Wise up, Mr. Geithner

When President-elect Barack Obama picked Timothy F. Geithner to be his Treasury secretary four months ago, numerous analysts praised the choice because of Geithner’s expertise in the financial industry. He was president of the Federal Reserve Bank of New York at the time, and had helped craft the response to the troubles roiling global credit markets. But as the debacle over the American International Group bonuses has made clear, Geithner’s knowledge about Wall Street is matched by his ignorance about the political culture of Washington. And the blunders committed by Geithner (and others, including the Federal Reserve and previous Treasury Secretary Henry M. Paulson) could undermine key elements of President Obama’s economic recovery plan.

Those steeped in Wall Street’s pay scales and compensation packages, as Geithner and Paulson are, may not have seen anything wrong in AIG promising sizable “retention bonuses” to employees and managers in its Financial Products unit. Bonuses often substitute for large salaries in the financial industry, and the AIG group was charged with a difficult and crucial task: extricating the firm from its bad bets on complex mortgage-backed securities. But average taxpayers saw things in much simpler terms. Their money was sustaining six- and seven-figure salaries at a company that would be bankrupt if not for Uncle Sam, and whose reckless behavior had helped wreck the economy.

As The Times reported Thursday, Paulson’s Treasury Department agreed in November to let AIG pay rich bonuses even as it was being propped up by Washington. Unfortunately for Geithner, the payments to the Financial Products employees didn’t come to light until last week, after he’d reviewed and acquiesced to them. Administration officials claimed that their hands were tied by AIG’s employment contracts, but that argument mollified no one.

The predictable result, in addition to the calls for Geithner’s ouster, was the bill now rocketing through Congress to impose confiscatory tax rates on many of the individuals who’ve collected bonuses from rescued firms. To the financial industry, it’s yet another switchback by Washington, which has spent the last year plunging in new directions and then quickly reversing course. The shifts have made investors wary just when the administration is trying to persuade them to be its partners in restoring credit to consumers and small businesses, disposing of illiquid bank assets and averting foreclosures. Geithner’s initiatives in those areas hold promise, but they won’t get far unless he hones his political skills -- fast.