Naming New Treasury Chief Will Calm Markets

I hope that by the time you read this President-elect Barack Obama will have named his Treasury secretary. Judging by the way the stock market sold off right after Tuesday's election -- the worst post-election drop ever, as far as I know -- there's an urgent need to know how our new president is going to manage the ongoing turmoil in the financial markets.

Last month's authorization by Congress for the Treasury to invest up to $700 billion in "troubled assets" -- the TARP program -- vests the Treasury secretary with vast powers never before held by that office. Who is going to exercise that power? How will he do it?

Markets have had a difficult time since Oct. 3 when Congress first signed the $700 billion blank check. And that's when we knew who was going to call the shots -- Henry Paulson -- although we didn't know how he was going to do it.

We still don't. Because he still doesn't. He's already said he'll invest $250 billion buying perpetual preferred stocks in banks, in order to bolster the capitalization of the banking sector. But that leaves $450 billion. And based on a report Paulson filed with Congress this week, how it will be deployed is still very much up for grabs.

With a new administration coming in, Paulson may try to accelerate things, and get as much of that money put to work as he can before someone else comes in and messes it up, at least from Paulson's perspective.

Who might that someone else be? Plenty of names have been bandied about.

Uber-investor Warren Buffett has been mentioned. I doubt he'd want to subject himself to that kind of pressure at his age. Same for former Fed chief Paul Volcker.

Robert Rubin, a former Treasury secretary, has said he's not interested. That's good news. The last thing we need is an executive from Citigroup (C) -- one of the worst actors in the credit crisis -- to take over the government's handling of the very same crisis. It may take a thief to catch a thief, but this is ridiculous.

Don't think it can't happen, though, just because it's ridiculous. Last week the New York Federal Reserve announced the appointment of a new senior vice president in its Bank Supervision Group. Guess who? A fellow name Michael Alix, who, according to the New York Fed's press release, "worked for the Bear Stearns Companies, Inc., where he served as chief risk officer from 2006-2008 and global head of credit risk management from 1996-2006."

Speaking of the New York Fed, another candidate for Treasury is its president, Timothy Geithner. He's gotten a bit tainted by the credit crisis himself. His signature is on the dubious acquisition by the Fed of $30 billion worth of busted mortgage-backed securities from Bear Stearns. He's been the Fed's point man for one botched rescue after another: Bear Stearns, Lehman Brothers and AIG (AIG). I don't know whether he's to blame for the horrible way those all turned out, but where there's smoke there's usually fire.

The best candidate being widely discussed is Lawrence Summers, another former Treasury secretary and a very accomplished academic economist. After leaving the Clinton administration, he served as president of Harvard University, where he was eventually drummed out because of some remarks he made that men and women might have certain fundamental differences. I've noticed the same thing, actually. Even more controversial (for a Democrat), he once did academic research arguing that tax cuts are good for economic growth. Again, I've noticed the same thing.

You know who the very worst candidate for Treasury secretary would be? Barney Frank, the Democrat from Massachusetts who chairs the House Financial Services Committee. He's not formally in contention for the job. It's worse than that. He's acting like he's already running the Treasury, and intends to keep doing so no matter who the secretary turns out to be.

Frank's House committee, along with the Senate Banking Committee, are the ones responsible for legislation like TARP. That's fine. Congress makes the laws, and the executive branch carries them out. But Frank is acting like he wants to do the carrying out, too.

Last week he put out a statement about how banks must -- and must not -- use investments made in them under TARP. He said, "Any use of the these funds for any purpose other than lending -- for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. -- is a violation of the terms of the Act." That's just not true. Read the legislation. Read the Treasury term sheet defining the investments.

Then on Wednesday, the day right after the election, Frank went even further. Apparently admitting that using the money for something other than loans wasn't really against the law, he leveled a whole new kind of threat against the banks. He said in an interview that the flow of TARP funds would stop unless banks "will redouble their efforts to get it lent out." Frank said, "If the money isn't being lent out, then I suppose there's no harm done if it's cut off."

That's not exactly what the already battered financial sector wants to hear. We're in a crisis of confidence, and the financial sector -- and the whole stock market, indeed the whole economy -- needs to know that the people who purport to be rescuers are really going to be there to do some rescuing.

That's not the only uncertainty that's dogging the post-election market. With three Senate races not to be ultimately determined for weeks or even months -- Alaska, Georgia and Minnesota -- we don't know whether or not the Democrats will have a filibuster-proof supermajority. If they do, then a Democratic Congress will be able to do whatever it wants, and there won't be anything the Republican opposition can do to slow it down. Even our new president, who styles himself as a moderate, won't be able to stay in control. That's what makes Barney Frank's saber-rattling so scary.

Hopefully the matter of the Treasury secretary will be settled quickly. If Obama is smart, he'll not only get that decision under his belt, he'll also make many other announcements about his intentions for economic policy. If he can do that, he can calm down the spasm of fear and uncertainty that is gripping markets in the wake of Obama's election.

That would set the stage for a nice rally, as Obama -- who is an inspiring leader, whether or not you agree with his politics -- at least temporarily restores a spirit of hope and confidence in America. But to do that, he's going to have to act. The time for talking is through.