Tax woes may dog Geithner, even after confirmation

WASHINGTON Mon Jan 26, 2009 8:44am EST

New York Federal Reserve Bank President Timothy Geithner, President Barack Obama's nominee for Treasury Secretary, makes a point during testimony in his confirmation hearing before the Senate Finance Committee on Capitol Hill in Washington, January 21, 2009. REUTERS/Brian Snyder

New York Federal Reserve Bank President Timothy Geithner, President Barack Obama's nominee for Treasury Secretary, makes a point during testimony in his confirmation hearing before the Senate Finance Committee on Capitol Hill in Washington, January 21, 2009.

Credit: Reuters/Brian Snyder

WASHINGTON (Reuters) - Timothy Geithner's tax controversy won't cost him his confirmation as U.S. Treasury Secretary on Monday but it could prove a source of friction when he seeks new powers from Congress to fight recession.

While few senators say they'll vote against Geithner, his $34,000 in income tax errors leave them with a bad aftertaste about a nominee once seen as ideal for the job.

"Until the day he leaves public service it will be a festering sore for him. It will be the first thing that people throw in his face when they disagree with his decisions," said Larry Sabato, director of the University of Virginia's Center for Politics.

Geithner's nomination was endorsed last week by an 18-5 vote in the Senate Finance Committee, clearing the way for a full-Senate confirmation vote scheduled for around 6 p.m. (2300 GMT) on Monday. The no votes were all from Republicans.

Approval will allow Geithner, whose time as head of the New York Federal Reserve Bank gave him an insider's view of the financial crisis, to focus on reforms and changes to the $700 billion U.S. rescue program expected in the next two weeks.

Some of these changes will require legislation. Geithner said in testimony that President Barack Obama's economic team is considering setting up a "bad bank" that would absorb distressed assets from commercial banks, freeing them to boost lending.

Analysts have estimated that banks need to recognize at least $1 trillion more in losses, and recapitalizing them will lead to effective nationalization of some of the largest institutions.

This means Geithner will likely have to request additional funding for the Troubled Asset Relief Program because the second $350 billion in the fund is insufficient to soak up bad assets and pay for other proposed uses, such as supporting consumer credit markets and preventing home foreclosures.

Obama's top economic adviser, Lawrence Summers, did not rule out a new funding request on NBC's "Meet the Press" program on Sunday.

Lobbying for more TARP funds -- after the handling of the first $350 billion was seen as botched by many Democrats and Republicans -- won't be easy, while changes also may contain more provisions distasteful to Republicans, such as allowing bankruptcy judges the ability to rewrite mortgage loans.

With only an expected nine-vote Democratic majority in the Senate, the Obama administration needs significant numbers of Republicans on board with its rescue efforts.

And future legislation that could boost taxes for the wealthy once the recession eases would undoubtedly dredge up Republican memories of Geithner's tax transgressions.

APOLOGY NOT FULLY ACCEPTED

Geithner, a former Treasury Department undersecretary in the Clinton administration, has apologized for not paying some taxes on time, saying he made "careless" mistakes.

After a 2006 tax audit, Geithner paid tax arrears with interest for 2003 and 2004 but did not immediately correct his 2001 and 2002 tax returns, which were protected by a three-year statute of limitations. He corrected those years only after he was nominated for the Treasury job.

Sen. John Kyl, an Arizona Republican, pressed him on this point last week and said he felt Geithner did not display "requisite candor" to earn his support.

The flap over Geithner's taxes unnerved investors last week, fanning fears that it could lead to an extended void at the top Treasury post at a time when the banking crisis appeared to be worsening as recession takes hold. No other candidate with as much markets expertise and financial rescue battle experience has emerged.

ACTIONS, RESULTS IMPORTANT

Geithner can likely repair the tax flap damage if his programs are well-crafted and succeed in calming the crisis.

"My general feeling is that the tax story that surrounds Geithner is a hindrance for him and will be lurking like a mini black cloud," said Ethan Siegal, analyst with the Washington Exchange, a consultancy.

"But he can still be a star at Treasury. The bottom line is what does he do, what does he say, how does he help Obama?"

The depth of the financial crisis and the pressing need to get on with new rescue efforts and regulatory reforms could help him overcome such difficulties. House Speaker Nancy Pelosi on Sunday signaled willingness to add more federal investment into the TARP program in exchange for stricter oversight.

Greg Valliere, a political strategist with the Stanford Research Group, predicted Geithner will be approved by a 70-30 margin and senators will overlook an issue that would have likely sunk a Treasury nominee in a more benign economy.

"There are such enormous issues that need attention that within weeks, the tax flap will fade. The bigger issue is what happens to the banks," Valliere said.

"His halo has slipped, and it will take him a while to rehabilitate his image," he added. "Ultimately, I think he'll do that. I think he's that good and that knowledgable."