Geithner Prevailed In Bailout To Protect CEOs

by Chris Sturr | February 11, 2009

According to a report in the International Herald Tribune, Treasury Secretary (as of Tuesday) Geithner won over an internal battle within the White House over the terms of the bank bailout. According to the report, Geithner successfully stopped demands to institute comprehensive compensation limits for all employees at companies receiving bailout funds, to dictate to banks how bailout money should be used, to replace bank executives, and to wipe out shareholders of failed banks receiving taxpayer aid.

The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy Geithner, against some of the president’s top political hands.

In the end, Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and congressional officials.

Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

Because of the internal debate, some of the most contentious issues remain unresolved.

On Monday evening, new details emerged after lawmakers were briefed on the plan.

It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.

It wants the Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corp. might provide guarantees to investors who participate in the program, which some people might call a “bad bank.”

A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans. A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.

The capital injections would come out of the remaining $350 billion in the Troubled Asset Relief Program, or TARP.

A separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.

Some of President Barack Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks, and the poor management of last year’s bailouts, could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive U.S. government money.

They also worry that any reaction could make it difficult to win congressional approval for more bank rescue money, which the administration could need in coming months.

For his part, Geithner, who on Tuesday makes his debut as Treasury secretary and as the public face of the bailout, will blame corporate executives for much of the economic crisis, according to officials. But he worried that the plan would not work — and could become more expensive for taxpayers — if there were too much government involvement in the affairs of the companies.

Geithner also expressed concern that too many government controls would discourage private investors from participating.

A spokeswoman for Geithner, Stephanie Cutter, had no comment.

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