Dems in awkward position over Citigroup bailout plan

A proposed rescue for Citigroup has put congressional Democrats in an uncomfortable position of choosing between liberal advocacy groups who dislike the bailout package and President-elect Obama’s economic team that helped negotiate it.

Several left-leaning consumer advocacy organizations have criticized harshly the Citigroup aide package and have voiced general dissatisfaction with government action taken this year to shore up the shaky financial markets.

{mosads}But while leading consumer advocates, who are traditionally allied with Democrats on many issues, have panned the Citigroup plan, two of Obama’s most senior advisers were deeply involved in crafting it.

Timothy Geithner, the president of the Federal Reserve Bank of New York, whom Obama has tapped to head Treasury, played a big role in the Citigroup talks.

So did Robert Rubin, a director and senior adviser at Citigroup, who has served as an economic adviser to Obama’s presidential transition team.

“Tim Geithner played a major role in designing it,” said Sen. Judd Gregg (N.H.), a leading Senate Republican on economic issues.

Gregg said that Democrats would “absolutely” find themselves in an awkward position if they criticized the deal because of the role that Geithner and Rubin played in putting it together.

In addition, two senior members of Obama’s economic team, Peter Orszag and Jason Furman, are former protégés of Rubin. Orszag has been selected to head the Office of Management and Budget next year and Furman is a top aide.

Consumer advocates have panned the plan, which calls for the government to invest $20 billion in Citigroup directly and back more than $300 billion worth of loans and securities held by the company.

“I don’t see the taxpayers getting the benefits they need,” said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group. “It’s sweet for Citigroup. It seems like the politically connected companies like Citigroup get a better deal than they deserve. The bailout should be a bailout and shouldn’t be a giveaway.”

But Democrats in Congress have been more forbearing.

“Significant steps must be taken to stabilize our markets and get credit flowing again,” said Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, in a statement last week. “In that context, I understand the actions taken by the administration with regard to Citigroup. I look forward to reviewing the details of the plan.”

Senate Majority Leader Harry Reid (Nev.) was one of the few Democrats who sounded a skeptical tone in response to news of the Citigroup package.

“I support stabilizing the financial system so the country can begin its economic recovery, I do not support a raw deal for American taxpayers,” Reid said in a statement. “Given the scope and size of this arrangement with Citigroup and the fact it is different from the others, Treasury should be prepared to defend that taxpayers are adequately protected.”

But Reid did not broadcast his concern widely, instead sending it to a few reporters who inquired specifically about his views.

“I think it puts Democrats in a tough spot but there’s a way out: to scrutinize [Obama’s] appointments and not to decide in advance that they’re locked into not criticizing it,” said David Arkush, the director of Public Citizen’s Congress Watch, in reference to the Citigroup plan.

“It’s just a gift of roughly $300 billion for virtually nothing in exchange,” said Arkush. “These are the bankers who made decisions to buy these assets. They caused the crisis and we’re going to turn around and give them money. It’s starting to look like outright plunder.”

A spokesperson for Citigroup declined to comment specifically on the consumer groups’ criticism. But defenders of the Citigroup package argue that taxpayers receive a variety of benefits in return for their money.

One proponent said the $20 billion government investment in Citigroup will pay cumulative dividends at a rate of 8 percent per year, which is higher than the rate set for other companies in the Troubled Asset Relief Program passed by Congress this fall.

Citigroup defenders also note that the company will pay the first $37 billion in losses it suffers from bad investments.

Some critics, however, would have liked to see the Congress take a tougher stance toward Citigroup.
Dean Baker, co-director of the left-leaning Center for Economic and Policy Research, said Citigroup’s management should have been replaced and the equity of its shareholders should have been erased, measures imposed on the insurance giant AIG when it accepted a government rescue package.

Baker said he worried that the ties between Citigroup and Obama’s economic team could give Democrats pause before criticizing the deal.

“I certainly worry about that,” said Baker. “I hope Democrats would use their judgment. They may feel the need to go along because it could be seen as criticizing Obama in some way.”

Senior Senate aides and a Treasury Department official said the $20 billion direct investment in Citigroup, as well as the first $5 billion worth of backing for bad loans and securities, would come out of the first $350 billion of the rescue package, which Congress has already authorized. The rest of the funding to guarantee up to $306 billion in toxic assets will come from the Federal Deposit Insurance Corporation and the Federal Reserve.

Since Congress has already authorized the funding, some observers question whether Congress could do anything to halt or delay the Citigroup rescue package.

“On this one Congress will have oversight authority but they don’t have to bless the deal,” said a banking industry lobbyist. “I suppose you could have a resolution of disapproval.”

The lobbyist speculated lawmakers could grill Geithner about the rescue plan during his confirmation hearings next year.