It's hard not to be somewhat encouraged by the announcement that Bank of America has reached a deal with Treasury to repay the $45 billion in "exceptional assistance" it received last fall and winter. BofA was one of two problem megabanks (the other being Citigroup) to receive such a mega-bailout, and at times looked like it would be years before it returned the cash.

So far the members of Congress who think the Treasury Secretary should go don't quite constitute a full-blown caucus, much less anything resembling a majority. But they're expressing their opinions with increasing passion. Early this month Democratic Senator Maria Cantwell confessed that she was "not sure" why Geithner still had his job given his too-soft treatment of Wall Street. (A spokesperson later walked back the implication of that statement.) Then, last week, Geithner took some lumps from both Democrats and Republicans in the House. Oregon liberal Pete DeFazio proclaimed that Geithner should resign over his refusal to answer questions about the AIG bailout. At a hearing of the Joint Economic Committee the following day, Texas GOPer Kevin Brady told Geithner that "[T]he public has lost all confidence in your ability to do the job" and pleaded, "For the sake of our jobs, will you step down from your post?" 

And the risks for Geithner only appear to be growing on Capitol Hill. Someone who recently attended a large gathering of House Democrats told me last week that "there were moments when it turned into a pep rally against Geithner and the Obama economic team." 

The criticism of Geithner is threefold: First is the continued taint of AIG, whose bailout he orchestrated as president of the New York Fed. The recent report by Neil Barofsky, the special inspector general for the bank bailout (aka TARP), has reignited suspicions that Geithner and the Fed pumped taxpayer money into the cratering insurance company in order to funnel billions of dollars to its major counterparties--banks like Goldman and Merrill Lynch. The second criticism is related to the first--that Geithner is too close to Wall Street generally. This comes partly from his role in the bailouts of Citigroup and Bank of America, partly from his decision to help investors buy the banks' toxic assets rather than nationalize them, and partly from revelations about conversations he had with the CEOs of Goldman and Citi at the height of the crisis. Third, both of these problems have been magnified by the rising unemployment rate and the perception that Geithner is more concerned with the deficit than with job growth.

On the merits, I think these criticisms are all slightly off the mark.

“Banking on the State” by Andrew Haldane and Piergiorgio Alessandri is making waves in official circles. Haldane, Executive Director for Financial Stability at the Bank of England, is widely regarded as both a technical expert and as someone who can communicate his points effectively to policymakers. He is obviously closely in line--although not in complete agreement--with the thinking of Mervyn King, governor of the Bank of England.

Haldane and Alessandri offer a tough, perhaps bleak assessment. Our boom-bust-bailout cycle is, in their view, a “doom loop.” Banks have an incentive to take excessive risk and every time they and their creditors are bailed out, we create the conditions for the next crisis.

Any banker who denies this is the case lacks self-awareness or any sense of history, or perhaps just wants to do it again.

The Haldane-Alessandri “doom loop” is fast becoming the new baseline view, i.e., if you want to explain what happened or--more interestingly-- what can happen going forward, you need to position your arguments relative to the structure and data in their paper.

Just when our biggest banks thought they were out of the woods and into the money, the official consensus in their favor begins to crack. The Obama administration’s publicly stated view--from the highest level in the White House--remains that the banks cannot or should not be broken up. Their argument is that the big banks can be regulated into permanently low risk behavior.

In contrast, in an interview reported in the NYT this morning, Paul Volcker argues that attempts to regulate these banks will fail:

“The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company.”

Volcker may not have the ear of the President (as the NYT points out), and Alan Greenspan--also arguing for bank breakup, but along different lines--might also be ignored. But watch Mervyn King closely.

Although higher capital requirements do seem like a no-brainer, Andrew Kuritzkes and Hal Scott offer some words of caution in the FT:

The five largest US financial institutions subject to Basel capital rules that either failed or were forced into government-assisted mergers in 2008 – Bear Stearns, Washington Mutual, Lehman Brothers, Wachovia and Merrill Lynch – had regulatory capital ratios ranging from 12.3 per cent to 16.1 per cent as of their last quarterly disclosures before they were effectively shut down. The capital levels of these five banks were between 50 per cent and 100 per cent above the minimums and 23 per cent to 61 per cent higher than the well-capitalised standard.

Even though Kuritzkes and Scott don't mention the possibility that a different mix of capital might be more effective in cushioning against distress, they do come up with an interesting idea: more stress tests.

Few issues since the collapse of venerable Lehman Brothers one year ago have caused as much consternation as performance bonuses for bailed-out bankers. Yet, even among sophisticated observers, there is confusion about what really happened. So, with the benefit of a year's perspective, how should we think about banker compensation in the context of bank bailouts?

Here's a hint: The bonus outrage has distracted attention from the more important way that taxpayers underwrote the wealth of profligate bankers, which was to preserve the extensive equity holdings that senior personnel at these institutions had accumulated prior to the debacle of 2008. And this diversion, in turn, has delayed effective action that might inject a bit of moral culture into the money culture of Wall Street.

Bank of America and the SEC were blasted on Monday in a ruling issued by a Federal District Judge. The two parties had proposed a settlement deal over bonuses that had been paid to Merrill Lynch last year. The judge, Jed Rakoff, not only rejected it; he criticized the ethics of the proposal:

"the proposed Consent Judgement is neither fair, nor reasonable, nor adequate. It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality,"

The entire (shockingly bold) ruling has been posted below. It's worth reading:

44% of companies who cut pay plan to go back to old levels within 6 month.

Being Treasury secretary is usually not a job that calls for great political skills. But with a banking crisis crippling the economy and threatening to turn a recession into a depression, Tim Geithner has been plunged into the center of politics--as both the person responsible for what the administration should do, and as the main exponent of that policy. But he has faltered in crafting an effective policy and failed miserably in putting it forward.

One legend, most likely apocryphal, says that the word lobbyist was coined at Washington, D.C.’s Willard Hotel--where politicos and powerbrokers would linger in the hotel lobby in an attempt to schmooze and sway President Ulysses S. Grant. Whatever their origins, lobbyists have become a permanent fixture of the Beltway scene. With a raging debate over the influence of corporate and special interest (especially in the wake of the Citizens United Supreme Court case), TNR took a look back to a piece written by senior editor John B.