Help wanted

Many folks are beginning to understand one of the huge implications of the recent bailout legislation: the Secretary of the Treasury has just become the second-most powerful guy in Washington. Speculation is now heating up as to who the next Secretary will be. Current Bush administration Treasury Secretary Hank Paulson has already removed his name from consideration, not that he should’ve worried himself in the first place…it’s very doubtful that John McCain or Barack Obama would have asked him to stay on.

Which raises the question – who will be the next honcho over at Treasury?

Based on my reading of user comments at the bottom of a Wall Street Journal article that addressed the same topic, I must say that there are a lot of people who seem to misunderstand what is going to be required of the next Treasury Secretary. The qualities being bandied about as favorable are things like being predictive, anticipatory, and so forth, but the economic horse is rather out of the barn at this point. The damage is done. It matters little (in the short term) whether the next Treasury Secretary can move public policy toward more sobriety in the banking industry or financial markets.

The main task facing the next Treasury Secretary is, basically, managing the largest workout in financial history, which means overseeing the massive de-leveraging that must take place in order for the economy to begin its recovery, and this de-leveraging must consider how the government will deploy the capital called for in the bailout. In other words, what assets do you buy, what sequence do you buy them in, and what price should you pay for them? Additionally – and equally important – how will the government structure deals over the long term? In other words, what will become of the assets once they have been rehabilitated? Who will benefit? Creditors? Taxpayers? The new capital investors of a sold entity? These aren’t easy questions, but resolving them has little to do with sheer financial genius. After all, it was the geniuses that got us into this fix in the first place.

From this perspective, the quality that emerges as most important is character, and I’m not sure that any sufficiently qualified person under consideration would come to the job entirely free of troublesome conflicts of interest.

One thing is sure, though. Whoever takes over the Treasury portfolio will have a thankless job. There is a pressing need for the government to begin buying distressed assets now, whether that is the rotting asset-backed securities or the actual assets themselves. This cannot wait until January when the new administration takes over the reins. So, in addition to figuring a way out of this mess over the long term, the next Treasury Secretary will necessarily inherit Mr. Paulson’s initial attempts to effect the bailout. This may be a good thing, or not so good. Much depends upon Mr. Paulson’s decisions in the next three months, which is unfortunate. After all, in a matter of a few months Mr. Paulson will be a private citizen again with every incentive to profit from the regime he has set in motion – why should we trust him?