The financial danger is that the Treasury will burn through the money approved by Congress without fixing the system. The political danger is that Republicans will posture as the populists, expressing faux-indignation that so much taxpayer money has gone to Wall Street. The overarching risk to Obama's presidency is that the plan won't work, and his political capital will evaporate along with the financial capital.
There is a whole other path to repairing the banking system, and a whole other set of experts, equally brilliant and better in touch with financial realities. But their unfiltered views are not reaching the president. This loyal opposition, of which more shortly, is not limited to lefties; it spans the ideological spectrum.
But the Geithner/Summers strategy is the complete opposite. Geithner hopes to enlist hedge funds and private equity companies to purchase bonds from banks, using loans and loan guarantees from the Treasury and the Federal Reserve, and thereby restart the very system that failed.
This approach gives far too much power and taxpayer subsidy to the least transparent and least regulated parts of the financial system. On Saturday, the Wall Street Journal reported that the announcement of the details of the plan had to be delayed yet again, because two of the biggest firms wanted even sweeter terms before they came to the table.
The Geithner/Summers approach is complex, slow, ad hoc, non-transparent, and far too Wall Street oriented.
Only now is Geithner getting around to initiating proper audit of the zombie banks he is aiding, under the euphemism, "stress tests."
As an indication of just how closely Geithner and company are acting on Wall Street's behalf, consider this tidbit, whose significance the media largely missed: Friday's Washington Post reported that a man named H. Rodgin Cohen, under consideration for Deputy Treasury Secretary, had become the latest proposed senior appointee to withdraw from consideration. The Post treated the story as part of the continuing saga of unfilled sub-cabinet jobs.
But who is "Rodge" Cohen? Astoundingly, he is a senior lawyer from the firm of Sullivan and Cromwell, and the man who has been negotiating with Geithner on behalf of the large Wall Street banks!
What the hell, if you're going to act mainly in the interests of the banks, why not bring just their people right into government? The story didn't give details, but only mentioned that "an issue" had emerged during the vetting process. We can only imagine what kinds of conflict of interest problems the vetting team unearthed.
Unlike Roosevelt's RFC, the Treasury lacks any institutional capability to do the job properly. As a consequence, it shovels out money first, does audits later, oscillates wildly between being hands off and micro-managing, and tries to wring out purely symbolic sacrifices like making Citi give back its proposed new $43 million executive jet.
On Sunday morning, the talk shows were dominated by the revelation that AIG -- on the hook to taxpayers for $175 billion -- was paying out bonuses to the very unit in London that caused the catastrophe. The newspaper stories suggested that news of this latest outrage originated with a preemptive leak from the administration.
Larry Summers solemnly declared on the Sunday talk shows that these bonuses were appalling, but that America is a nation of laws where "a contract is a contract." That's malarkey.
The UAW has been forced to renegotiate contracts as part of the auto bailout.
Summers credited Secretary Geithner for reducing the original proposed bonuses, but if Geithner has the leverage to achieve that reduction, he has the leverage to reduce the bonuses to zero. The government owns 80 percent of AIG.
It would be hard to imagine two administrations seemingly more opposite than the Bush and the Obama presidencies. Yet Geithner's approach is essentially a continuation of the failed strategy of Bush Treasury Secretary Henry Paulson, Geithner's former close colleague in Geithner's prior role as president of the New York Fed.
By the same token, Larry Summers and Tim Geithner are not the only smart people about finance. If President Obama wants a second opinion, he could begin with Paul Volcker, nominally chairman of Obama's own "Economic Recovery Advisory Board," which so far is mainly window-dressing. According to my sources, Summers and Geithner seldom talk to Volcker because they don't like Volcker's criticisms of their plan.
The president could also consult with several people in the Federal Reserve System who have a different view, and also the FDIC leadership, and the Congressional Oversight Panel that was created by Congress as the precondition for appropriating the TARP money. The panel has the statutory right to get documents from the Treasury. But under Geithner as under Paulson before him, Treasury has been stonewalling. Legislators of both parties are increasingly viewing Geithner as part of the problem.
Robert Kuttner: Lifting the Tarp: Will President Obama's Economic Team Lead Him Off a Cliff?