By Robert Schmidt and Rebecca Christie
Jan. 21 (Bloomberg) -- Timothy Geithner faces a grilling in Congress over why, after underpaying his taxes, lawmakers should trust him with a $700 billion rescue fund as Treasury secretary in the worst economy since the Great Depression.
The Senate Finance Committee today is likely to demand answers on issues ranging from Geithner’s tax troubles to his solutions for broken U.S. financial markets. While few lawmakers question Geithner’s ability, the missteps with the Internal Revenue Service give him an extra hurdle to clear before an expected Senate vote this week to confirm his nomination.
Market turmoil and the 13-month recession so far are outweighing senators’ concerns about the tax returns of the man nominated to rebuild the U.S. economy. He retains strong backing among Democrats, and even critics say his experience as president of the Federal Reserve Bank of New York has readied him to be President Barack Obama’s economic policy chief.
“There’s no doubt about his qualifications,” said Charles Grassley of Iowa, the senior Republican on the Finance Committee, who says he remains troubled about Geithner’s late payment of almost $50,000 in federal taxes and penalties. “There’s no doubt in a time of recession like we’re in now, where the secretary of the Treasury plays such an important role, that he fits in.”
Adding urgency to Geithner’s confirmation is a renewed slide in bank shares. The Standard & Poor’s 500 Financials Index, down about 36 percent since the beginning of the year, yesterday reached the lowest since March 1995. Among the worst recent performers have been Citigroup Inc., which dropped to a 17-year low yesterday, and State Street Corp., which fell 59 percent.
Grassley Undecided
Senate Finance Committee Chairman Max Baucus, a Montana Democrat, has scheduled a committee vote on the nomination for tomorrow. Senior committee members including Baucus have said they’ll vote to approve the nomination. Republicans on the committee expressing support include Nevada’s John Ensign and Utah’s Orrin Hatch. Grassley said he is still undecided.
While no one has yet been named to replace Geithner at the New York Fed, William Dudley, the bank’s top markets official, is a leading candidate.
For Geithner, 47, the hearing will also serve as his first opportunity to begin outlining the Obama administration’s plan for the devastated financial industry, while providing support for average Americans who have lost homes or jobs. Lawmakers say they want to hear a comprehensive plan detailing how Geithner will deploy the remaining $350 billion of the Troubled Asset Relief Program.
TARP ‘Reform’
In prepared remarks, Geithner didn’t mention his taxes and without providing specifics called for “reform” of TARP and quick action to revive the economy.
“The ultimate costs of this crisis will be greater if we do not act with sufficient strength now,” Geithner said in the document, a copy of which was obtained by Bloomberg News. “In a crisis of this magnitude, the most prudent course is the most forceful course.”
When questioned, Geithner is likely to be pressed on issues ranging from the $825 billion economic stimulus legislation to the need for tighter regulation of Wall Street to U.S. policy on the dollar to relations with China.
Working in Geithner’s favor is a need for continuity: He has been the Fed’s point person on the rescues of insurer American International Group Inc. and investment bank Bear Stearns Cos. He also was a part of the Fed and Treasury team that decided to let Lehman Brothers Holdings Inc. collapse.
Bank Support
The big U.S. banks, whose executives have worked closely with Geithner throughout the turmoil, back his nomination.
“This is not a time for on-the-job training,” said Steve Bartlett, president of the Financial Services Roundtable, a trade association representing the 100 biggest financial services companies. “The industry is very supportive” of Geithner’s nomination.
Bartlett, a former Republican member of Congress, also said the Senate needs to consider the consequences for the economy if Geithner’s nomination is stalled or defeated.
“It’s not like we have the luxury of saying, ‘Let’s play games,’” he said. “The economy is in the tank.”
Still, Geithner’s experience spearheading the government’s Wall Street bailout may also be viewed as a liability by some lawmakers. The nominee is expected to be quizzed by Grassley and others on whether the programs backed by the first half of TARP were effective.
Bipartisan Criticism
Lawmakers of both parties have expressed concern that the Bush administration’s handling of the rescue plan has favored the financial industry at the expense of American taxpayers who have also been harmed by the credit crunch. Former Treasury Secretary Henry Paulson’s strategy of injecting capital into banks hasn’t worked to ensure their solvency and lenders’ share prices continue to fall to new lows.
“My fear is only that he was very invested in TARP and that he’s very much tied to the New York financial system,” said Lynn Tilton, chief executive officer of $6 billion private- equity firm Patriarch Partners in New York. Geithner “needs to recognize” that the effort thus far has “failed,” she added.
Geithner is also likely to be pressed about his job regulating Wall Street and whether he is too close to the financial industry executives he has been charged with overseeing.
The Fed had oversight responsibility for some of the main contributors to the subprime mortgage crisis, including Citigroup, which has now been bailed out twice by the government.
‘Discipline’
“It’s the job of the Treasury secretary to really come down on the financial industry; we really have to discipline them, downsize them, put them in order,” said Dean Baker, co- director of the Center for Economic and Policy Research.
On his personal finances, Geithner must explain how he failed to pay self-employment taxes on his 2001-2004 returns while working at the International Monetary Fund. While the Obama team has said it was an honest mistake, Geithner has acknowledged receiving written instructions from the IMF on how to pay the taxes, according to documents released by the Finance Committee.
Geithner paid some of the taxes after being audited by the IRS and didn’t pay the rest until it was clear he would be nominated for the Treasury post, the panel said. He also made other errors such as claiming dependent-care deductions for sending a child to sleep-away camp; only the cost of day camps is deductible.
As Treasury secretary, Geithner would be in charge of the IRS, a point that hasn’t been lost on the average taxpayer, said Lynn Turner, a former chief accountant at the Securities and Exchange Commission.
“The average American sees this, as there is one set of rules that applies to the Treasury secretary and another set of rules that applies to the rest of them,” Turner said.
To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net
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