All three of President Obama’s top economic advisers were on message when they appeared Sunday on separate television talk shows. Treasury Secretary Timothy F. Geithner, they said, had concluded, based on lawyers’ advice, that he could not stop the $165 million in bonuses that the American International Group was even then doling out to hundreds of employees.
But when Mr. Geithner and other officials met at the White House that night, the president’s political advisers—who had agreed to the day’s message—decided the growing outcry left Mr. Obama no choice but to publicly second-guess his Treasury secretary.
The next morning on camera, the president said he had directed Mr. Geithner to find a legal way “to block these bonuses and make the American taxpayers whole.”
Thus began perhaps the worst week in a string of bad weeks for the Treasury secretary. The mixed messages on AIG gave further ammunition to critics who had begun questioning Mr. Geithner’s credibility as the administration’s point man on the economy, an essential commodity if he is to help restore consumer confidence.
Fair or not, questions about why Mr. Geithner did not know sooner about the AIG bonuses and act to stop them threaten to overwhelm his achievements and undermine Mr. Obama’s overall economic agenda. Edward M. Liddy, chief executive of AIG, told Congress on Wednesday that he generally deals with Fed officials, figuring they would keep Treasury informed.
The controversy comes as Mr. Geithner is about to announce details of the restructured bank rescue program, and it clouds prospects for more rescue funds that the administration is all but certain to need.
Mr. Geithner’s once-heralded credentials with Wall Street were already marred by false starts in revamping the Bush administration’s bank rescue program, even as his perceived closeness to financiers — he is the former president of the Federal Reserve Bank of New York — and unease with populist politics left Main Street skeptical.
On Wednesday, a junior Republican in Congress and some traders on Wall Street went so far as to call for him to quit or be fired. The Republican leader of the House, Representative John A. Boehner of Ohio, told a conservative talk-radio host that the secretary is “on thin ice.”
But Mr. Geithner’s boss, the president, interjected a vote of “complete confidence.”
“Tim Geithner didn’t draft these contracts with AIG,” Mr. Obama told reporters as he left for California on Wednesday. “There has never been a secretary of the Treasury, except maybe Alexander Hamilton right after the Revolutionary War, who’s had to deal with the multiplicity of issues that Secretary Geithner is having to deal with — all at the same time.”
“He is making all the right moves in terms of playing a bad hand,” the president continued. “And what we need to be doing is making sure that we are providing him the support that he needs.”
Mr. Geithner is shouldering more crises on his slight frame than most Treasury secretaries ever have. And he is doing so without the usual complement of Treasury assistants because of administration delays in vetting potential nominees—a consequence in part of its efforts to avoid embarrassments like the disclosures of Mr. Geithner’s past tax lapses.
Since before his confirmation in late January, Mr. Geithner has juggled a crushing workload: overhauling the Bush administration’s discredited financial bailout program; helping with Mr. Obama’s nearly $800 billion economic stimulus plan; and managing the government effort to salvage the auto industry.
Mr. Geithner is now fashioning a new federal regulatory structure for the financial industry to replace the one that failed. He has developed a housing program that aims to avert up to nine million more foreclosures, and programs for getting credit flowing to small businesses and consumers as well as the major financial giants.
At 47, the same age as the president, Mr. Geithner works out at 5:30 a.m., gets to his desk by 6:30 and leaves 15 hours later.
On Tuesday last week, as he prepared for a meeting in London of the finance ministers of the Group of 20 nations, Mr. Geithner learned that AIG by Sunday would send out the bonuses to employees at its financial products unit, which developed the risky derivatives now blamed for the global credit crisis.
With few senior political appointees on hand, the word came from one of the numerous career civil servants who keep the Treasury functioning through changes of administration, according to an official.
Mr. Geithner consulted lawyers. They told him the government could not override the contracts that the insurance conglomerate had signed in early 2008, when its financial products unit was fast losing money.
On Wednesday evening, Mr. Geithner called Mr. Liddy, and demanded that he renegotiate payments. The next morning, Mr. Geithner informed White House advisers. Later that day a senior adviser, David Axelrod, informed the president.
On Friday, Mr. Liddy said he could not block the bonuses; he did agree to reduce executive bonuses set for July 15 and Sept. 15. With Mr. Geithner in London, Treasury officials tried to manage the potential criticism by leaking word to news media on Saturday. On Sunday, the economic advisers went on TV.
The AIG tempest has been especially explosive for Mr. Geithner because, as president of the New York Fed, he was the one administration official who had been involved in the Bush-era bailouts.
Once AIG was under the Fed’s control, its compensation plans hardly came up, according to officials. In December, an initial $55 million in bonuses went out with hardly a stir.
Administration officials Mr. Geithner’s instincts are that government should not dictate compensation issues to businesses. As Treasury secretary, however, Mr. Geithner since has developed executive compensation limits, which Congress in turn toughened.