve already made the bet… Treasury Secretary Timothy Geithner is eyeing the door. But he has one more test, and passing it could save his job. If the financial markets don’t respond (on a sustained basis) well to his most recent major proposal, discussed privately between highly placed fund managers and Geithner Sunday afternoon, with a vigorous chorus of support, if they do not buy into the specifics of his toxic assets structure (outlined below), it is difficult to see how he can continue to function as Treasury Secretary, notwithstanding President Obama’s statements that he wouldn’t even accept Geithner’s resignation if tendered. This plan goes to the essence of his job description.

NY Times columnist Paul Krugman has already challenged Geithner in what he believes is an outdated plan he calls “cash for trash” that was dumped in the last six months of the Bush administration. Krugman: “And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they're doing. It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.”

While there has been support for the effort - Berkeley professor Brad DeLong is one – doubters like Krugman and Former IMF economist and current MIT professor Simon Johnson seem strongly negative. The March 23^rd theDeal.com: “Critics say that in its unwillingness to get tougher--take over banks, fire managers, etc.--the administration is repeating the mistakes Japanese regulators made after Japan's bubble burst in the early 1990s. In this analysis, we're headed for an era of zombie banks and a lost decade like the one Japan suffered.” At first blush, however, the DOW reflected massive optimism that the plan offers hope as the market soared. Time will tell if this initial reaction can be sustained.

Here are the broad strokes of Treasury’s proposal to incentivize private investors to commit between $500 billion to $1 trillion to buy revalued “toxic” assets (whose price will be determined through an auction format, obviously at a steep discount off the face value) off the books of our financial institutions: 1. the FDIC (accessing money from the Federal Reserve) will set up investment partnerships and lend up to 85% of purchase price of these assets 2. Working through four or give investment firms, the Treasury will provide government matching funds to private investors to buy the assets, and 3. Treasury (along with the Federal Reserve – a move that may further accelerate inflation as the Fed recently already committed to buy $1.25 trillion in existing government-guaranteed mortgage-backed securities) will expand its lending capacity to help buy such assets through the Term Asset-Backed Securities Loan Facility. The government will start the plan with $75-$100 billion of money left over from the Troubled Asset Relief Program, but clearly much more of a government commitment required to incentive the private sector.

These potential private buyers (mostly hedge funds and private equity players) are looking very carefully at the popular and Congressional mood to limit executive bonus compensation, including adding new taxes, which they say will kill their appetite to help the government with their “clean up banks” balance sheet plan. Except for pre-existing restrictions, Geithner assured the fund managers that no such “limits” would be added to this new program. Chief Whitehouse economist, Christina Romer explained on Fox News why this group of fund managers should be viewed positively: “What we’re talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks’ balance sheets.” Will the specifics save Geithner’s credibility and his job? We’ll see.

Wonder if there is a “credit default swap” margin on that one? Does he really deserve to go so soon in his tenure? After all he doesn’t even have his staff in place yet. Hey, this is politics, and well, they might just need that goat. But if the new plan works, can Geithner move from goat to hero?! Let’s hope so!!! It means the plan works!

I’m Peter Dekom, and I’m wondering too.