Geithner's Proposal: Does Treasury Want a Never-Ending TARP, and Where's the Accountability?

by Deb Cupples |  Treasury Secretary Tim Geithner wants to persuade Congress to give an executive branch agency -- perhaps the Federal Reserve -- the power to seize non-bank financial firms and do other things.

I don't know the details, but a few paragraphs buried in the second half of a Washington Post article leave me wondering.

"The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy....

"Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

"The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

"Geithner plans to lay out the administration's broader strategy for overhauling financial regulation at another hearing on Thursday." (WaPo)

One problem that jumps out is that Secretary Geithner has prioritized the amassing of such astonishing powers over the reforming of how our financial system and public companies are regulated.

Another glaring problem lies in the nature of the astonishing powers that Mr. Geithner wants to hand to a select-few government officials.

Imagine if President Bush and a few highly placed government officials could have simply stepped in last fall -- without Congressional oversight -- and started "guaranteeing losses" or "buying assets" of troubled companies.  

During the fall, then-President Bush and then-Treasury Secretary Henry Paulson were pushing to funnel $700 billion tax dollars -- without strings -- to myriad financial institutions.

In September, a Treasury official even admitted that $700 billion for which the executive branch sought was not even a solid number based on solid calculations. Remember?  When asked how Treasury came up with that gargantuan number, a spokesperson told Forbes Magazine:

"It's not based on any particular data point....  We just wanted to choose a really large number."

And that's supposed to foster us taxpayers' faith in the executive branch's competence and trustworthiness?

Remember, too: one of the deal breakers for Mr. Bush and Mr. Paulson was any attempt by Congress to limit the pay packages of executives at firms that would get our tax dollars.  In other words, Mr. Bush and Mr. Paulson did not desire to even try to prevent the looting of shareholder dollars by executives at troubled firms.

Given the recent outrage over bonuses to AIG and Fannie Mae managers, Congress obviously didn't do much to stop the funneling of strings-free tax dollars into individuals' pockets.

But legally, Congress could have done something about it.

If the executive branch were given the power to unilaterally bail out big troubled companies (i.e., companies with big lobbying budgets and cozy relationships to regulators), isn't there a possibility that our nation would end up living under a never-ending TARP?

Maybe you have no qualms about the current administration's wielding such power (though I certainly do), but the problem wouldn't stop there. 

Such power would likely be passed to many future presidents and their administrations.  I know I was glad that the last Bush Administration couldn't unilaterally funnel truckloads of tax dollars to the very executives who had helped bring their companies down. 

Given that I don't know who any of our future presidents will be, I'm nervous about seeing such massive powers handed to the executive branch with so little oversight from Congress and so little accountability.

Yves Smith at Naked Capitalism has other criticisms of Mr. Geithner's proposals, which are certainly worth mulling over. Memeorandum has commentary.

Other Buck Naked Politics Posts:

* What Could we do with $700 Billion (Instead of bailing out Crooks)?

* Door in Face Technique: Bush Dupes Congress into Buying Bailouts

* Wall Street Execs Got Billions While Driving Economy Toward Cliff

* Executives Skate out of Economic Disaster with Millions

* Real Executive Bonuses Based on Fake Profits

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Comments

[Ron Russell]

All of this smoke and mirror act is just a power grab in the name of economic security. Those on the left and the right should recoil from this plan---nothing new here at all. Its been tried in other countries during times of economic crisis and results have always been the same. It invariably leads to some form of despotic government. No one wants this.

[Charles]

I before E, except after "G" and before "thner", Deb.

This one is understood most easily this way: a bank is an institution that borrows short-term and lends long-term. They need to be regulated very, very tightly. When they fail, the FDIC has authority for "guaranteeing losses, buying assets or taking a partial ownership stake".

Institutions like AIG, Citi, and so on became banks on the sly; hence they are called "shadow banks." In order to fix the problem, the government needs to have the same power as the FDIC has always had for banks. The way to make sure that it does not become overwhelming federal power is to eliminate shadow banking. Then this authority will end naturally as we wind down the shadow banks.

[rawdawgbuffalo]

fundamentals still aint sound

[rawdawgbuffalo]

fundamentals still aint sound

[Deb]

Charles,

Apparently, I spelled it wrong in the title but not in the first sentence. Sorry about that.