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Treasury Secretary Geithner faces harsh criticism from legislators over bailouts

By David Cho
Washington Post Staff Writer
Wednesday, January 27, 2010; A01

When Timothy F. Geithner emerged as the leading candidate for Treasury secretary in late 2008, he privately urged Barack Obama to think twice about whether to hire him. Geithner had been a key architect of the government's bailout of Wall Street and would carry that history into the new job, he reminded the incoming president.

The warning proved prescient. Nearly a year after Geithner was confirmed, his actions to rescue the financial system -- first as president of the Federal Reserve Bank of New York and then as Obama's initial Treasury secretary -- have made him a lightning rod for discontent with the Obama administration.

Geithner will come under fire again Wednesday when he faces questions at a hearing on Capitol Hill about his role in bailing out the insurer American International Group while he was New York Fed president. The grilling comes as lawmakers from both parties are becoming more aggressive in challenging Obama over federal rescue efforts, which have helped bring huge profits to Wall Street but have failed to significantly trim the ranks of the jobless.

With populist fervor putting Democrats in electoral jeopardy, lawmakers took aim in recent days at Federal Reserve Chairman Ben S. Bernanke, another key figure behind the bailout, threatening his confirmation for a second term. The White House and Senate Democratic leaders seem to have succeeded in shoring up support for Bernanke ahead of a Senate vote expected this week.

Now the Obama team is closing ranks behind its embattled Treasury secretary, saying that his actions likely averted a global financial meltdown. President Obama called him a "terrific" adviser in a television interview this week.

"Whoever is in these key economic positions becomes a bit of a lightning rod, especially after the extraordinary year we've been through, but the truth is [Geithner] has been a very steady hand in that crisis and he's been the author of many of the reforms that the president has championed," said David Axelrod, Obama's senior adviser. "Tim's been a great advocate for the economy and for the public interest."

Speculation about Geithner's job security spiked last week in blogs and on cable television after Obama broke with his Treasury secretary's long-standing advice on how to address risky behavior at the biggest banks. The president announced a tougher approach that would limit the size and activities of financial firms.

No other member of Obama's Cabinet has taken as much heat as Geithner. His first months in the job were rocky as he dealt with questions about his failure to pay some personal taxes and confronted doubts on financial markets about his plans for reviving the economy. But by summer, he appeared to be hitting his stride.

Geithner's team rebuilt confidence in the nation's financial system by orchestrating a "stress test" of the largest financial firms, which affirmed their health and allowed them to raise private capital and repay their bailouts. The stock market soared. The worst of the financial crisis seemed to be over.

But as banks began to report startlingly high profits -- and pay enormous bonuses to their executives -- Geithner was back in the political crosshairs. As the public face of Obama' economic team, he took the brunt of the blame for the dichotomy between Wall Street's prosperity and the struggles of many ordinary Americans. His critics tried to tar him as a friend of the banks.

Geithner said in an interview he is not surprised by the anger.

"I don't think there's anything exceptional in this. It's perfectly understandable. It's the price of holding this office," he said. "I am here to help the president make good judgments about what policy makes sense, what's fair and what's going to work to make things better."

He added: "We ran a financial rescue operation that was much more effective; it took hold much more quickly and at a much lower cost than anyone had anticipated." But now, he said, people are frustrated over the unemployment rate and are worried about whether Washington will deliver on a new bill to create jobs.

Administration officials challenged critics who say Geithner is an ally of the banks, stressing his role in getting many large firms to pay back their federal bailout money. Geithner has said the goal of the rescue program was not to help financial firms themselves but to put them in a position to help stimulate the rest of the economy through lending.

The first phase of that approach was successful, but the second half has not fared as well. The Treasury's program to address rising foreclosures has struggled. The unemployment rate remains in double digits. And bank lending continues to decline. The trickle from Wall Street down to Main Street has not yet occurred.

Anger over the struggling economy is likely to be on full display Wednesday at a hearing of the House Committee on Oversight and Government Reform, which has called Geithner to testify Wednesday as part of an investigation into the New York Fed's role in the rescue of AIG, which received a federal aid package of more than $180 billion.

Some lawmakers said they will narrowly focus on the New York Fed's actions. But others are planning to ask broader questions about Geithner's involvement in the bailout after he joined the Obama administration.

"Tim Geithner has had two problems: He has to take bullets for the failure of the economy on behalf of the president, and that makes him unpopular in public," said Rep. Darrell Issa (R-Calif.), who has taken the lead in pushing for the hearings. "The other thing is . . . he got confirmed in January, but he owns everything that happened 18 to 24 months before that, including a very unpopular activity coming out of New York."

In an interview last year, Geithner recalled telling Obama shortly after the presidential election to think carefully about appointing him to Treasury. Acknowledging at the time that many people disagreed with elements of the financial rescue, Geithner said, "I wanted to make sure he understood what he was getting."

Obama was not dissuaded.

"The president, when he asked me to do this, he knew that I was going to come with a history because of all I had done previously, but I'm proud of that history," Geithner said in an interview this week.

It remains to be seen whether the political darts aimed at Geithner will hobble his credibility or undercut his ability to accomplish Obama's priorities, which include winning congressional approval for a new bill to create jobs and legislation to reform the regulation of financial markets.

Said Rep. Barney Frank (D-Mass.) of the anger at Geithner: "The criticism is partly political; it's partly the banks tried to have their cake and eat it, too."

A few lawmakers from both parties have called for Geithner's resignation, though this demand has not moved into the mainstream on Capitol Hill.

"One has to wonder, given the new tone at the White House and what seems to be their new agenda given the elections . . . how long we're going to need to keep a Treasury secretary who was hired because Wall Street was comfortable with him," Rep. Peter A. DeFazio (D-Ore.), who has been critical of Geithner in the past, said on a conference call with reporters.

Obama himself came to Geithner's defense this week.

When asked by ABC News on Monday whether he had asked Geithner and his closest administration ally, National Economic Council Director Lawrence H. Summers, to stay until the end of the year, Obama responded: "You know, we haven't had the conversation because my presumption is that they are staying."

He continued: "But the fact of the matter is that when you look at the cards that we were handed at the beginning of last year and where we are now, a lot of that has to do with sound, steady economic leadership."

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