The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

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Wall Street helped produce the global financial and economic crisis. Now, as the Obama administration prepares to unveil a revised bailout plan for the banking system, policy makers hope Wall Street can be part of the solution.

Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks like hedge funds, private equity funds and perhaps even insurance companies to buy the contaminating assets that wiped out the capital of many banks.

The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

Details of the new plan, which were still being worked out during the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate U.S. government financing and relieve fears that taxpayers will pay excessive prices if the government takes over risky securities. The banks created those securities when credit and home prices were booming a few years ago.

Besides devising a way to bring private investors into the bank bailout, the Treasury plan is expected to inject more capital into some banks and to give many homeowners relief from immediate foreclosures.

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Our admiration for Obama is grounded in what he represents: fairness. He is the product of a just, democratic system that respects equal opportunity for education and work. This system allowed a black man, after centuries of racial discrimination, to become president. This fairness is precisely what we are missing in Egypt.

That is why the image of Obama meeting with his predecessors in the White House was so touching. Here in Egypt, we don’t have previous or future presidents, only the present head of state who seized power through sham elections and keeps it by force, and who will probably remain in power until the end of his days.

Accordingly, Egypt lacks a fair system that bases advancement on qualifications. Young people often get good jobs because they have connections. Ministers are not elected, but appointed by the president. Not surprisingly, this inequitable system often leads young people to frustration or religious extremism. Others flee the country at any cost, hoping to find justice elsewhere.

We saw Obama as a symbol of this justice. We welcomed him with almost total enthusiasm until he underwent his first real test: Gaza.

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A: Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

Q: As goes GM, so goes the nation?
A: The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Q: Isn’t the process of restructuring under way in households and at corporations?

A: They are cutting costs to service the debt. But they haven’t yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.

—Ray Dalio, Chief Investment Officer, Bridgewater Associates in this weekend’s Barrons (full content limited to subscribers)

The “massive overhaul” of the banking bailout will be announced a day later than expected.

Treasury Secretary Timothy Geithner was originally scheduled to give full details about the changes to the rescue plan in a speech midday Monday. But the Treasury Department said Sunday that the plan will be announced Tuesday instead, in order for Geithner to focus on the stimulus bill that is being debated in the Senate.

“With record high job losses, and weakening economic forecasts, we’re focused on working with Congress to pass an economic recovery bill so we can create the jobs and make the investments necessary to get our economy moving again,” said Treasury spokesperson Isaac Baker in a statement. “Economic officials administration wide will be working and consulting with senators throughout the day.”

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President Obama…[Thursday] announced the creation of his faith-based outreach office, expanding its agenda beyond funding social programs to work on policies aimed at strengthening family life and reducing abortion.

Obama’s office leaves in place rules that allow faith-based groups receiving federal funding to hire only people of their own faith, but White House aides said the hiring rules would be reviewed on a case-by-case basis when there are complaints and that the Justice Department will provide legal assistance.

Obama’s move more fully formalizes the partnerships between the federal government and faith groups that first began under President Bill Clinton and was expanded by President George W. Bush. But where Bush used the faith office primarily for funding programs — drawing criticism that he was mainly assisting his political supporters — Obama said he wants to use the office for policy guidance, as well.

Speaking at the National Prayer Breakfast at the Hilton Washington yesterday, Obama said the goal of the initiative “will not be to favor one religious group over another — or even religious groups over secular groups. It will simply be to work on behalf of those organizations that want to work on behalf of our communities, and to do so without blurring the line our Founders wisely drew between church and state.”

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The Senate agreement on a roughly $827 billion economic stimulus bill sets up tough negotiations with the House primarily over tens of billions of dollars in aid to states and local governments, tax provisions, and education, health and renewable energy programs.

Congress is racing to finalize the legislation this week, with the price tag for the Senate plan now only slightly more than the $820 billion measure adopted by the House. Both plans are intended to blunt the recession with a combination of quick-acting tax cuts to help increase spending by consumers and businesses, and slower long-term government spending on public works projects and other programs to create more than 3 million jobs.

But the competing bills now reflect substantially different approaches. The House puts greater emphasis on helping states and localities avoid wide-scale cuts in services and layoffs of public employees, while the Senate cut $40 billion of that type of aid from its bill.

The Senate plan, reached in an agreement late Friday night between Democrats and three moderate Republicans, focuses more heavily on tax cuts, provides far less generous health care subsidies for the unemployed and lowers a proposed increase in food stamps. To help allay Republican concerns about cost, the Senate proposal even scales back President Obama’s signature middle-class tax cut.

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Senate negotiators struck a $780 billion deal on Friday that eases the path for a massive economic recovery program. With amendments, the plan comes to $820 billion ”” just $1 billion more than the plan passed by the House late last month, but it differs in several respects.

The bipartisan compromise, endorsed by three Republican senators, gives President Obama a bare working majority in the Senate. If all Democrats back the plan, as expected, those three Republican votes are just enough to ensure a win, despite strong GOP opposition.

Key elements of the plan, which cover a vast range of federal spending, include: $116 billion in infrastructure improvements; $88 billion in new funding for education; $40 billion for the development of clean energy; $23 billion for programs to help those most hurt by the economic downturn; and $14 billion for healthcare, including $3 billion to jump-start a plan to computerize health records.

The plan includes a tax cut of up to $1,000 for working couples. An amendment adopted this week would add a tax credit of $15,000 for home purchases.

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The Obama administration has decided on a new package of aid measures for the financial services industry, including a bad bank component, and is expected to announce it next Monday, according to a source familiar with the planning.

Though government sources told CNBC that nothing has been decided, Reuters, citing a Treasury Department official, reported Secretary Timothy Geithner would unveil a plan Monday.

The plan will be “smaller” than originally expected, said the industry source, and centered around government guarantees and insurance of troubled assets””what’s called a “ring fence” concept.

“Everybody seems to like that,” said the source. “There’s a lot of internal conflict about whether this [the bad bank] makes sense … they realize they have to do something with the bad bank.”

There have been so many conflicting reports about what Mr. Geithner is going to propose I am unsure what to believe, and, even when it is announced on Monday the devil will be in the details. If this is the direction, however, it sure does not look right to me. Read it all–KSH.

Bill Gross, co-chief investment officer of Pacific Investment Management Co., said the U.S. may slump into a “mini depression” unless policy makers spend trillions of dollars to spur growth.

“This economy needs support from the government, a check from the government in the trillions,” Gross said today in a Bloomberg Television interview from Pimco’s headquarters in Newport Beach, California. “There is a potential catastrophe if the U.S. government continues to focus on billions of dollars.”

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Citing two senior Democratic Senate aides, Dow Jones claims reports that a deal has been achieved by a bipartisan group of Senators to cut $107B of spending from the $920B economic stimulus plan.

While these programs support campaign promises made by Mr. Obama, they do nothing to lift the nation out of its current doldrums.

The bill’s rushed decision to spend $9 billion for rural Internet service, for example, needs to be jettisoned. So do many other projects that have nothing to do with job recovery, such as $400 million to research sexually transmitted diseases.

Meanwhile, the stimulus side of the bill will not do the job that America needs it to do. Mr. Obama’s economic advisers say it will eventually create 3 to 4 million jobs. The Congressional Budget Office puts its job-creation range lower, between 1.2 and 3.6 million jobs. But the nation lost nearly two million jobs in the last quarter of 2008 and is forecast to lose another four million jobs by the end of 2010 if there is no economic stimulus. That points to the need for a more effective stimulus plan for 2009 and 2010.

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President Obama’s economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.

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It took [Tom] Daschle’s resignation to shake the president out of his arrogant attitude that his charmed circle doesn’t have to abide by the lofty standards he lectured the rest of us about for two years.

—Maureen Dowd in yesterday’s new York Times

However, ideology is not the only reason that senators — from both parties — are balking at the president’s plan. As it emerged from the House, it suffered from a confusion of objectives. Mr. Obama praised the package yesterday as “not merely a prescription for short-term spending” but a “strategy for long-term economic growth in areas like renewable energy and health care and education.” This is precisely the problem. As credible experts, including some Democrats, have pointed out, much of this “long-term” spending either won’t stimulate the economy now, is of questionable merit, or both. Even potentially meritorious items, such as $2.1 billion for Head Start, or billions more to computerize medical records, do not belong in legislation whose reason for being is to give U.S. economic growth a “jolt,” as Mr. Obama himself has put it. All other policy priorities should pass through the normal budget process, which involves hearings, debate and — crucially — competition with other programs.

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By now, it’s clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression. Millions of jobs that Americans relied on just a year ago are gone; millions more of the nest eggs families worked so hard to build have vanished. People everywhere are worried about what tomorrow will bring.

What Americans expect from Washington is action that matches the urgency they feel in their daily lives — action that’s swift, bold and wise enough for us to climb out of this crisis.

Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.

That’s why I feel such a sense of urgency about the recovery plan before Congress. With it, we will create or save more than 3 million jobs over the next two years, provide immediate tax relief to 95 percent of American workers, ignite spending by businesses and consumers alike, and take steps to strengthen our country for years to come.

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The Obama administration is expected to impose a cap of $500,000 for top executives at companies that receive large amounts of bailout money, according to people familiar with the plan.

Executives would also be prohibited from receiving any bonuses above their base pay, except for normal stock dividends.

President Obama and Treasury Secretary Timothy F. Geithner plan to announce the executive compensation plan on Wednesday morning at the White House.

The new rules would be far tougher than any restrictions imposed during the Bush administration, and they could force executives to accept deep reductions in their current pay. They come amid rising public fury about huge pay packages for executives at financial companies being propped up by federal tax dollars.

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The abrupt collapse of Tom Daschle’s cabinet nomination on Tuesday undercut President Obama’s mission to expand health care by depriving him of an unusually well positioned architect for a big legislative campaign and leaving him without a backup plan.

Mr. Daschle’s decision to withdraw his candidacy for secretary of health and human services could slow the president’s drive to reshape the nation’s health care system as the White House searches for a replacement, and it could allow Congress to step into the vacuum during that delay, analysts said.

But the White House insisted that Mr. Daschle’s departure would not stop the effort to cover the uninsured and rein in health costs, a goal that is “bigger than one person,” as the press secretary, Robert Gibbs, put it. “We’re looking for a new nominee,” Mr. Gibbs said, “but the problem has existed for quite some time, and the work toward a solution to make health care more affordable won’t stop or won’t pause while we look for that nominee.”

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The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.

The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.

Gordon Brown was caught in the crossfire as John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads ”” a clear reference to the Depression of the 1930s, triggered by US protectionist laws.

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(AP) — Nancy Killefer: can’t be Obama performance officer because of failure to pay unemployment tax

Many American Muslim leaders are eager to help President Barack Obama improve the image of the United States in the Islamic world, but they worry that their contribution might not be welcome. The broad suspicion of Muslims in the country since the Sept. 11, 2001 attacks persists in keeping many U.S. groups from working with the Muslim community, they say.

“These issues are not going to go away just because we have a president now who has more understanding of the Muslim world,” said Salam Al-Marayati, executive director of the Muslim Public Affairs Council, an advocacy group based in Los Angeles. “We’ll actually be under more scrutiny now that these issues are going to be raised at the top of the Obama administration.”

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US President Barack Obama has already used experts within the last few months to hold high-level but discreet talks with both Iran and Syria, organizers of the meetings told AFP.

Officially, Obama’s overtures toward both Tehran and Damascus have remained limited.

In an interview broadcast Monday, Obama said the United States would offer arch-foe Iran an extended hand of diplomacy if the Islamic Republic’s leaders “unclenched their fist.”

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The lessons for today? So far, the Treasury and the Federal Reserve have done a good job of consolidating the commercial and investment banking sector into four giants: Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. But based on those banks’ continued depressed stock prices and the high cost of credit they are being forced to pay, it is clear that the market is not yet convinced of their health.

Instead of printing up money to create a huge, unwieldy “bad bank,” I would recommend creating separate bad banks for each of these four institutions (and perhaps some others), and financing them by having the government assume an amount of each good bank’s corporate debt equal to the value of the troubled assets put into the bad banks.

It would work this way: The managements of each of the four banks would be given a one-time opportunity to sell any assets (from vanilla domestic corporate bonds to the most exotic foreign derivatives) to a new bad bank owned entirely by the government. The only condition would be that the four big banks would have to convey the assets at year-end, audited book values, not at some guess of what they might be worth down the road.

While these assets are “toxic” to the banks right now because they are illiquid, volatile and at depressed prices, the government can hold on to them until they regain value, making it an investment for the taxpayer that could pay off handsomely in the end. The public would have transparency, as it would know what the assets are and how they are liquidated over time.

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President Obama is stressing bipartisanship when it comes to the $900 billion economic stimulus plan being considered in the Senate, and he may get it — in unity of opposition.

Senate Minority Leader Mitch McConnell, R-Ky., said he “can’t believe that the president isn’t embarrassed about” the stimulus packages that have passed the House and the Senate appropriations and finance committees.

The Senate is set to take up debate on the plan Monday afternoon. Republicans insist it won’t go through in its current form.

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THE party is over. The crowds have gone. The empty tubs of Ben and Jerry’s “Yes, Pecan” ice cream have been binned. Shops are selling “And He Shall Be Called Barack Obama” T-shirts at a generous discount.

But before the new president has got comfortable in the Oval Office, he has been buffeted by bad economic news. American firms announced at least 65,000 job cuts on January 26th alone. Unemployment, which was 4.9% only a year ago, stood at 7.2% in December and is sure to rise. The only bright news was that house sales rose 6.5% between November and December, as buyers snapped up bargains.

Mr Obama spent much of his first week trying to push his gargantuan stimulus package through Congress. The package includes some $275 billion in tax cuts and handouts and $300 billion in short-term spending, such as aid to cash-strapped states for providing health care, unemployment benefits and so forth. The Congressional Budget Office, a non-partisan number-cruncher, reckons about two-thirds of the package could be pumped into the economy within 19 months. That should help soften the recession.

The rest of the package, however, consists of longer-term investments in infrastructure….

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President Barack Obama promised on Saturday to help lower Americans’ mortgage costs with a new plan, coming soon, that would revive the financial system and “get credit flowing again.”

Obama, who has made fighting the country’s economic and financial crises the top priority of his young administration, called on the U.S. Senate to approve an economic stimulus bill that the House of Representatives passed this week.

But as economic conditions get worse the president said new strategies were coming to address the country’s ills.

“Soon my Treasury secretary, Tim Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families,” Obama, a Democrat, said in his weekly radio address.

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The central question facing policy makers: How does the government help banks exorcise their bad bets? For many of these assets, there is no current market price. If the government buys the assets for more than they are ultimately worth, taxpayers will take the hit. If the government pays too little, banks will have to record losses on other similar assets, exacerbating the problem.

Read it all from the front page of today’s Wall Street Journal.

Throughout 2008, Larry Summers, the Harvard economist, built the case for a big but surgical stimulus package. Summers warned that a “poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured.” So his proposal had three clear guidelines.

First, the stimulus should be timely. The money should go out “almost immediately.” Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits “beyond a short horizon of a year or at most two.”

Summers was proposing bold action, but his concept came with safeguards: focus on the task at hand, prevent the usual Washington splurge and limit long-term fiscal damage.

Now Barack Obama is president, and Summers has become a top economic adviser. Yet the stimulus approach that has emerged on Capitol Hill abandoned the Summers parameters.

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President Obama plans to name Joshua DuBois, a 26-year-old Pentecostal pastor and political strategist who handled religious outreach for the Obama campaign, to direct a revamped office of faith-based initiatives, according to religious leaders who have been informed about the choice.

The office, created by President George W. Bush by executive order at the start of his first term, is likely to have an even broader mandate in the Obama White House, said the religious leaders, who requested anonymity because the appointment has yet to be announced.

The White House declined to comment.

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