Geithner Hampered by Staff Deficit in Financial Plan (Update1)

Feb. 12 (Bloomberg) -- Treasury Secretary Timothy Geithner, under intensifying pressure from Wall Street and Congress to complete his financial-rescue plan, is being handicapped by a dearth of staff experts critical to the effort.

Geithner’s strategy of forging a partnership with private investors to buy toxic assets would benefit from aides steeped in law and finance to thresh out the competing interests in the plan. Yet the administration has yet to nominate people for any of the Treasury’s financial posts as the White House seeks to avoid Senate confirmation battles.

The Treasury chief said it will take “several weeks” to fix the details of his plan to lend to a fund that will remove as much as $1 trillion of illiquid assets choking banks’ balance sheets. Investors may not afford him that luxury. The Standard & Poor’s 500 Stock Banks Index has lost 18 percent since Geithner rolled out his outline three days ago, with almost half the 16 banks in the gauge trading below $10.

“His job is all the more complicated and challenging because he does not have his team in place,” said Timothy Adams, who served as Treasury undersecretary from 2005 to 2007 and is now a managing director of the Lindsey Group in Fairfax, Virginia. “He needs the two-dozen or so top political appointees in their offices and on the job.”

Months to Fill

It typically takes months for any administration to get the undersecretaries and assistant secretaries of federal departments in place. The magnitude of the financial crisis means President Barack Obama has less scope to move slowly on the process.

A Treasury official, who declined to be identified, played down the difficulties posed by the limited staff, saying that the department has the key people it needs in place to develop its policy for ensuring financial stability. Lee Sachs, who was a partner at Mariner Investment Group, is leading the effort.

Officials from the Federal Reserve, where Geithner served as president of the New York bank, are also providing assistance.

They have their work cut out for them. U.S. banks have sustained $758 billion in credit losses since the crisis began and have warned of more to come. The S&P 500 Banks Index fell 6.2 percent to 74.23 at noon in New York. Columbus, Ohio-based regional lender Huntington Bancshares Inc. was at $1.71. Birmingham, Alabama-based Regions Financial Corp. was at $3.39.

‘Closing’ Window

Lawmakers have also pressed for action. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told Geithner on Feb. 10 that “we don’t have a lot of time, the window is closing and we’ve got to move.”

Geithner this week laid out a three-part program for tackling the credit crisis: Inject fresh government capital into some of the country’s biggest financial institutions; start a program of up to $1 trillion to promote new lending to consumers and businesses; and establish the toxic-debt fund.

It’s the third leg of that package that’s preoccupied investors and for which most of the details are missing. A key challenge that remains unresolved: the competing incentives in the partnership between the public and private sectors.

Distressed-asset investors typically want the cheapest possible price to protect their returns. Sales at those prices, however, would result in large writedowns for banks and the potential failures of some, something the administration would want to avoid, analysts said.

Competing Priorities

“The government’s incentive is to get the price up to support the balance sheet” of banks, said Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Fed’s monetary affairs division. “The private sector participants want to pay as low a price as possible.”

The solution is more complex than outright Treasury purchases of devalued assets, or guarantees against losses, while holding out the chance of a smaller hit to the taxpayer. The concept of shared risk in a mutual fund-like vehicle may reflect political exhaustion at using government money to help current creditors and shareholders of banks.

About $313 billion is left in the $700 billion bank bailout fund Congress approved in October.

An administration aide said the public-private investment fund will be developed in collaboration with market participants. The goal is to find a middle ground between ceding control and dumping a fully formed plan on to investors. The Treasury wants to entice voluntary participation, using incentives of public financing and possibly public capital, the aide said.

“They are trying hard to do the right thing, and that is keeping the assets in the private sector,” said Eric Hovde, President of Hovde Capital Advisors LLC in Washington, which manages a $1 billion portfolio of financial stocks. Still, “they are running out of time.”

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.netCraig Torres in Washington at ctorres3@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net