Geithner's Folly

News & Politics

President Obama deserves immense credit for being willing to spend serious money to prevent recession from becoming depression. He has resisted pressures from fiscal conservatives to put budget balance first, or to make social insurance bear the brunt of spending cuts down the road. And he has used his gifts as a teacher to enlist the broad support of the American people for a far-reaching strategy of public investment.


However, all of this good work will be for naught if his team doesn't get the banking system functioning again. And so far the grand design of Treasury Secretary Tim Geithner is entirely on the wrong track.

On Friday, the Treasury made its latest deal with Citigroup to infuse even more public money into the essentially insolvent zombie bank. The terms were appalling. Basically, the government gets more preferred stock with little voting power. It can be converted to common stock, but if Citi goes deeper into the red, the government takes the loss. If by some miracle, Citi recovers, its shareholders get the gain. Once again, Treasury has declined to convert its de facto ownership into effective management control, preferring to bargain with Citi's executives at arm's length.

Geithner has also come up with the idea of subjecting the largest banks to "stress tests" to determine just how badly damaged their balance sheets are. This has been advertised as government examiners crawling all over bank records, but much of this belated effort will rely on the banks' own risk models--the same risk models that got the banks into this mess.

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