Larry Summer's has an excuse for becoming head of Obama's economic team and overseeing the response to the financial crisis after accepting over $5 million last year for part-time advice to a large hedge fund, and millions more for speaking to America's largest financial institutions: it was a good way to learn about the industry he might oversee. No kidding.
It's obvious what the industry thinks it was buying from this arrangement, but given the embarrassing performance of the Obama economic team over the weekend, we're left wondering what useful expertise the public got out of the blatant revolving door policy.
Start with the reported confusion over the Washington Post's poorly explained story that economic officials were deliberately structuring their financial bailout programs to evade Congressional restrictions on excessive executive pay for bailed out banks. TPM suggests that David Axelrod essentially conceded the claim why Secretary Geithner denied it. But I think WaPo confused the original story by equating firms in different categories, while the Administration couldn't get its story straight to explain it.
The WaPo story first insinuated and then asserted that the bailout programs were deliberately structured to avoid compensation limits, but the original story does not seem to support this claim. The WaPo did not explain there are different types of firms, and the compensation limits logically apply to some but not to others. Consider, for example, three possible categories:
1. Possibly insolvent bank holding companies for whom the recapitaliztion bailouts are directed, presumably as a means to "unfreeze" credit markets. These are the firms whose toxic (misunderstood) assets Geithner et al are trying to purchase/remove from the banks' balance sheets and who might then need to be recapitalized.
2. AIG and others who guaranteed securities held by category 1 institutions. While bailout funds have been used to rescue AIG, it's also clear most of those funds were intended to flow through to category 1 institutions whose assets AIG had insured.
3. Third-party financial institutions, not necessarily in categores 1 or 2, whom the Government would like to use to help restart secondary markets and rid the banks of their toxic assets. These might include hedge funds, pension funds, sovereign funds, etc who might be "partners" in the PPIP or other programs.
WaPo did not make these distinctions except to suggest that the government created entities to evade Congressional compensation limits. But if you read the WaPo article, it seems the firms that would be exempt from compensation limits are primarily in category 3, i.e., firms the government is asking to help solve problems #1 and #2. And because it is asking for their help, it does not wish to discourage their participation by imposing compensation limits. After all, the PPIP is designed to encourage their participation by allowing them the opportunity to profit from purchasing assets from firms in category #1.
Given this framework, I don't see a contradiction in the responses given this weekend by Axelrod and Geithner. In the TPM extracts of the interviews of Axelrod and Geithner, we first see that journalists' questions were confused/muddled, but to the extent they were asking, "did you design the programs to evade Congressional restrictions?" the answers are consistent. Axelrod says, in effect, we don't want to impose the restrictions on those trying to help us solve the problem -- which would make sense for category #3 firms, not the banks in category #1. And Geithner says, "No," and then proceeds to ramble and obfuscate as he usually does.
The first point is there is a rational, non-sinister argument that the compensation limits should apply to banks in category #1, but not to those firms only in category #3 whom we're asking to help solve the problem in #1. The second point is the Administration couldn't seem to clearly explain this -- unless it wasn't true. I don't know which is worse.
But you ask, "what if a bank is in both category 1 and 3?" The above logic would suggest the limits apply, but only because the bank is in category 1, Congress' original intended target, not 3.
That issue surfaced last week with suggestions that the PPIP auctions could be gamed by the banks being auction bidders, as well as sellers. Jeff Sachs posted on a possible game that then alarmed Paul Krugman.
What's distressing about this is that potential gaming of auctions is a predictable, common concern among auction design experts, who are usually hired to advise how to minimize the risks. And yet, six months after Treasury first proposed auctions to help purchase and price toxic assets, we find Treasury still hasn't assured critics that it has thought through totally predictable problems in auction design.
So let's go back and ask what the public bought by getting all that "expertise" Larry Summers was paid by the financial giants to bring to the economic team. What we seem to have is a Keystone Kops approach: experts who can't see how tawdry this whole revolving door looks and why the public should be upset, people who apparently haven't considered predictable criticisms of their proposals, and people who can't seem to explain their own programs after spending the last 6-18 months thinking about them.
And this is the "dream team."
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