Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

Who appointed the G7 (+1) to its perch? The finance ministers for the main protagonists in World War II (1939-1945) met in Rome over the weekend to discuss the world economic crisis. Does a meeting of this nature that excludes India and China truly have a hope of wrapping its collective mind around the problems and their possible solutions?

Is ideology standing in the way of the most elegant solution to the U.S. banking crisis? Give former President George W. Bush his due: when the dimensions of the banking crisis became apparent to him, he scrapped a "market guy" ideology and poured taxpayer money into the banks. Is the Obama Administration willing to take what for them would be a similar ideological leap? Is their unwillingness to do so behind the complex public-private partnership at the center of the Geithner proposal to deal with troubled assets? Is there a similar reason behind the relatively light-handed approach Geithner would take to pushing the banks to resume lending?

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Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.”  But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.

The Treasury executive compensation reform guidelines fall into three categories covering:

• all TARP recipients;
• participants in a “generally available capital access program,” such as the Capital Purchase Program; and
• institutions that receive “exceptional assistance,” such as Citigroup, Bank of America, and AIG. 

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On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.

Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.

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What will it take to jolt the U.S. economy back into shape? Congressional leaders have floated ideas for an economic stimulus package ranging from $500 to $700 billion. President-elect Obama is not espousing numbers yet but has assembled his economic team and charged it with developing recommendations for restoring economic growth and creating 2.5 million jobs. While serious rumors about his economic advisors started circulating last week, Obama officially presented the group at a noon press conference today:

• Treasury Secretary—Timothy F. Geithner, President and CEO of the Federal Reserve Bank of New York and former long-time Treasury official
• Director of the National Economic Council—Lawrence H. Summers, former Clinton Administration Treasury Secretary and Harvard economist
• Director of the Council of Economic Advisors—Christina D. Romer, University of California at Berkeley economics professor
• Director of the Domestic Policy Council—Melody C. Barnes, former counsel to Sen. Edward Kennedy (D-MA) and policy director of the Center for American Progress
• Deputy Director of the Domestic Policy Council—Heather A. Higginbottom, former legislative director and presidential campaign advisor to Sen. John Kerry (D-MA)

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In a further demonstration that the markets prefer certainty over uncertainty, the likely appointment of Federal Reserve Bank of New York President Timothy F. Geithner as the next Treasury Secretary appears to have calmed the market’s fears to some degree, since the Dow Jones Industrial Average was up 6.5 percent at today’s close. Geithner has worked closely with Treasury Secretary Hank Paulson to address the financial crisis, and insiders predict a very smooth transition from Paulson to Geithner.

The issue of Geithner’s role with Paulson on the more controversial decisions, such as saving Bear Stearns while leaving Lehman Brothers to fail, has been the only point of criticism among otherwise glowing reviews. Geithner has led the New York Fed for five years, and prior to that directed policy at the International Monetary Fund and was a senior fellow at the Council on Foreign Relations. During the Clinton Administration, Geithner served as Under Secretary of the Treasury for International Affairs. He served in various capacities at the Treasury Department from 1988 to 2001. While he represents change, Geithner brings a depth of Treasury experience that may be reassuring to many.

In other news, Congress left for the Thanksgiving holiday but first gave the Big Three automakers the homework assignment of "writing a plan for viability" by December 2nd. If the plans demonstrate that the domestic automakers would be a sensible, long-term investment for $25 billion worth of taxpayer loans, Congress will return to Washington on December 8th to pass auto bailout legislation. House Speaker Nancy Pelosi said Congress will also begin work on an economic stimulus proposal that will be ready to go at the start of the 111th Congress.

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