Treasury Secretary Tim Geithner’s broad-strokes proposal for the second phase of federal bailout funding for banks on Tuesday was assailed by economists and sent the markets plunging.
The plan, which would commit more than $1 trillion in federal funds and private investment, is aimed at easing credit markets, recapitalizing banks and clearing toxic assets from bank ledgers.
Geithner’s pitch came at a bad time for President Obama, who is still trying to close the deal with Congress on his $838 billion economic stimulus package. Some feared that making the cases for two complex, expensive economic programs might be too much.
Behind-the-scenes details of the bailout plan remain in flux as the administration debates internally over whether to take an aggressive approach to the bailout program, or come out with a minimal program that includes more transparency but less government intervention.
Outlining his plan at a press conference repeatedly hyped in advance by President Obama, Geithner acknowledged the erosion of public support for the Troubled Asset Relief Program, which was initiated during the Bush administration.
“American people have lost faith in the leaders of our financial institutions and are skeptical that their government has — to this point — used taxpayers’ money in ways that will benefit them,” Geithner said.
After Congress approved the $700 billion bank bailout late last year, a series of allegations over bankers receiving huge bonuses, heading off on luxury spa retreats and awaiting delivery of corporate jets turned public support away from the program.
Even so, some economists said the new plan was incomplete, and the notion of commingling public and private funding too complex to pull off quickly enough to be effective.
“The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to be credible,” said Brian Bethune, an economist at Global Insight. “The speech had too many political overtones.”
Several lawmakers complained the proposal lacks specifics such as an exit strategy for getting the federal government out of the banking business.
“Coming out today with such a vague plan it is evident to me that there is still dissension in the White House about what to do,” said Sen. Bob Corker, R-Tenn., a member of the Senate Banking Committee. “I would not have made the announcement that was made today. I would have waited. The markets thought that the administration was going to address the issue.”
Complicating the political equation over the TARP is the still-unresolved economic stimulus package — Obama’s signature issue and the administration’s top priority at the moment.
“Publicly the stimulus is clearly the bigger priority,” said John Fortier, a political scholar at the American Enterprise Institute. “This new plan seems very mysterious. I was struck by the fact that, in the very immediate sense, it doesn’t seem to have calmed the markets.”
As the markets closed Tuesday, the Dow Jones Industrial Average had declined 381.99 points, or 4.6 percent.
In recent days, the Obama administration has tried to sweeten the TARP by adding provisions such as limits on executive compensation for institutions receiving assistance, and a greater emphasis on transparency and accountability — the dual buzzwords of proponents in the White House and Congress.
“We saw the way that the first amount of money was used and we see what has to be done differently in order, one, to make that pot go farther, but also to give the American people some reasonable confidence that their money is being spent in a way that will help them,” said White House Press Secretary Robert Gibbs.
