FACTBOX-One year on, US’s Geithner faces big challenges

By Reuters Staff
January 26, 2010

WASHINGTON, Jan 26 (Reuters) – U.S. Treasury Secretary Timothy Geithner is in the eye of a political storm as he tries to deflect congressional inquiry into his role in bailing out insurer AIG and battle a perception that his influence is diminishing.

The White House on numerous occasions in recent weeks has reiterated its support for Geithner, a former New York Federal Reserve Bank president sworn in as Treasury chief one year ago.

A decision last week by President Barack Obama to start a fight with banks by limiting their size seemed to highlight an expanding policy role for Obama economic adviser and former Fed Chairman Paul Volcker, with Geithner less visible.

Following are five challenges Geithner must grapple with as the administration tries to buttress the economy and tamp down questions about steps taken to counter the financial crisis.

* AIG BAILOUT

The bailout of insurance giant American International Group Inc has dogged Geithner for his entire first year in office, raising questions about decisions he made as head of the New York Fed to pay off the insurer’s bank counterparties in 2008. As Treasury secretary, he failed to halt hundreds of millions of dollars in bonus payments to AIG executives, stoking populist anger and cementing a public perception that he is a creature of Wall Street’s bailout culture — even though he is a lifelong public servant.

Geithner’s association with the AIG train wreck may hurt his credibility as he tries to persuade a newly mutinous Congress to accept Obama administration plans for tougher curbs on Wall Street and new measures to stabilize housing and aid small businesses. Some pundits say a thorough airing of the AIG matter could help clear the air for Geithner — assuming there is no “smoking gun” that reveals improper actions.

* HOUSING AND FORECLOSURES

The housing sector where the crisis was centered is only slowly healing with foreclosures at or near record levels and sales lagging. Sales of existing homes plunged a record 16.7 percent month over month in December to a 5.45 million unit annual rate.

Treasury is mulling how to speed up a $75 billion foreclosure prevention program, possibly by increasing assistance for owners in trouble. But some critics believe Treasury will eventually have to consider making banks write down the principal amounts of loans.

The administration estimated when it announced its foreclosure-mitigation effort a year ago that three to four million foreclosures could be prevented by 2012. As of December, fewer than 800,000 loans had been modified on a trial basis and only 31,000 homeowners had won permanent mortgage payment reductions.

* JOBS AND SMALL BUSINESS AID

More than six months after a return to economic growth, the U.S. economy is still losing jobs and the unemployment rate stands at 10 percent. The lack of job growth has frustrated Americans who have struggled with a long and deep recession, helping to drive staunchly Democratic Massachusetts to elect a Republican to the U.S. Senate last week.

At the same time, the economy’s traditional job creation engine — small business — continues to suffer from a lack of available credit as banks repair their balance sheets, preventing firms from expanding and hiring.

The Treasury wants to shift some available funds from its $700 billion bailout program to boost lending for small businesses, and Geithner needs congressional approval to lift some restrictions to make government capital more attractive to small banks. But many Republicans and some Democrats want to use the Troubled Asset Relief Program funds to pay down debt.

* REGULATORY REFORM

The administration has said that overhauling financial regulation is a top priority in the wake of the crisis, which was widely blamed on lax oversight and the emergence of a “too-big-to-fail” syndrome that forced the government to bail out big banks and financial institutions.

The drive for stiffer regulation has become increasingly fragmented since Obama’s announcement that he wants to bar commercial banks from trading on their own account and limit their size, ideas championed by Volcker.

Geithner now must push earlier proposals, including a mechanism for winding up troubled institutions, along with the “Volcker rule” measures in a Congress, where Republicans are reluctant to sign on to anything that they feel gives government a larger role in business affairs. Geithner was a cautious backer of the Volcker proposals who had concerns about the government taking such an activist hand.

* CHINA AND THE DOLLAR

China’s practice of limiting moves in the relative value of its yuan currency against the dollar is a long-standing irritant that Geithner inherited from prior administrations. He has had no more success in persuading Beijing to allow more flexibility than his predecessors.

Congressional pressure for action is strong in the face of huge trade deficits with China and double-digit U.S. unemployment, with some lawmakers pushing for an outright declaration that China’s policy constitutes an illegal subsidy.

Geithner has to balance calls for trade action over China’s currency policy against the U.S. need to continue selling its debt securities to China because huge budget deficits mean the United States is reliant on borrowed money to pay its bills and China is now the No. 1 holder of U.S. debt. (Reporting by Glenn Somerville and David Lawder; Editing by Padraic Cassidy) ((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net))

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