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Barack Obama

Geithner's big week offers a chance at redemption

WASHINGTON (Reuters) - If embattled U.S. Treasury Secretary Timothy Geithner can calm the AIG storm and convince investors that his plan for rehabilitating the banks will work, all may be forgiven.

As brutal as the past week was for Geithner -- with lawmakers accusing him of doing nothing to stop bailout recipient AIG from paying fat bonuses, and some calling for his resignation -- the coming days will be even more crucial.

While the bonus fury rages in Washington, financial firms and investors are itching to know precisely how Geithner plans to rid banks of bad assets, and whether doing business with the government will subject them to uncomfortable scrutiny.

Possibly as soon as Monday, Geithner is expected to roll out a three-part plan, including low-interest loans for private investors to buy bad assets from banks.

Geithner is also due this week to outline regulatory reform proposals to establish a clear process for unwinding troubled nonbank financial companies like AIG and an early-warning system to spot developments that could imperil the financial system, all with an eye toward preventing future crises.

He cannot afford a repeat of February when a ballyhooed speech on his plan to fix the financial crisis offered little detail. That triggered a stock-market slump and raised questions about whether the government knew what it was doing.

“He’s lost a lot of credibility and a lot of political good will, but he can turn things around,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “If he can come up with a credible plan, fine. If not, then his days are numbered.”

The uproar over $165 million in bonuses paid to employees of American International Group Inc has opened Geithner up to attacks from all sides.

Not only was he blamed for allowing the bonuses but he also took heat from Wall Street firms, which saw AIG Chief Executive Edward Liddy grilled by angry lawmakers and wondered whether accepting government help would mean their CEO could be next.

SORRY BUDDY

In a sign of how rough things are getting for Geithner, traders on the online prediction market Intrade saw a 16.5 percent chance that he would be out at Treasury by June 30, and a 32 percent chance he would be gone by December 31.

President Barack Obama has had to voice support for Geithner repeatedly in recent days. In an interview with CBS’s “60 Minutes” to air on Sunday, he said he would not accept Geithner’s resignation if it was offered.

“Sorry buddy, you’ve still got the job,” Obama said he would tell Geithner, according to interview excerpts.

U.S. Sen. Richard Shelby, the top Republican on the Senate Banking Committee, said the show of support does not make him feel “especially good” about the Treasury nor Geithner.

“He’ll have to have at least a 180 degree turnaround, I believe, to be a successful Treasury secretary,” the Alabama senator told “Fox News Sunday.”

When Geithner started his job, his credibility was already dented by underpayment of self-employment taxes earlier this decade, which led 34 senators to vote against his confirmation. Shelby voted to approve it.

For many investors and economists, the bonuses chatter threatens to undermine efforts to repair the banks, which they see as critical to pulling the economy out of recession.

“It has become a major distraction and the worry now is, ‘Am I going to get beat up if I take government money?’” Global Insight’s Behravesh said.

“What kind of strings are going to be attached to this by Congress? It creates a perverse disincentive in the sense that it might make companies that should take the money reluctant to take it.”

Shifting the focus back to the bigger issue of cleaning up the banking mess will not be easy. Geithner is scheduled to testify to Congress about AIG on Tuesday. Lawmakers are keen to know precisely when he and Federal Reserve Chairman Ben Bernanke knew about the bonuses.

On Friday, Representative Connie Mack said Geithner should resign or be fired after losing the confidence of Americans.

“Secretary Geithner should resign today for the good of the country. If he won’t, he should be summarily fired and replaced with someone who can get the job done without destroying the economic foundations and values upon which this nation was built,” the Florida Republican said in a statement.

Given Obama’s endorsement, there is little chance Geithner will be dumped even if he has a poor showing this week. There are no obvious alternative candidates to step in, and the Treasury is woefully understaffed, with few deputies to take up the slack.

But if the economy does not show improvement by the end of the year, Geithner “would be a likely candidate for sacrifice” ahead of mid-term elections in November 2010, said Larry Sabato, director of the University of Virginia’s Center for Politics.

“By that point, Obama will have to do something to show that they’re changing plans,” he said.

Editing by Maureen Bavdek

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