Concern over Geithner shifts from tax returns to bailout role

McClatchy NewspapersJanuary 21, 2009 

WASHINGTON — Timothy Geithner is expected to win Senate confirmation as Treasury secretary as early as this week after apologizing to senators on Wednesday for making a number of errors on his income tax returns.

Lawmakers warned Geithner that their constituents have serious concerns not only about his failure to pay $34,000 in taxes, but also about how Washington is spending the $700 billion financial sector rescue and trying to revive the reeling economy.

The comments on Wednesday by members of the Senate Finance Committee foreshadowed the coming debate on his confirmation. The committee is expected to vote on Thursday, with full Senate consideration shortly after.

Those debates are likely to feature views such as that expressed by Sen. George Voinovich, R-Ohio, who last week said that he and his constituents were outraged about Geithner's tax troubles.

On Wednesday, however, he said, "I haven't heard a bunch of people screaming about it," and added that it was more important to look closely at how the Obama administration will deal with the economy.

"They've got big problems, and a lot of Americans feel they have to have more answers," Voinovich said, particularly about the Troubled Asset Relief Program, the government's effort to rescue failing financial institutions. Many lawmakers are upset over how it's being administered.

Geithner had to clear an early hurdle at Wednesday's nearly four-hour hearing — explaining his tax problems.

"These were careless mistakes. They were avoidable mistakes. But they were unintentional. I should have been more careful. I take full responsibility for them," Geithner said.

As Treasury chief, he'll oversee the Internal Revenue Service, and many senators were uncomfortable that for four years Geithner failed to pay the self-employment taxes that millions of Americans pay every year. He's since paid the IRS $42,000 in back taxes and interest.

"The person ultimately responsible for tax policy must be credible on the issues of tax reform and compliance," said Iowa Sen. Charles Grassley, the committee's top Republican.

Grassley added: "It is deeply problematic that a U.S. citizen with your financial knowledge and expertise doesn't consider whether he should be making a contribution to the Social Security trust fund when an employer makes clear that it is the employee's responsibility."

Geithner didn't provide much detail on why he made the mistakes, noting only that he'd made an initial mistake, then repeated it on his own in subsequent years and even later with a paid tax preparer.

He acknowledged that he'd signed paperwork sent by his employer, the International Monetary Fund, agreeing to pay his portion of self-employment taxes and said that to the best of his recollection, the TurboTax software program that he used didn't prompt him about the self-employment taxes he failed to pay.

Sen. Jon Kyl, R-Ariz., grew frustrated and accused Geithner of "dancing around" questions concerning his knowledge at the time that an IRS statute of limitations was about to run out. The implication was that Geithner that knew he owed back taxes for 2001 and 2002 and played for time until the clock ran out on the IRS.

"I provided him the opportunity to explain, with a little more clarity, some of the issues relating to his tax liability. In my mind, he was not clear in his answers," Kyl said.

Beyond failing to pay his portion of self-employment taxes for nearly four years when he worked for the IMF, Geithner also made numerous errors that are somewhat baffling, such as claiming a child-care tax credit for time that his children spent in summer camp.

Senators didn't press him on this, however, and his role as an architect of the government's response to the financial crisis outweighed questions about his tax preparation.

Geithner is a political insider who knows how to defuse controversy. He was flanked at the witness table by former Federal Reserve Chairman Paul Volcker, Obama's top adviser on economic recovery, and New York Sen. Charles Schumer, one of the more influential Democrats in the Senate.

Since November 2004, Geithner has been the president of the Federal Reserve Bank of New York, the most powerful in the system given its proximity to Wall Street and the role it plays coordinating with central banks overseas. He was deeply involved in the March sale of investment bank Bear Stearns and in September's government rescue of insurance giant American International Group.

Geithner said that September's collapse of investment bank Lehman Brothers — which deepened the global financial crisis and led to AIG's rescue and the $700 billion Wall Street bailout in October — wasn't his fault or the Federal Reserve's.

"We could not force any institution to come in and buy Lehman . . . (and) we did not have the authority at that point to do that," he told senators, blaming an inadequate regulatory structure for today's global financial meltdown. "That was a critical and tragic set of constraints."

Many senators complained that constituents see Washington giving billions to big banks and ask why local banks are seemingly ignored.

"We've had only two banks . . . in Michigan that have received any of the TARP funding," said Sen. Debbie Stabenow, D-Mich., "and none in southeastern Michigan, where half the population is in Michigan."

Sen. Pat Roberts, R-Kan., said he had 350 rural banks in his state, and three have said they'd like help.

"They don't want to be tossed into the briar patch," he said, "and they have contributed zero to the economic crisis we now find ourselves in."

Geithner didn't specifically answer either senator, but said repeatedly that it was important to prop up large financial institutions whose failure could create shocks across the global financial system.

He tried to emphasize that there are no easy answers. Geithner said that a number of new approaches were under consideration and that he and Obama had consulted experts around the globe to weigh next steps. He said that details and a comprehensive plan would be coming "relatively soon," but that providing information now would add to the uncertainty in the global financial markets.

Government will step in to play the role of a private sector too distressed to act now, Geithner said, pointing to one new approach under the Obama administration.

"We're going to have to provide much more direct substantial support to the credit markets," he said, suggesting that government will play the role of a secondary market, in which loans of all sorts traditionally are bundled together and sold to investors. The Federal Reserve is preparing to purchase billions of dollars of these asset-backed securities in a bid to thaw the frozen credit markets.

In a criticism of the Bush administration, with which he worked closely, Geithner said that bolder approaches were needed.

"If our policy response is tentative and incrementalist . . . then we risk great damage to our living standards, to the economy's productive potential and to the fabric of our financial system," he said.

This was also a tacit endorsement of a largest-ever economic stimulus plan that Obama and the Democratic-controlled Congress are readying, estimated to cost $900 billion or more. Lawmakers begin marking up the legislation this week.

(Greg Gordon contributed to this article.)

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