By Michael A. Fletcher and Anthony Faiola
Washington Post Staff Writers
Monday, March 23, 2009
As the Obama administration prepared to unveil major elements of its plan to address the global financial crisis, some of its leading economic officials reacted coolly to congressional actions to recoup bonuses from financial firms through targeted taxes, with one adviser saying the approach may be a "dangerous way to go."
While acknowledging the legitimacy of the public outcry over at least $165 million in bonuses paid to executives at American International Group, administration officials stopped far short of endorsing legislation passed last week by the House that would levy a 90 percent tax on the payments. The Senate is scheduled to take up a modified version of the measure this week.
"I think the president would be concerned that this bill may have some problems in going too far -- the House bill may go too far in terms of some -- some legal issues, constitutional validity, using the tax code to surgically punish a small group," Jared Bernstein, the top economic adviser to Vice President Biden, said on ABC's "This Week." "That may be a dangerous way to go."
Another top Obama economic official, Austan Goolsbee, echoed that view. "The president's also been clear we don't want to govern out of anger. He's going to look at what comes out of the House, what comes out of the Senate, see what ideas we have," Goolsbee, a member of the president's Council of Economic Advisers, said on CBS's "Face the Nation."
The public outrage over the AIG bonuses has undermined support for Treasury Secretary Timothy F. Geithner at a pivotal moment. In an interview broadcast last night on "60 Minutes," Obama expressed strong support for Geithner, who has been criticized in Congress and elsewhere for what some call his halting response to the financial crisis and for not doing more to block the AIG bonuses. AIG paid the bonuses to members in its troubled Financial Services division after receiving more than $170 billion in federal bailout aid.
Still, Geithner is central to the Obama administration's plans for dealing with the global economic crisis, key portions of which are to be rolled out this week.
Today, the Treasury Department is expected to introduce plans to create a government body to finance the purchase of as much as $1 trillion in toxic assets from ailing financial institutions. The new entity would combine assets with private investors, as well as the Federal Deposit Insurance Corp. and the Federal Reserve, to buy those assets, a step seen as crucial to unclogging the balance sheets of banks and allowing credit to flow more freely. Administration officials were putting the finishing touches on the plan yesterday and were reaching out to some of the private investors whose participation is key to the plan's success.
Also, the Obama administration this week is expected to announce new proposals for financial regulation, executive pay, accounting standards, the structure of the International Monetary Fund and other issues ahead of a summit of 20 major nations in London on April 2.
At the summit, leaders will seek to reach a consensus on those and other coordinated steps meant to combat the global economic crisis and prevent a repeat. In particular, France and Germany are seeking to win assurances at the summit that Washington is committed to tighter financial regulations.
Diplomatic sources say the Europeans have largely backed the 24 recommendations contained in a report of an advisory group to the Group of 20 industrialized and developing nations calling for broad reforms, including tighter regulations of hedge funds and rating agencies as well as higher capital requirements for banks.
The details of how to enact such changes are likely to be left to each nation, though the Europeans are pressing for countries including the United States to agree to a rough outline of principles. For instance, they are requesting that the G-20 adopt language that would call for hedge funds to register and report regularly on their size, investment style, borrowing levels and performance. Currently, hedge funds are not subject to rigorous reporting requirements.
The report calls for G-20 nations to take new steps to monitor and prevent excessive levels of executive compensation, although administration officials said that was not a central thrust of the proposals. That would be done partly by having regulators take executive compensation packages into consideration when assessing the overall risk levels at major financial institutions.
A European official who spoke on the condition of anonymity said that while there are still "some differences" on the specifics of a final agreement, those differences were relatively narrow and were being worked out. Some of the bigger differences instead center more on the U.S. position that governments must be more aggressive on fiscal stimulus to combat the crisis -- a position that Germany and France reject. In an interview with the Wall Street Journal, European Central Bank President Jean-Claude Trichet said that a new stimulus plan was not needed.
Critics have also expressed concern that the measures agreed upon at the summit may ultimately be so vaguely worded to win broad support that they may prove to have little real effect.
On Thursday, Geithner is scheduled to testify before the House Financial Services Committee about overhauling financial regulation. He is likely to call for giving the Federal Reserve new powers to regulate the financial system as a whole, including power to oversee any institution that is big enough or intertwined enough to pose risks to the financial system.
Congress was moving toward such steps just two months ago, and Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, endorsed the idea. But the push has faded lately as members of Congress have become more skeptical of the Fed's perceived lack of accountability and its role in the takeover of AIG and bonuses paid to executives there.
The new economic proposals come as Congress is to begin debating the administration's $3.6 trillion budget proposal for next year. The spending plan, which Obama calls central to his vision to lay a foundation for the nation's economic future through its investments in expanding and reducing the cost of health care, education and renewable energy, has come under intense fire because of its huge price tag. Also, some of the key revenue-raising mechanisms in the proposal -- including a tax on carbon emissions and a limit on tax deductions that can be taken by high-income families -- face an uphill battle in Congress.
Opposition to the ambitious spending plan only increased Friday after the Congressional Budget Office released an analysis projecting that the plan would require the national deficit to swell by $2.3 trillion more than the president predicted in his budget request a month ago.
On CNN's "State of the Union," Sen. Judd Gregg (R-N.H.), who was on track to serve as Obama's commerce secretary before backing out last month, said the proposal was a non-starter because of its impact on the long-term deficit.
"The practical implications of this is bankruptcy for the United States. There's no other way around it," Gregg said. "If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued."
Sen. Susan Collins (R-Maine), also expressed concern about the deficit spending contemplated in the budget. "It brings our debt levels to an unprecedented level," she said on ABC. "That is not sustainable," she added. "It poses a threat to the basic health of our economy."
On the same program, Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, expressed similar concerns. "Look, $2.3 trillion over 10 years is a stunning amount of money," he said. "In fairness to this administration, they locked down their forecasts three months ago. There's been a lot of bad news since. So we've got a worsening situation. That requires adjustments, and it's going to have to be across a broad front."
Christina Romer, chairman of Obama's Council of Economic Advisers, did not back down from the budget proposals, saying that the estimates in the CBO report are not necessarily accurate.
"There is a question whether CBO is right," she said on CNN. "So we know that forecasts -- both of what the economy is going to do and of what the budget deficit are going to do -- are highly uncertain."
Staff writers Neil Irwin and Michael D. Shear contributed to this report.