Image: Timothy Geithner
Charles Dharapak  /  AP file
Timothy Geithner was one of the first Cabinet-level officials nominated in November and his confirmation initially was expected to be easy, considering his strong qualifications and close involvement with efforts to halt the financial industry meltdown.
By John W. Schoen Senior producer
msnbc.com
updated 1/14/2009 6:29:56 PM ET 2009-01-14T23:29:56

New York Federal Reserve President Timothy Geithner, once was seen as a shoo-in to be Treasury secretary under President-elect Barack Obama, is suddenly facing tough questions.

This week's disclosure that he failed to pay some income taxes over a four-year period forced a delay in his Senate nomination hearing. At the same time there is a growing chorus of criticism over the management of the government's $700 billion financial industry bailout in which Geithner played a key role.

Geithner was one of the first Cabinet-level officials nominated by Obama in November and his confirmation initially was expected to be easy, considering his strong qualifications and close involvement with efforts to halt the financial industry meltdown.

But on Wednesday his confirmation hearing was postponed until next week after the Senate Finance Committee received a report containing the full details of his tax delinquencies.

Sen. Charles Grassley, R-Iowa, said the delay was needed to give members of the full Senate a chance to review the report. In an interview with CNBC, Grassley said there was no question that Geithner is qualified to run the Treasury Department. But Grassley wouldn’t speculate on the impact of the tax disclosures.

“We've got to re-establish credibility in the markets, and having people that are credible in the secretary of Treasury's position is important,” Grassley said. “These are critical times; the economy is very bad, we need strong leadership. Nobody questions his leadership, but there are questions about sloppiness that need to be resolved, and they have to be resolved to the satisfaction of a large number of the people on the committee.”

Video: Treasury nominee under fire The delay comes as the global financial markets continue to try to find a footing amid a worsening economic downturn, and the U.S. economy continues to show signs of deterioration. The Dow Jones industrial average fell sharply Wednesday after the Commerce Department reported that retail sales dropped 2.7 percent last month, more than double the 1.2 percent decline expected.

The controversy surrounding Geithner’s nomination is reminiscent of President Bill Clinton's  unsuccessful nominees for attorney general, Zoe Baird and Kimba Wood. (Baird's nomination failed after it was learned she failed to pay taxes for a household employee; Wood’s nomination was derailed because she hired an undocumented worker.)

Geithner’s nomination also is clouded by the disclosure that he employed a housekeeper in 2005 after her legal immigrant work status had lapsed for three and a half months. But several senators said Wednesday they view that as a “technicality.”

The more troublesome problem is related to his failure to pay some $34,000 in back taxes.

Sen. Arlen Specter, R-Pa., said Wednesday he has not decided whether to oppose the nomination but said the missed tax payments were “not a trivial matter.”

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“Look here, the secretary of the Treasury is in charge of the Internal Revenue Service on collecting taxes, and integrity is very important,” he told Fox News. “And if the top man doesn't pay his taxes, what kind of an example does that set for everybody?  And you can be sure when the cases are hauled to court or before the IRS, a lot of people will be saying, 'Well, if the top guy did it, I ought to be entitled to some leniency too.'”

The delinquent taxes relate to Geithner’s employment at the International Monetary Fund from 2001 to 2004. Because foreign organizations like the IMF don’t pay Social Security and Medicare taxes, individual employees are responsible for paying the employer's share. Geithner failed to do so for those four years. The IRS reports that this is a common mistake made by roughly half of all Americans in his situation.

But the Senate Finance Committee, in documents released Tuesday, noted that the IMF issues guidelines to employees on self-employment taxes and that Geithner had signed annual statements saying that he would pay them. He also had experience dealing with such taxes, the panel noted.

In a 2006 audit of Geithner’s return, the IRS caught the back payments on his 2003 and 2004 returns, which Geithner then paid. But Pro Publica, an independent news Web site, reported that a three-year statute of limitations precluded the agency from auditing the 2001 and 2002 tax returns. Those additional payments weren’t made until the Obama team discovered the additional errors in November, according to Pro Publica, which quoted an aide to the finance committee.

While few senators so far have voiced outright opposition to Geithner’s nomination, next week's hearing likely will also provide a forum for critics of the Treasury’s Troubled Asset Relief Program, in which Geithner has played a central role.

Opposition to continuing the TARP has been growing in Congress for weeks. It escalated Tuesday when Sen. David Vitter, R-La., and five other Republican Senators introduced a resolution to block the release of the remaining $350 billion in funds, which requires congressional approval. President George W. Bush formally asked for release of the funds last week on behalf of Obama.

Critics of the program — from both parties — have raised several concerns:

  • Despite the investment of an initial $350 billion in the banking system, the credit markets remain sluggish and the economy continues to deteriorate. (Supporters of TARP argue that without the funds, the banking system would be in much worse shape.)
  • Originally designed to buy up bad, mortgage-backed assets from banks, the Treasury abruptly shifted course in November and announced it would invest directly in banks instead. Treasury officials at the time said the asset buyback plan was unworkable and that direct investment would have a more immediate impact.
  • The program has lost focus. Though bailouts for industrial companies were initially ruled out, the Bush administration reversed course in December and allocated TARP funds to help the auto industry.
  • Treasury hasn’t provided an adequate accounting for the funds. Though the Treasury has posted basic information about how the money was allocated among banks, those banks have not had to disclose how they’re using the money.
  • Too much federal intervention. Critics of the plan say that, by choosing which banks get TARP funds and which don’t, the government has taken on the role of “picking winners and losers” in the financial system.
  • Not enough foreclosure relief. Though the original TARP bill directed the Treasury to establish a plan to stem the rise in foreclosures, those efforts have fallen short.

The House is considering a revision of TARP that would include more aggressive foreclosure relief and better accountability. But opponents argue that with the government set to spend as much as $800 billion in new funds for an economic stimulus package, the remaining TARP funds aren’t needed.

But in a speech Tuesday at the London School of Economics, Federal Reserve Chairman Ben Bernanke said the banking system remains fragile and may need further TARP funding. Bernanke suggested that Obama may want to consider going back to the original plan of buying up bad assets on the books of banks.

"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," Bernanke said.

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