Late Change in Course Hobbled Rollout of Geithner's Bank Plan
Tuesday, February 17, 2009
Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.
According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.
They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.
The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.
Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.
The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis.
Meanwhile, the sources said, Obama's senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys.
Moreover, the department made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced.
Though Geithner had been in his job for only two weeks, he had been thinking about the problem of troubled assets since the credit crisis erupted 19 months earlier, first as president of the Federal Reserve Bank of New York and then, since November, as Barack Obama's pick to head the Treasury.
His predecessor atop Treasury, Henry M. Paulson Jr., had drawn political fire after he unveiled the Bush administration's $700 billion bailout program in September, facing accusations that the money had been spent erratically.
Geithner, while still at the New York Fed, had been deeply involved in the discussions over crafting Paulson's program. The effort may have arrested a potentially devastating financial panic, but he sought to improve on its implementation by developing a more systemic plan for using billions of dollars, sources said.
Quickly, discussions got underway. Geithner set a Feb. 9 date to release a plan, creating an artificial deadline meant to focus internal debate and prevent an overly