Who's Watching the Money?

Barack Obama thought he could have a fairly normal transition. Oh, he knew how serious the financial crisis was ("something that we have not seen since the Great Depression," he told "60 Minutes"). But after pledging to tackle the economy "head-on" at a Nov. 7 news conference in Chicago—with 16 of the nation's economic elites standing behind him like the board of America Inc.—Obama apparently felt he'd said enough. There is "only one government and one president at a time," he said, adding that he would apply "deliberate haste" to choosing a Treasury secretary and other cabinet members. Then the president-elect ensconced himself in his transition bunker in Chicago, attending to important matters like discussing the secretary-of-state slot with Hillary Clinton.

Yet with the economic news worsening every day, Obama found he couldn't ignore the growing power vacuum back east. Drained of energy and ideas following its $700 billion bailout program in October, the Bush administration seems to be giving new meaning to the concept of "lame duck." President Bush served as a genial host—but nothing more—at an emergency meeting of the G20 nations that produced no plan. Treasury Secretary Hank Paulson, apparently feeling he too had done enough, blocked a Big Three auto rescue and abruptly abandoned the "distressed asset" buy-up plan he sold to Congress in October as a cure-all. Since those assets—the toxic subprime mortgages that started the collapse in the first place—are still sitting like a dead weight on many firms' balance sheets, frightened investors have begun to wonder all over again which firms are going under and which will survive. Making matters worse, Paulson delivered a rambling history of the crisis at the Reagan Library in California that sounded like a farewell—two months before he actually leaves office. Federal Reserve chairman Ben Bernanke, meanwhile, found himself almost out of tools, having already pushed interest rates to near zero.

In ordinary times, a leisurely transition and the fact that Congress is full of lame ducks for nine weeks don't matter much. In ordinary times, the lack of civic-minded business leaders with credibility and a desire to exert forceful leadership doesn't matter much either. But as the president-elect has acknowledged, these are not ordinary times. A sense of drift has gripped the politico-economic nexus of New York and Washington, and the markets have begun to fear that what was already a major recession could turn worse. Panic sent the yield on the only known safe investment haven, U.S. Treasury bonds, to record lows of less than 1 percent in some cases. What that means is that people don't even expect to earn profits anymore; they just don't want their money to disappear entirely. Investors have been unwilling to commit capital to a wide range of stock sectors (financial, auto, insurance, housing) because they don't know the amount or scope of federal aid.

So pervasive has the panic become that some critics were starting to point fingers back at Chicago. To be sure, Obama doesn't have the power to do much of anything to right the economy during this transition period, but what he can do is reassure the markets by quickly making clear the course he plans to take, with a detailed map of his economic rescue plan—something the Obama team has been loath to do so far. Even some Obama advisers admitted to a sense of puzzlement over the president-elect's seeming slowness in fleshing out his stimulus and auto-bailout proposals.

As the markets continued to tank, Obama answered his critics in part on Nov. 21, settling on Timothy Geithner as his likely new Treasury secretary. Geithner, the 47-year-old president of the Federal Reserve Bank of New York, is a respected market interventionist who studied at the knee of former Treasury secretary Robert Rubin as an under secretary during the Clinton years. Geithner—who was born two weeks after Obama—has a quick laugh, a sense of irony and a lot of energy, bouncing in and out of rooms at the sedate New York Federal Reserve building. For the past several years Geithner has functioned as Wall Street's fire chief, playing a crucial behind-the-scenes role in the Paulson-Bernanke bailouts (a topic that may cause him some discomfort at his confirmation hearings). Geithner's appointment certainly cheered the markets: the Dow turned on a dime and shot up nearly 6.5 percent on the news.

The Geithner appointment, and Obama's announcement Saturday that he is developing a two-year stimulus plan including new job-creating investments in infrastructure and alternative energy, are signs that he is beginning to grasp the economic rudder. Even so, many say more will be expected from Obama before he takes office. Rep. Barney Frank, chairman of the House Committee on Financial Services, told NEWSWEEK HE has urged the president-elect to make a statement right away asking that Paulson's Troubled Asset Relief Program—or TARP—be redirected for wide-scale mortgage relief. "It has become important for him to speak out about that," Frank told NEWSWEEK. "My sense is that Paulson is steering clear of any further use of the TARP because he doesn't want to pre-empt the president-elect. But the danger is Obama will get blamed for Paulson's decision" to hold back the money. New Jersey Gov. Jon Corzine, another Obama adviser, urged the president-elect to push for a stimulus "north of $600 billion." "You have to pick a program that is going to have overwhelming force," Corzine told NEWSWEEK. To reverse market psychology, Obama should "get something together that could be proposed the moment he's sworn in."

CEOs at top firms across the country are struggling with leadership vacuums of their own. Nowhere is that more obvious than at Citigroup, Wall Street's longtime flagship and for much of this decade the nation's largest financial institution. In the wake of waves of layoffs and an influx of new management, blurred lines of authority have created a continual sense of confusion in its midtown Manhattan headquarters and lower Manhattan trading floors. In early November, many employees were told not to travel for two weeks—either because they could be fired or because they'd be needed to cover for departed employees. Vikram Pandit, the former Morgan Stanley executive and hedge-fund manager elevated to CEO last December to clean up the mess left behind by Charles Prince, has been less than Churchillian. A tepid public speaker, he keeps a low public profile. On Monday, Nov. 17, Pandit called a town-hall meeting at 399 Park Avenue to discuss the need to cut some 50,000 jobs, and then sent an e-mail blast to the shellshocked employees: "We are in a far stronger position going into 2009 than we were going into 2008." Investors disagreed. Citigroup's stock, which had fallen into the single digits for the first time since the 1990s, dived throughout the week, breaking below $4 on Friday, Nov. 21. "The most recent deterioration has taken all of the market's leadership sectors—industrials, energy and materials—down," says Louise Yamada, head of Louise Yamada Technical Research Advisors LLC. "And now there isn't any leadership." In times of recession, consumer staple companies like Campbell Soup are supposed to lead the market to higher ground. But recently they've been slumping too.

Most other CEOs seem to be hunkered down, conserving cash rather than restructuring their businesses. The natural leaders— establishmentarians like General Electric CEO Jeff Immelt, or JPMorgan Chase's Jamie Dimon, or Michael Dell of Dell Computer—have their own issues to deal with. Even Warren Buffett, the oracle of U.S. capitalism, seems to have clay feet these days: his stock has been scythed by 45 percent since September. And when CEOs do emerge, it's to ask the taxpayers for help, as the chief executives of Ford, General Motors and Chrysler did last week. In occasionally brutal House and Senate hearings, the leaders of these massive enterprises begged for $25 billion in short-term aid while acting as if the screw-ups on the watch weren't their fault, and without offering plans as to how such aid would allow them to dig out of their deep ditch. It didn't help that each had flown into town on his own corporate jet. When asked if he'd consider slashing his compensation to a symbolic dollar, Ford CEO Alan Mulally (2007 compensation: $21.7 million) responded, "No, I think I'm OK where I am."

Nonetheless, Michigan Sen. Carl Levin and the delegation from surrounding states offered an amendment late Thursday to make the companies more accountable for the desperately needed money in an effort to approve the $25 billion package. But Majority Leader Harry Reid, still fearing a resounding "no" from colleagues, postponed a vote on the measure. "Yes, we're kicking the can down the road because that will give us the opportunity to do something positive," he said on Thursday. The Senate did, however, find time to stage a series of bipartisan testimonials for an 85-year-old convicted felon, Alaska Republican Ted Stevens. Congress adjourned Thursday without taking action on the auto industry's request for help, or other issues.

Some see political motives in all this foot-dragging. Obama may want to avoid being linked in any way to the policy failures of the Bush era. Harvard economist Ken Rogoff (a sometime adviser to John McCain during the campaign) says that by not "taking ownership" of the problem now, Obama can reappear dramatically as a savior on Jan. 20 like Franklin Roosevelt in 1933, thereby reclaiming the commanding heights of U.S. politics for the Democratic Party. "It's exactly the FDR model. The [market] may sink another 10 percent, but then they can win elections for another 10 years," Rogoff says. "It makes sense politically to hang Bush out to dry, but Obama has to hang the economy out to dry at the same time." Obama, in other words, may want to turn crisis into opportunity.

Drift is dangerous for several reasons. Uncertainty has a way of freezing markets—who would put money into a situation that's shifting, like planting a foundation in sand? And so in the absence of clarity, the trend is to go lower. Sell now, ask questions later. The VIX index—also known as the fear index, a measure of investors' concerns about volatility—has risen to record levels in recent weeks.

So who is to blame? A spokeswoman for Paulson, Brookly McLaughlin, says the criticism of the Bush administration is unfair. "We're still very much working on programs," she says. "We plan on using our resources aggressively to support the normalization of credit markets and the expansion of credit." Barney Frank says it's unfair to say that Congress and the administration are simply washing their hands until January. "We're responding quite readily," he says. "The Congress did get the administration to help with unemployment insurance. On mortgage foreclosure we've been putting maximum pressure on them. And we're dealing seriously with the auto-industry issue. We've set a time for them to come back" to Congress with a restructuring plan. But a lot more could be done in the next several weeks. Industries can be nationalized, or allowed to fail, with lots of knock-on effects. Right now there are plenty of economic supertankers floating around in stormy seas. Most of the captains are overboard, or belowdecks. And Barack Obama, even before he's sworn in, may have to make his way to the helm.

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