So much for perfect timing. Barack Obama presented his economic team -- Summers, Geithner, Orzag -- all protégés of Robert Rubin -- just as the Treasury Department was pumping out billions to rescue Citibank -- which featured Rubin as chair of its executive committee -- from collapse. Is this the change we need?
Forget about Rubinomics redux. The depth of the crisis we face renders the old arguments irrelevant. Under Bill Clinton, Rubin championed reducing budget deficits, deregulating finance, and opening foreign markets to private investment. Now deficit spending must go up, banks must be re-regulated, trade imbalances must be reduced and manufacturing can no longer be scorned.
Obama gets this. His first initiative will be to pass a substantial and sustained recovery plan based on putting people to work with public investment in areas vital to our future. He's chosen experienced hands to get that done. In his Cooper Union address during the campaign, he laid out clear principles for re-regulating finance, and curbing the excesses that created the mess we are in.
But his appointment of NY Fed Bank head Tim Geithner as Treasury Secretary can't help but raise concern. Geithner has been, along with Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson, at the center of the erratic and secretive Bush administration reaction to the financial collapse. He'll be ready to go from day one, Obama noted. But go where? As the New York Times editorialized today, the Senate better probe whether Geithner has learned anything in the Paulson follies, for after dispensing what Bloomberg News estimates is more than $7 trillion -- yes trillion -- to keep the banking system from collapsing, things aren't getting much better. The big banks still verge on insolvency and they still aren't lending.
The Citibank deal is a perfect illustration of the failure. After investing $25 billion in Citibank last month, taxpayers learned that, after one more Sunday night perils of Paulson drama, they'd be pumping in another $20 billion, while helping to guarantee $306 billion in Citibank "assets," mostly mortgage backed securities of dubious value. (Citibank takes the first $29 billion in losses; taxpayers cover 90% of the rest).
In return, we get preferred shares that pay 8% dividends and... not much else.. OK, Citibank's dividend is reduced to 1 cent for three years. Executive compensation has to be approved by the Treasury. But senior managers are not fired. The board is not replaced by public representatives. Forced reorganization is not ordered. Unlike the auto companies, Citibank isn't asked for a new plan to save itself. Citibank spokesmen say they will keep on with their current plan. Which as far as anyone can determine consists of layoffs, prayer, incantations, and throwing themselves on the thus far tender mercies of Hank Paulson.
The stock market went up on news of the deal and the announcement of the Obama team. But at the end of this, Citibank, which claims assets of over $3 trillion on and off its balance sheets, still holds hundreds of billions of toxic paper. It's doubtful it can cover the losses it agreed to take under the new deal without going belly up. Speculators know this. Unless the housing bubble reflates or the economy suddenly revives, Citibank will surely be back for more help soon enough. And other mega-banks, also too big to fail -- and too big to succeed -- will line up to get the same treatment.
Obama has turned the page on Bush's purblind refusal to spend the money needed to get the real economy going. But with the Geithner appointment and the apparent willingness to stand with Paulson going forward, Obama seems perilously close to following the same course as Bush in the banking bailout. For a man who won the presidency understanding that it was time to turn the page, this would be a good place to do just that.