“Conservatives agree that as point person, you failed,” Rep. Kevin Brady (R-Texas) told the Treasury secretary yesterday during a hearing of the Joint Economic Committee. “Liberals are growing in that consensus as well. Poll after poll shows that the American public has lost confidence in this president’s ability to handle the economy. For the sake of our jobs, will you step down from your post?”

Geithner, of course, didn’t budge, arguing that it was Congress that left the new administration “an economy falling off the cliff.”

“Almost nothing of what you said represents a fair and accurate perception of where this economy is today,” Geithner told Brady.

And on some counts he’s right. Since Geithner’s swearing-in 10 months ago, the stock market has rebounded and the investment-banking industry has flourished. Yet little of that high-altitude recovery has trickled down to middle-class America, where homeowners continue to sink and unemployment is at a 26-year high.

That discrepancy has led some liberal Democrats to go after the White House recovery strategy as well. Earlier in the week, Rep. Peter DeFazio (D-Ore.) blasted Geithner and others on Obama’s economic team for hoarding unspent Wall Street bailout money instead of allowing Congress to tap some of it for infrastructure projects — a plan that would help shift the recovery to Main Street.

“Unfortunately, the president has an adviser from Wall Street, Larry Summers, and an adviser from Wall Street, Timmy Geithner, who don’t like that idea,” DeFazio told MSNBC’s Ed Schultz Wednesday. ”They want to keep the money [because] there may be more needs on Wall Street.”

None of this, of course, should come as any surprise. Geithner headed New York’s Federal Reserve Bank for the five years prior to his appointment atop Treasury, forming entrenched allegiances to Wall Street. So if there’s anything new in these latest episodes, it’s only that Congress is finally discovering where the loyalties of the Treasury secretary actually rest.

This week, Rep. Barney Frank (D-Mass.), the House Financial Services chairman whose systemic-risk legislation includes the after-the-fact fees urged by Geithner, says he’s now leaning toward the Bair plan. Indeed, The Wall Street Journal reports today that “a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.”

There will be plenty of time to make the changes. Frank’s committee will meet tomorrow to begin marking up the bill, with debate on amendments not expected until Thursday, the Journal reports. No doubt some lawmakers are drooling at the chance to tweak the bill.

Cantwell ripped into the financial reforms put forth by Geithner and the Obama administration as “appalling” for including alleged loopholes and exemptions for large financial institutions in legislation overhauling the regulatory framework for the nation’s top firms.

“I’m not sure,” Cantwell said during an appearance on MSNBC this morning when asked by host Dylan Ratigan why Geithner still has a job.

And yesterday on NBC’s “Meet the Press:”

“What the Treasury secretary basically said was that, yes, banks should take more risks and we should continue the loopholes,” she said. “And that’s really appalling because right now, we know that lack of transparency has caused this problem with the U.S. economy, and Wall Street is continuing, one year later, with the same loopholes.”

It won’t be easy for the Obama administration to push through legislation if it can’t even convince its own party to support it.

A timely, orderly resolution process that could be applied to both banks and non-bank financial institutions, and their holding companies, would prevent instability and contagion and promote fairness.

But Bair, echoing a common message from House lawmakers, is opposing a provision to reimburse taxpayers for bailouts by taxing the solvent competitors of the bailed-out firm — a tax the White House wants to apply only after the government steps in to euthanize the troubled company. Treasury Secretary Tim Geithner said yesterday that collecting the tax beforehand — effectively creating an insurance fund to pay for industry bailouts — would only encourage large institutions to make the risky bets that were largely responsible for the recent global collapse.

People will live the expectation where the government will come in and protect them. We don’t want to create that expectation. That’s why we think it’s better to do it after the fact.

Bair disagrees. “To be credible, a resolution process for systemically significant institutions must have the funds necessary to accomplish the resolution,” she told lawmakers.

It is important that funding for this resolution process be provided by the set of potentially systemically significant financial firms, rather than by the taxpayer.  To that end, Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion.

The reason to pre-fund?

It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.

There’s still a long ways to go to iron out these differences. The “too-big-to-fail” bill unveiled this week by House Financial Services Chairman Barney Frank (D-Mass.) is just a discussion draft. The actual language isn’t expected until next week, when a markup is also likely. Expect a lot of amendments.

Treasury Secretary Timothy Geithner (WDCpix)

Appearing before a House panel on Thursday, Treasury Secretary Tim Geithner made his best pitch for legislation granting the White House broad new powers to seize Wall Street firms when their collapse might torpedo others in the industry.

It didn’t go so well.

Image by: Matt Mahurin

“Mr. Secretary, I’m not a man that fears this administration or you,” Rep. Paul Kanjorski (D-Pa.) told Geithner. “But I do fear the accumulation of power exercised by someone in the future that can be extraordinary.”

Rep. Brad Sherman (D-Calif.) echoed those concerns, arguing that the bill represents “the most unprecedented transfer of power to the executive branch to make decisions about both spending and taxes in history — all without congressional approval.”

The tone of the comments could foreshadow a tough road ahead, not only for the White House, but for Financial Services Chairman Barney Frank (D-Mass.), who introduced legislation this week that grants the Treasury’s request to broaden the president’s “resolution authority.” The bill is one of the final pieces of the finance-reform puzzle that Frank has been putting together all year. But by conceding most of the administration’s requests, the Massachusetts Democrat — who asked no questions of Geithner Thursday — has riled others on his panel, who want to see more taxpayer protections in the bill.

Frank’s proposal would create an oversight commission to monitor and regulate Wall Street’s investment houses and other non-bank institutions to ensure that they’re on solid footing. Federal regulators could, for example, force companies to increase capital reserves or decrease the amount of debt they’re holding, if the scenario was deemed a threat to topple the firm.

The bill would also empower the White House to swoop in and dismantle failing Wall Street institutions in order to minimize the impact on the finance system as a whole — a strategy modeled on the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are threatening to fall.

To protect taxpayers, Frank’s bill aims to have failed-company shareholders and creditors cover the cost of the government help. If more money is needed, taxpayers would initially pick up the tab, to be reimbursed later by an after-the-fact tax levied against other large Wall Street institutions that would presumably benefit from the stabilizing effects of the government intervention.

Supporters maintain that the proposal does not empower bailouts at all, but would simply allow the government to manage the deaths of failed companies so they don’t drag down the financial system with them — a kind-of controlled euthanasia designed to protect consumers from the hubris of the finance industry.

“If we do have to step in, it will be very painful for those companies” Frank told MSNBC Thursday. “They will be put out of business. The CEOs will be fired. Shareholders will be wiped out. We are not going to have a situation where people can expect to be bailed out and live happily ever after.”

Geithner, for his part, denied that the proposal authorizes the White House to tap federal coffers at all. Asked by Rep. Maxine Waters (D-Calif.) if the bill grants “the authority to spend the taxpayers’ money to bail them out if you deem that to be a good way of handling that situation,” the Treasury secretary answered with one word: “No.”

Yet the House bill empowers the administration to make loans, buy assets, and invest in failing institutions if regulators determine those steps are required to prevent “serious adverse effects on financial stability or economic conditions in the United States.” To do so, of course, the White House would use taxpayer funds. And no monetary limits are specified.

And while the bill aims to recover the taxpayer dollars within 60 months of the bailout, Sherman notes that the White House would also have the authority to extend that deadline indefinitely.

“It could be 60 years,” he said.

That these bailout protections are limited only to those institutions whose failure is deemed a system-wide threat is another source of criticism on Capitol Hill. Many lawmakers and finance experts contend that that stipulation creates an unfair advantage for big firms over their smaller competitors. For example, they could get capital at lower rates if lenders know they have access to some level of federal lifeline. That dynamic, critics argue, would act to promote “too-big-to-fail” institutions, rather than reining them in.

“Why should the American people have to sit out there and see us creating mammoth organizations that nobody says we have the authority to control or limit, but we have the authority to help them when they get into trouble?” asked Kanjorski.

There are still other concerns. For example, some lawmakers are attacking the proposed bailout tax on large institutions, arguing that it should be collected beforehand as a type of insurance fund, rather than imposed after a competitor goes under.

“No more TARP. No more bailouts,” said Rep. Luis Gutierrez (D-Ill.). “Let them [the companies] create the fund, the systemic risk fund, that will guarantee that the American taxpayer will no longer have to be involved should they cause such a crisis ever again.”

Geithner responded that such a system would encourage even more risky behavior from the largest companies. “If you create a fund in advance, there’s a risk you’re going to create more moral hazard,” Geithner siad. “People will live the expectation where the government will come in and protect them. We don’t want to create that expectation. That’s why we think it’s better to do it after the fact.”

Meanwhile, conservatives and representatives in the finance industry are blasting the notion that solvent companies should be forced to pay to bail out the mistakes of competitors. “Should Ford bear the costs of compensating the taxpayer for what happened to G.M. and Chrysler?” asked Rep. Jeb Hensarling (R-Texas.).

Gutierrez pointed out yet another concern: Placing such broad new powers in the hands of Treasury leaders – who often arrive directly to the job from previous positions of power on Wall Street – creates the impression of the fox guarding the hen house.

“How do we know the next secretary of the Treasury won’t be the former CEO of Goldman Sachs as they have been in the past?” he asked. “They seem to be interwoven, and that’s what the American public sees.

“They see the interconnectedness in terms of their power, their influence and always to their benefit.”

The Treasury Secretary went on to say that the what’s being requested is merely “the authority to wind them [failed companies] down.”

What he didn’t mention is that the winding down will require taxpayer dollars, at least in the early phases of a takeover.Those losses are designed to be recovered within 60 months by tapping shareholders and creditors, and if necessary by imposing an after-the-fact tax on other large and solvent institutions. Yet the provision also allows the government to extend that 60-month recovery window indefinitely.

“It could be 60 years,” said Rep. Brad Sherman (D-Calif.), in response to Geithner.

“Further,” Sherman said in a statement yesterday, “it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.”

The financial markets are too important to the economy to be left to the markets alone. You need a strong framework of regulations, a much stronger framework than we had.

In Congress, Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, and Rep. Barney Frank (D-Mass.), who heads the House Financial Services panel, are pushing for sweeping reforms of the finance industry this year, including the creation of a new agency designed to protect consumers from some of the more dubious practices of the banks.

With Congress already facing hugely contentious health reform and climate change bills this fall, however, the Democrats might not want to hold their breath for action this year.

“Our people kind of thought it was a non-event,” one executive of a large bank said. “There’s nothing in there that’s radical. It’s not like the horrible and unethical action from Congress where they were putting artificial caps on pay or trying to steal back bonuses . . . I don’t think there are worries about it on Wall Street.”

From another source:

“The focus was really on a light touch approach,” [another] person added, speaking on condition of anonymity because the discussions are ongoing. “Nobody said the government needs to regulate with a heavy hand, like caps or micromanagement, but that investors needed more tools to increase disclosure and director accountability.”

Indeed, while the new compensation plan targets the top executives and highest-paid employees at the seven companies receiving the most bailout cash, executives at the hundreds of other bailed-out companies will go largely untouched. Example: While the plan places limits on bonuses (as mandated by an amendment passed by Congress earlier in the year), it limits the definition of “bonus” to exclude the commissions that send the pay for many traders soaring.

The Obama plan also scraps the $500,000 salary cap the administration had proposed in February for executives of bailed out firms. President Obama unveiled that cap with the statement that Americans were outraged with “executives being rewarded for failure.” Could it be that just four months later the White House no longer sees a problem with rewarding the same failure?

This is what happens when Wall Street runs the Treasury.

The Obama administration earlier this year issued guidelines that include limiting salary for top executives at some firms receiving TARP funds and requiring that additional pay be in the form of restricted stock, vesting only after the company repays its debt, with interest, to the government. Congress then chimed in with even tougher rules curbing bonuses for top earners at firms receiving TARP money. As part of that effort, lawmakers barred those firms from paying top earners bonuses that equal more than a third of their total compensation.

“The White House,” the Journal reported, “has been wrestling with how to marry those two efforts, which in combination are more punitive than administration officials had intended.”

Indeed, “more punitive” is hardly what policymakers seem to be after. A brief history:

Both the Bush and Obama administrations have been extremely lenient about limiting executive compensation for firms accepting bailout cash. The original bailout bill, unveiled by then-Treasury Secretary Henry Paulson in September, contained almost no conditions on executive pay at all. Congress intervened to apply some limits, but the loopholes remained enormous.

In January, the House passed a bill to close some of those loopholes, but the Senate ignored the bill.

A month later Obama, along with his Treasury Secretary Tim Geithner, announced their own executive pay limits, though those guidelines also were pocked with holes. The reason for the leniency, a Treasury release argued at the time, was “to strike the correct balance between the need for strict monitoring and accountability on executive pay and the need for financial institutions to fully function and attract the talent pool that will maximize the chances of financial recovery.” The message was clear: The White House feared that severe restrictions on executive pay, even for firms kept afloat only on the waterwings of billions of federal dollars, would scare away the “talent pool” that had run the companies into the ground — employees deemed vital to the recovery.

More recently, the Senate succeeded in passing another law limiting some executive bonuses to a third of compensation. It’s this law that the administration apparently feels is too punitive, despite the fact that Treausry officials watered it down before it was passed. And of course none of these efforts have done much to limit executive pay, as reports have indicated.

So this is the landscape that Feinberg is soon to encounter. Think about that the next time you’re feeling bitter about your job.

Treasury Secretary Timothy Geithner (WDCpix)

As the Wall Street bailout nears its first anniversary, the controversy over giving public money to private banks has become public knowledge. But an equally risky aspect of the financial rescue has flown largely under the radar: the government’s reliance on private contractors – many with potentially significant conflicts of interest – to help revive the stalled economy.

The Treasury Department knows that the law firms and investment managers hired to aid its salvage effort could be influenced by their ties to bailed-out banks; in fact, the department released a rule in January aiming to mitigate the problem.

That rule, however, has raised questions from watchdogs by asking contractors to identify and police their own conflicts of interest. And a careful review of bailout hiring agreements reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government.

Illustration by: Matt Mahurin

“It’s just a wonderfully closed circle,” Simon Johnson, former chief economist at the International Monetary Fund and leading critic of the bailout, said in a recent interview.

“They’ll sell you on this line that there’s a scarcity of talent,” so contractors must be plucked from Wall Street and remain part of its culture, Johnson continued. “It’s the same argument they’re using to explain why they’re appointing a Goldman Sachs lobbyist as [Treasury Secretary Tim] Geithner’s chief of staff. That’s part of how the club thinks.”

Can these contractors guide the bailout with the public interest in mind while simultaneously courting bailout-related business for themselves? It’s tough to say, but imposing greater transparency requirements is crucial, according to more than a dozen financial and legal experts interviewed for this story.

Right now, even as more of these lawyers and financiers are helping with the financial rescue, less is being disclosed about their handling of taxpayer-owned assets. Investment managers are setting values for securities that their companies may also hold privately, while law firms are approving government aid for companies they still represent in certain cases – but the public remains almost completely in the dark.

The Investment Managers

Consider the case of AllianceBernstein. Like many investment management firms, Alliance did not have a good 2008. Assets dropped by more than 40 percent, net income fell by one-third and the company was forced into its first layoffs in 35 years.

Yet things were looking up by late April, thanks to the Treasury. Alliance was one of three firms the department chose to monitor the assets and debt of banks receiving bailout. Its contract involves Alliance in highly sensitive issues, from executive pay limits to the execution of government stock warrants.

“We expect this to be an attractive proposition from a profitability point of view,” CEO Peter Kraus told analysts as he announced the news.

But Alliance executives also told analysts that the firm plans to apply for the Treasury’s Public-Private Investment Program, which could allow the firm to leverage its look at banks’ balance sheets into profits down the road.

If Alliance joins the PPIP, the company could partner with private investors to purchase the same types of mortgage-backed securities that it’s also handling for the government – thus earning a double windfall when the market value of those mortgage-backed securities increases.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program warned of this potential conflict in his most recent report to Congress: “transactions in these frozen markets will have a significant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefit anyone who owns or manages the same asset, including the [public-private program] manager who is making the investment decisions…”

Under the Treasury’s conflict-of-interest rule, Alliance and its fellow contractors (FSI Group and Piedmont Investment Advisors) are only required to step aside from managing assets owned by a bailed-out bank if that bank’s assets provided more than 5 percent of the firm’s most recent annual revenue.

The contracts signed by Alliance, FSI and Piedmont, posted on the Treasury’s website, acknowledge six potential conflicts of interest and suggest how each can be worked around. Yet Treasury did not reveal which banks’ assets were given to which contractor, or even whether the investment managers are doing anything with the securities they’re being paid to watch.

An Alliance spokesman declined to comment when asked how the firm is working out any conflict-of-interest risks it may face.

“The whole idiocy of this,” Chris Whalen, co-founder of the banking risk-management firm Institutional Risk Analytics, said during a recent conversation, “is that the administration would even have these firms pretending to manage this stuff, giving them subsidized deals.”

Alliance is now poised to value assets once held by Merrill Lynch – the same company that paid Alliance CEO Kraus a $25-million bonus for three months of work. Kraus’ bonus, distributed just before Merrill was sold to Bank of America, was part of a $3.6 billion pot that is now under investigation by the New York attorney general and the Securities and Exchange Commission.

A Treasury spokesman did not respond to several requests for comment on conflicts of interest, but did point to its January regulation as evidence of the government’s action on the issue and awareness of possible problems.

The Law Firms

The risk of conflicts of interest is not limited to asset managers sitting on toxic mortgage-backed assets. Simpson Thacher & Bartlett, the prominent New York law firm chosen in October to be the chief legal adviser to the TARP, has a long history of shepherding mergers and acquisitions in the banking industry, particularly during the housing bubble’s halcyon days.

Before the bailout began, Simpson Thacher had advised Washington Mutual on avoiding insolvency and the board of AIG on winning help from the Federal Reserve. Come the crash, however, the law firm was put in charge of setting terms for the government’s investment in major banks – on the opposite side of the table from the banks it once helped make mighty.

Simpson Thacher’s original contract, signed in October, did not mention the need to work around or waive conflicts. When the law firm agreed to expand its bailout work in February, however, that pact stated that Treasury “HAS NOT WAIVED any potential conflicts of interest” – giving the government room to make case-by-case decisions if problems arose.

Yet the law firm’s contract, however, appears to allow an inherent conflict of interest: The Treasury cleared Simpson Thacher to continue representing private clients participating in “other programs in support of the [bailout]” – non-TARP initiatives such as the PPIP or the Term Asset-Backed Securities Loan Facility.

In fact, Simpson Thacher senior partner Lee Meyerson, whose pivotal role in the TARP made him American Lawyer’s No. 4 “Dealmaker of the Year,” continued to advise private-equity clients on how to snap up failing banks while he worked on the bailout. When Florida’s BankUnited collapsed last month, costing the government $4.9 billion, three private equity firms represented by Meyerson swooped in to take over the property.

Simpson Thacher did not respond to repeated requests for comment about the language in its Treasury contract and on its internal mechanisms to prevent conflicts of interest.

“These firms are making up the rules [of the bailout] and advising private clients about the rules,” Yale Law School professor Jonathan Macey, a banking specialist and author, said in a recent interview.

“The problem is, No. 1, this means we lose the appearance of fairness,” he continued. “And, No. 2, there’s a very strong inclination for the people making up the rules to be sympathetic to their own clients as opposed to other people’s clients when they’re writing the rules.”

Davis Polk & Wardwell, another law firm turned Treasury contractor, was so closely involved in drafting Geithner’s proposal for “resolution authority” to wind down non-bank institutions that when members of Congress received the Obama administration’s draft proposal on the topic, it still bore Davis Polk’s computer signature. Ironically, Davis Polk turned down a chance to apply for Simpson Thacher’s first bailout contract – citing the risk of conflicts of interest.

At the Federal Reserve

The Treasury is not the only bailout administrator that has come to lean on contractors.

BlackRock, which manages a $1.3 trillion asset portfolio that ranks largest in the world, was hired for three no-bid deals in October by now-Treasury Secretary Geithner, then president of the Federal Reserve Bank of New York.

Geithner assigned BlackRock to supervise toxic assets once held by Bear Stearns, as well as those held by AIG – deals worth at least $71.3 million over three years. Yet BlackRock, like Alliance, plans to participate in the Treasury’s PPIP, again offering the firm the possibility of benefits based on its knowledge of AIG and Bear’s exposure.

Lawmakers in both parties have raised concerns about BlackRock’s conflicts, as The New York Times reported earlier this month. But Charles Hallac, a founding partner of BlackRock and the head of its risk-advisory arm, BlackRock Solutions, said such concerns are unfounded.

No BlackRock analyst managing the AIG and Bear holdings will take part in the PPIP, or “any kind of program where they’re using government funds to make money for clients, Hallac explained in a telephone interview.

BlackRock was selected because of its expertise in separating its investment business from its risk-advisory business, Hallac added. “We didn’t want to show this to anybody who was going to try to make money in the markets with this information. So we created a separate team within BlackRock Solutions to just manage the Fed portfolio.”

However, he said some employees in line to work on the PPIP have helped with a separate Fed program that involves buying up mortgage-backed securities.

The financial world often uses the anachronistic phrase “Chinese wall” – a phrase that came into wide use after the 1929 stock market crash – to describe an investment firm’s internal efforts to isolate compromising information.

To a certain extent, then, the debate over conflicts of interest at BlackRock and other firms depends on whether you believe Chinese walls can survive in the age of BlackBerries and blogs.

“Let’s be honest, it’s bullshit. They don’t exist,” Barry Ritholtz, the CEO of the independent research firm Fusion IQ and the creator of the Big Picture financial blog, said in an interview. “They’re a theoretical, abstract legal construct that looks and sounds good when you’re developing legal constructs.”

One hedge fund manager, who requested anonymity in order to speak candidly, said he is more concerned bailout contractors’ access to Geithner and Federal Reserve Chairman Ben Bernanke.

“The public-private cooperation that’s going on – not just in the PPIP – ought to be very unsettling to people,” the hedge-fund manager said. “These guys are on the phone with Geithner, Bernanke, with everybody who matters and is setting policy in Washington. And at the same time, they’re trading their own books.”

While bias among these government contractors is undeniably problematic, some experts asserted that it is also unavoidable. As this argument goes, if the government ruled out firms that did significant business with a bailed-out bank, there would be no one left to hire.

“Because Treasury doesn’t have the in-house expertise, it’s inevitable that they would have to contract out,” said Campbell Harvey, a professor of international business at Duke University. “It’s also inevitable that there will be conflicts of interest. If you’re qualified, then almost by definition, there’s a conflict of interest.”

William Seidman, former chairman of the Resolution Trust Corporation (RTC), which led the recovery effort after the 1990s savings-and-loan crisis, offered a sharp contrast to Treasury’s current opaque bailout contracts.

Seidman said he racked up large auditing bills to ensure that his contractors were complying with conflict-of-interest rules. “Occasionally we had transactions that we didn’t make public for some sort of public-policy reason, but … most we had to report to Congress,” he said in an interview shortly before his death on May 13.

“It was expensive,” Seidman added, “but the program had so much potential for fraud or conflict that we thought it was essential.”

Elana Schor is the Washington correspondent for Streetsblog, a news Website focusing on sustainable transportation and infrastructure. She has formerly covered Congress for The Hill and The Guardian.