If the outlines of the administration’s bailout plan are approved, the next secretary will have to take shots in the dark while walking a tightrope.
Wanted: turnaround artist to buy and manage depressed $700 billion portfolio. Must understand complex securities and be able to explain how they work.
Experience with Wall Street, Congress and the media preferred. Opportunity for thick-skinned workaholic who wants to make a difference and doesn’t mind government pay. Send résumé to next president of the United States.
The next secretary of the Treasury will have a big job, no matter what the fate of the administration’s bank rescue plan. It will be a bigger job than any of his predecessors have had — bigger, in fact, than that of any other non-military cabinet officer in U.S. history.
If the outlines of the administration’s bailout plan are approved, the next secretary will have to take shots in the dark while walking a tightrope. No one knows how much the distressed securities held by Wall Street firms are worth, but he will probably have to figure out a way to price them.
If he prices them too high, he risks the ire of taxpayers; too low, the anger of Wall Street. And he’ll be negotiating with tough, wily arbitrageurs, who may be more skilled than he is at getting a good price.
What kinds of toxic securities should the U.S. government buy? Should it stop at mortgage-related bonds, or extend into credit card debt and car loans as well? There will be no college textbook for the new secretary to consult. And once the government acquires the securities, how long should he hold them before putting them on the market? Managing a warehouse of troubled assets has never been in the job description before.
Bill Gross, manager of Pacific Investment Management Co. of Newport Beach, Calif., which has $830 billion under management and runs the country’s largest bond fund, drafted the following job description at the request of Financial Week:
“The next Treasury secretary should be like a thoroughbred horse with the following lineage: one-fourth statesman to be able to navigate congressional rapids in ensuing years, as well as explain developments to the American people; one-fourth mathematician to be able to compute the cost of the rising federal deficit and its effect on the dollar and interest rates; one-fourth economist to be able to diagnose the state of the U.S. economy and the required level of stimulation to keep it above water and return it to positive real growth; and one-fourth horse trader to be able to understand the financial markets and their complexities and be able to recommend appropriate solutions.”
Robert Litan, associate director of the Office of Management and Budget in the Clinton administration, said the next secretary should have Wall Street experience (Henry Paulson ran Goldman Sachs before accepting his Washington assignment in 2006) and be skilled at management, deal-making and salesmanship.
In fact, he should be like Mr. Paulson, except with better communication skills.
“He’s doing an incredibly good job under very difficult circumstances,” said Mr. Litan, now a senior fellow at the Brookings Institution in Washington.
William Goetzmann, professor of finance at the Yale School of Management in New Haven, Conn., said that in addition to technical and management skills, the next secretary must be a person of integrity—an especially important characteristic if he has personal or financial ties to any banking firm.
“The opportunities for favoritism in dealing with Wall Street firms are extraordinary,” Mr. Goetzmann said.
Mr. Paulson’s plan called for the secretary to have virtually unfettered power. That spooked lawmakers of both parties, who have insisted on the formation of a bipartisan oversight board. They have also demanded that the $700 billion be authorized in installments, so Congress can review the progress of the program before signing off on additional funding.
“I don’t think [Mr.] Paulson could possibly have been surprised by this reaction,” said Alice Rivlin, who was vice chairwoman of the Federal Reserve in the Clinton administration. “He’s a deal-maker, and this was his opening offer.”
Mr. Paulson told a Senate panel last week that he intends to appoint an asset manager to help with the purchases, and then start out by buying small quantities of simpler assets, such as risky mortgage-backed securities. He refused to lay out more specific plans for the final 3½ months of the Bush administration.
“I don’t think it’s humanly possible to do this all before the next president takes office,” said Jonathan Koppell, director of Yale’s Millstein Center for Corporate Governance and Performance.
Mr. Paulson himself is probably not sure what decisions he’ll have made by Jan. 20. He and Federal Reserve Chairman Ben Bernanke said last week that they may institute reverse auctions, in which the Treasury would list securities it wanted to buy. Firms that owned these troubled assets would compete to sell them by trying to offer the lowest price.
“If they made a commitment to reverse auctions, a lot of concerns would dissipate,” said Alan Madian, who was an economic adviser to former Gov. Hugh Carey of New York. “These provide enormous protection for the taxpayer.”
With a host of questions still on the table, there is speculation about who will succeed Mr. Paulson. Neither presidential candidate has said whom he’d consider for the post, though Barack Obama told CNBC he would want Mr. Paulson to be “deeply involved in the transition.”
The Washington Post cited unnamed Wall Street and Washington insiders speculating that possible candidates in an Obama administration would include Timothy Geithner, president of the New York Fed; Steven Rattner, founder of private-equity firm Quadrangle Group; and Lawrence Summers, Treasury secretary in the Clinton administration.
Possibilities in a John McCain administration, according to the Post, include John Thain, former chief executive of Merrill Lynch; New York City Mayor Michael Bloomberg; former Massachusetts Gov. Mitt Romney; and former Sen. Phil Gramm.
The nomination of Mr. Gramm, who resigned from Mr. McCain’s presidential campaign after saying the United States was “a nation of whiners,” would be sure to provoke congressional opposition. “He would be worse than Frankenstein and Wolfman combined,” said Rep. Keith Ellison, a Minnesota Democrat.
Mr. Paulson’s reappointment is being pushed by some executives, including Warren Buffett, and it shouldn’t be ruled out, said Rep. Spencer Bachus, R-Ala.
“He has a year of experience with this, and he’s done a good job faced with an impossible situation,” said Mr. Bachus.
The pool of potential candidates may dwindle as candidates reflect on whether they really want what many consider to be the toughest job in finance right now.
Pimco’s Mr. Gross, asked whether he’d consider such an offer, said, basically, no way, no how: “I’m no statesman!”
