I'm not as inclined as Jonathan Stein to laud Tim Geithner's last minute decision to junk the bailout plan he'd been toiling on for weeks and build something vague and new on an artificially narrow timetable. Stein argues that we should "applaud the fact that Geithner did not stubbornly stick to a plan that he could see was not working, despite the fact that he had spent weeks working on it." And that may be true. But let's be clear about what the plan was:Senior economic officials had several approaches in mind, according to officials involved in the discussions. One would be to create an "aggregator bank," or bad bank, that would take government capital and use it to buy up the risky assets on banks' books. Another approach would be to offer banks a government guarantee against extreme losses on their assets, an approach already used to bolster Citigroup and Bank of America.As the first week of February progressed, however, the problems with both approaches were becoming clearer to Geithner, said people involved in the talks. For one thing, the government would likely have to put trillions of dollars in taxpayer money at risk, a sum so huge it would anger members of Congress. Officials were also concerned that the program would be criticized as a pure giveaway to bank shareholders. And, finally, there continued to be the problem that had bedeviled the Bush administration's efforts to tackle toxic assets: There was little reason to believe government officials would be able to price these assets in a way that gave taxpayers a good deal.
This was the Paulson original formula: The government bails out banks and shareholders by overpaying for bad assets on the taxpayer's dime. Details of this leaked often and early in the run-up to Geithner's press conference and the strategy was greeted angrily. So Geithner changed the strategy. The morning of his press conference, he told David Brooks, "I was very worried about us looking like we’re vulnerable to the charge that we’re overpaying as a way to provide disguised subsidies to banks." He was very worried, in other words, about the apparently accurate impressions of the plan he'd hoped to follow. As such, I'm less comforted by the fact that Geithner didn't push forward in the face of broad outrage than concerned at the inadequacy of his initial instincts. And it doesn't help matters that Geithner handled his own reversal poorly: He stuck to a compressed timetable and offered a vague proposal that weakened confidence in not only the plan, but the Treasury Secretary. And right now, we need confidence in the Treasury Secretary.
