• Could Tax Problems Trip up the Confirmation of the Best Candidate for Treasury Secretary?

    By William Patalon III
    Executive Editor
    Money Morning/Money Map Report

    After a two-day “holiday” to start the week–Martin Luther King Day today (Monday) and Inauguration Day tomorrow (Tuesday)–it’ll be back to business on Wednesday as Congress begins to grill U.S. Treasury Secretary nominee Timothy Geithner – the appointment many observers believe to be the most important of the new Barack Obama administration.

    Geithner, currently the president of the Federal Reserve Bank of New York, is viewed by Democrats and Republicans alike as probably the most qualified candidate to succeed current Treasury Secretary Henry M. “Hank” Paulson Jr., since whoever fills this post will have to be able to step right in and make whatever moves are needed to fix a financial system that seems to get worse by the week. Geithner is actually viewed as perhaps the one candidate with the qualifications, personality and personality needed for success.

    But there’s a problem.  The man chosen by President-elect Obama to run the U.S. Treasury failed to pay $34,000 in taxes over several years in the first half of the decade. This oversight, which relates to a period when Geithner worked as a senior official with the International Monetary Fund (IMF), will complicate a Senate Finance Committee hearing into his nomination as U.S. treasury secretary, the online edition of the London (U.K.) Times reported. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – emerged in papers released last week by the Senate Finance Committee.

    Lawmakers on both sides of the aisle were saying last week that they were still hoping Geithner could be confirmed, but with each passing day there are a growing number of critics, many of whom are calling for him to withdraw. The days ahead will tell us whether Geithner will be able to assume the post so many believe he’s just right for, or whether President Obama will have to settle for a less-than-perfect replacement.

    As Obama prepares to take the historic oath of office as the 44th President of the United States tomorrow, he faces the worst financial and economic crises since the Great Depression.  He intends to hit the ground running and put his personal touches on the much discussed stimulus package.

    Congressional Democrats revealed plans for the new administration’s stimulus, which has grown to $825 billion and which includes $275 billion in tax cuts.  For good measure, the Senate approved the release of the next $350 billion of Troubled Asset Relief Program (TARP) money, but only after Obama pledged to place restrictions on banks that will be receiving funds.

    Market Matters

    A light week on the economic calendar gives way to more earnings reports as investors move beyond (depressed) financials and focus on other key corporate releases, including:

    • International Business Machines (IBM) (Tuesday).
    • Google Inc. (GOOG) (Thursday).
    • Microsoft Corp. (MSFT) (Thursday).
    • General Electric Co. (GE) (Friday).

    Expectations are incredibly dire so any positive earnings surprises (no matter how low) should be well received.  The new Citigroup Inc. (C) will be worth watching as some analysts expect its downward spiral to continue and anticipate a similar fate as the bankrupt Lehman Brothers Holdings Inc. (LEHMQ).

    Amid all the talk of recession and bailouts, foreclosures and bankruptcies, unemployment and deflation, bear markets and capitulation, there was actually an airline-related story that actually was the feel-good story of the week last week – and it involved perennial also-ran US Airways Group Inc. (LCC). On Thursday, in an incident that the New York governor has labeled as “Miracle on the Hudson” – and in a story that finally lifts the human spirit above the “gloom and doom” of the ongoing financial crisis – U.S. Airways Capt. Chesley “Sully” Sullenberger III made a series of split-second decisions and heroically ditched his Airbus jetliner in the Hudson River after a dual engine failure, saving the lives of all 150 passengers and crew.

    Many folks didn’t even get their feet wet. The National Transportation Safety Board (NTSB) said it will be studying this case as an example of all the things to do “right” during such a crisis – in stark contrast to most of its investigations, which look at the sometimes scandalous events that went wrong. Sullenberger, a former U.S. Air Force fighter pilot is also a skilled glider pilot, and is also the airlines’ expert on safety.

    So while Vikram S. Pandit (Citigroup), Kenneth D. Lewis (Bank of America Corp. (BAC)), John Thain (Merrill Lynch & Co. Inc. (MER)), G. Richard Wagoner Jr. (General Motors Corp. (GM)), and many others, shirk responsibility over corporate (and shareholder) losses, let’s not forgot that true heroes still exist and their leadership is not measured by the value of their stock options or investment portfolios, or the size of their (missed) bonuses. Thank you, Sully. 

    Bank of America, fresh on the heals of its first quarterly loss in 17 years, emerged as the initial beneficiary of new TARP dollars (and loan guarantees) to help absorb Merrill into its corporate umbrella (where it joined forces with another failing institution, (Countrywide Financial Corp). While BofA seemed to be embracing the “financial supermarket” concept made famous by Citigroup, the latter took the opposite approach and sold part of its Smith Barney brokerage unit to Morgan Stanley (MS) and divided its remaining operations into two entities (See related stories on both Citi and BofA in today’s issue of Money Morning.)

    Citi lost more than $8 billion last quarter, despite its personal government bailout and initial TARP money.  Deutsche Bank AG (DB) warned of a $6 billion quarterly loss of its own, revealing that the financial debacle is not limited to the United States.  JP Morgan Chase & Co (JPM) recorded a slight profit last quarter, but added to its loan loss reserves as CEO James “Jamie” Dimon expressed “disappointment” over the results.

    While the financials reported earnings (losses) early to avoid the painful waiting, the news from other sectors was not any better.  Alcoa Inc. (AA) kicked off the earnings season by announcing worse-than-expected results, while Intel Corp. (INTC) lived up to its dire outlook by reporting a 90% drop in profits.

    Though Thomson Research predicted a 14% decline in Standard & Poor’s 500 Index earnings for the quarter, that forecast may look optimistic after the initial reports.  In other corporate news, Nortel Networks Corp. (NT) filed for bankruptcy; Yahoo Inc. (YHOO) found a new CEO; Circuit City Stores Inc. (CCTYQ) moved into liquidation mode; and Apple Inc.(AAPL) will continue without Steve Jobs for the foreseeable future.

    Oil plunged below $35 a barrel for a bit as the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) each reduced their projections for global demand in 2009.  Stocks resumed their downward spiral (before rebounding slightly late in the week) as the banking sector proved that TARP was no easy fix and that the earnings season could be disastrous.  A horrific retail sales report (see below) added to the economic woes as investors searched long and hard for something to believe in.  Thanks again, Sully, for the welcome relief (no matter how temporary).                        

    Market/ Index

    Year Close (2008)

    Qtr Close (12/31/08)

    Previous Week
    (01/09/09)

    Current Week
    (01/16/09)

    YTD Change

    Dow Jones Industrial

    8,776.39

    8,776.39

    8,599.18

    8,281.22

    -5.64%

    NASDAQ

    1,577.03

    1,577.03

    1,571.59

    1,529.33

    -3.02%

    S&P 500

    903.25

    903.25

    890.35

    850.12

    -5.88%

    Russell 2000

    499.45

    499.45

    481.30

    466.45

    -6.61%

    Fed Funds

    0.25%

    0.25%

    0.25%

    0.25%

    0 bps

    10 yr Treasury (Yield)

    2.24%

    2.24%

    2.41%

    2.30%

    6 bps

    Weekly Economic Calendar

    Alas, a Ben Bernanke sighting.  During the week, the U.S. Federal Reserve chairman expressed his concern that a new stimulus package might not be enough to provide a “significant boost” to the economy and confirmed that policymakers will “do their part” to promote recovery.  The Fed’s Beige Book depicted a domestic economy growing weaker by the day as conditions deteriorated within virtually all sectors across virtually all regions.  Fearful of a weakening labor picture, consumers disregarded the available (deep) discounts provided by the nation’s retailers and contributed to a very dismal holiday season.  In fact, retail sales plunged by 2.7% in December, more than twice the expected decrease in activity, and suffered the first annual decline on record (since 1992).

    While the trade deficit dropped to its lowest level in five years, exports also fell as our international trading partners have lost their unlimited appetites for U.S.-made goods and services.  This bad news for domestic manufacturers will surely be reflected in corporate earnings in the quarters to come.  On that note, industrial production dropped by 2% in December, a far worse showing that analysts expected.  On the housing front, 30-year mortgage rates fell below 5%, though home purchases are still rare and borrowers with less than stellar credit face difficulties in refinancing loans in this environment. 

    The inflation picture offered a bit of a reprieve from the negativity (though naysayers continued touting deflation or worse).  Wholesale prices plummeted for the fifth consecutive month and experienced their first annual drop since 2001.  In December, gasoline prices fell by another 25% and even food costs suffered their largest decline since early 2006.  The less volatile core producer price index (PPI) – which excludes the “volatile” food and energy components – rose slightly in December, though most economists expect that the lower energy costs will soon impact other sectors of the economy, as well.  Consumer price index (CPI) data reflected another large decline in retail prices, and the smallest increase in annual inflation since 1954.

    Unfortunately, few analysts even speak of the stimulus package that Americans have received at the pumps over the past few months as gas prices have plummeted far more than 50% since mid-summer (and this one won’t cost taxpayers a penny down the road). 

    Date

    Release

    Comments

    January 13

    Balance of Trade (11/08)

    Best showing in 5 years

    January 14

    Retail Sales (12/08)

    More than twice the loss the Street was expecting

     

    Fed Beige Book

    Broad-based negativity throughout the economy

    January 15

    PPI (12/08)

    5th straight monthly decline in wholesale inflation

     

    Initial Jobless Claims (01/10/09)

    Higher than expected post-holiday claims

    January 16

    CPI (12/08)

    Lowest annual increase since 1954

     

    Industrial Production (12/08)

    Twice the decline analysts expected

    The Week Ahead

     

     

    January 19

    Martin Luther King Day

     

    January 20

    Inauguration Day

     

    January 22

    Housing Starts (12/08)

     

     

    Initial Jobless Claims (01/17/09)

     

     

    News and Related Story Links:

    Join the conversation. Click here to jump to comments…

  • About the Author

    Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

    Read full bio

    1. Barbara Roth | January 19, 2009

      The sad thing is that the future Secretary of the Treasury, his tax accountant and the IMF couldn't figure out our tax system in order to know what Tim Geitner owed and should pay. A couple of years ago, the "Tax Specialists", H&R Block, had to pay a penalty for miscalculating THEIR tax liability. This just shows how screwed up our tax system is more than it is a condemnation of the principals involved. If there is a better example for a need for a flat tax of some type, I don't know what it is.

    2. Mike Hydes | January 19, 2009

      Yeah, that´s why I´m behind Steve Forbes for the job!

    3. Al | January 19, 2009

      "flat tax of some type" YES, let's promote this.

    4. Will Rogers | January 19, 2009

      The assertion that Geithner is the "most qualified" candidate for the Treasury job would be laughable if not so pathetic…The "genius" who is not smart enough to understand his tax liability or smart enough to hire someone who understands his tax liability is typical of what we get in D.C….he is likely a typical politician who thought he could get away with not paying what he owed in taxes!

      So much for change…he will fit right in in Washington D.C.

    5. Steveb Day | January 20, 2009

      Reference to "most qualified" in any position or level of authority is almost impossible to justify! Consider the "most qualified" who orchestrated this financial disaster; bank leaders, asleep at their desk politicians, real estate professionals, property appraisers, stock brokers and market analysts, the automotive industry, etc,etc. What America needs is truth, justice and a real change…not a silly tax break that puts $10-$20 in our pockets each week…come on and get real!! Is this the best solution that the "most qualified for president" could come up with?

    6. Charles Gimbel | January 19, 2009

      The financial problems our country faces are greater than any one of us. It is unfortunate that Geithner evaded taxes, and he should pay them even at this late date – if the liability is accurate. It is possible that hiring an illegal was simply not doing due diligence in vetting the employee. And, the tax issue could be related to the absolutely convoluted tax code.

      At any other time in recent history, this could be a ligitimate and contentious issue that could easily result in having him step down. For the good of our country, I hope this will not happen. Barack Obama's intent is to hit the ground running on Wednesday, and in Geithner he has a parson who is already up to speed, and in the run. The problems of the person are more ominous, and Geithner is probably the most talented and up to speed person for the position.

      Let us not call for a change for the candidate in this position, because this kind of change is not in the best interest of the United States of America. Most Americans, and most of the world, are look to Obama for the leadership to deliver us from this chaos. With that thought, I would object to placing obstacles in his path particularly in endorsing a candidate in such a key position.

    7. GARY CARNES | January 20, 2009

      I'm sure that Tim Geithner leads an extremely busy
      life, and most likely accepts and signs his accountants
      presentation of his tax prep, probably without going
      over it line by line. It's called delegation! The issue should
      not excuse Geithner from hiring more professional tax
      person in the future, but it's not enough of an issue to
      strike him from appointment to the secretary treasury
      post.
      If the people of this country and the congress really
      were serious about cleaning up the dishonesty in bus-
      iness and politics, a good first step might be to remove
      the distinction between prison and 'white collar detention'.
      Of course that will never happen because the people of
      influence surely reserve that white glove purgatory 'just
      in case'! I think that when the big bad boys are caught
      inflicting pain on the public they should room with the
      really 'big bad boys!!

    8. Kevin Beck | January 20, 2009

      If Geithner is the most qualified, then Henry Paulson and Ben Bernanke are geniuses. Geithner is as qualified as those two bums for dog catcher.

      A possible solution would be to separate the Department of Treasury from the Internal Revenue Service. Then next year, we can take the step of dismantling the Internal Revenue Service and replacing our current system with the Fair Tax.

    9. James Yamaki | January 24, 2009

      Shah Gilani for Treasury Secretary. Ooops, Timothy Geithner was confirmed.

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