Whose Plan Is This?

Geithner's vision was born on the Sage of Omaha's desk.
Michael Hirsh
Newsweek Web Exclusive

Tim Geithner dismisses the idea that he is manipulated by Wall Street. And indeed the Treasury secretary, a career Washington technocrat, has never worked on the Street. But that doesn't mean the kings of finance aren't influencing Geithner now. In fact, the public-private partnership plan that Geithner laid out with great fanfare last week to address the "legacy" assets issue was first conceived by Warren Buffett.

Buffett proposed the idea in a letter to Hank Paulson early last October, according to Phillip Swagel, who was assistant Treasury secretary for economic policy under Paulson. (A current Treasury spokesman confirms that Buffett "had some interesting ideas that are consistent with the concept" of what has become known as the Public-Private Investment Program, or PPIP.) In his letter from last fall, Buffett mentioned that he had been discussing the issue of how to deal with the toxic assets with Bill Gross of PIMCO, the giant bond fund, and Lloyd Blankfein, the CEO of Goldman Sachs. They all agreed that the private sector could help restart the frozen mortgage market. Paulson rejected the idea at the time, in part because the financial markets had deteriorated so quickly that he and Fed Chairman Ben Bernanke decided they had to move more quickly with direct capital injections into banks. "We had to put the fire out first," Paulson's former spokeswoman, Michele Davis, told me, adding that there was also a question of how the participation of major private investors would be received by the public at that early juncture. And by the time Geithner went with his plan, it had evolved somewhat from Buffett's original concept in several respects, including the idea of setting up five funds to compete for the assets.

My point in raising this episode, which has not been reported until now, is not to fault Buffett, Gross or Blankfein—or even Geithner. Indeed, it appears that Buffett, the Berkshire Hathaway chairman (who, full disclosure, is a director of The Washington Post Co., which owns NEWSWEEK), was genuinely trying to help Paulson find a way out of the bank collapse. But the genesis of the PPIP plan does resurrect questions about who's really running the show here, and how incestuous the relationship between Washington and Wall Street has become. Indeed, it goes to the heart of the deep philosophical divide over the Obama administration's financial rescue plans.

(More here.)