Treasury Chief ‘s Fortunes Slip, but Bush Is Loyal : Politics: Once hailed for S&L; and Third World initiatives, Nicholas Brady has left U.S. economic policy adrift under his low-key leadership, critics say. His resignation is rumored.

When the first report cards on the Bush Administration emerged early last year, Treasury Secretary Nicholas F. Brady was at the head of the class--hailed for his plans to restructure Third World debt and bail out the nation’s troubled savings and loan industry.

Now, barely a year later, Brady’s grades appear to have plummeted. His once-admired initiatives face mounting criticism. He has become embroiled in a cat fight with the Federal Reserve over whether to cap the dollar’s rise and possibly drive its value down further. Even more troubling, critics say his low-key leadership has left the United States adrift at a time when dramatic events--and more aggressive leaders abroad--are reshaping the global economy.

“U.S. leadership now is just nowhere to be seen,” a European economic official said.

Indeed, so disenchanted has Washington become with Brady that speculation is rife that he will soon step down--or be asked to resign, possibly in favor of Bush’s “superstar” budget director, Richard G. Darman.

“The economic team that really matters is Darman, (White House Chief of Staff John H.) Sununu and (chief White House economist Michael J.) Boskin,” said David D. Hale, economist for Kemper Financial Services and a close watcher of the Washington scene.

In what may prove the unkindest cut of all, New York Times columnist William Safire bitingly referred to Brady as “the nice man serving as Treasury secretary until Dick Darman takes over.”

To be sure, not everyone shares the view that Brady has fallen short. The economy has performed well during his 17 months at Treasury, and his aides argue that he has brought long-range analysis back to the Treasury. “I think he sees ahead; he’s got that good night vision,” said Deputy Secretary John E. Robson, a one-time Yale University classmate and former G. D. Searle & Co. executive who is Brady’s second-in-command and alter ego.

At Brady’s direction, Treasury has begun studies of such long-range economic problems as the high cost of obtaining capital and the country’s low saving rate. This year’s White House proposals for a new tax-deferred savings account for individuals and a repackaging of Bush’s earlier plan for cutting the capital gains tax stemmed partly from those reviews.

“He’s helped change the dialogue of the department” to focus on the longer term, Robson said.

A charming and unfailingly gracious man who seems devoid of personal ambition, Brady stirs almost none of the personal jealousy and animosity that often poison relations among powerful officials in Washington.

Uneven Record

Nonetheless, Brady’s track record is not unblemished.

His S&L; bailout plan, enactment of which provided President Bush with his first major legislative victory, is rapidly emerging as a potential disaster. Brady’s original cost estimates have proved to be far too low. Delays in disposing of the assets held by insolvent thrifts are running up costs and, some say, exacerbating the current slump in housing.

What’s more, critics say the insistence on reviving troubled S&Ls--rather; than closing them--may set the stage for a new crisis a few years from now, just when Bush will be up for reelection. “If a 10 is an outright debacle, this is an 8,” said Bert Ely, an S&L; analyst. “What they’re doing, really, is risking a political disaster for Bush in 1992.”

And the Treasury secretary’s Third World debt plan is getting less-than-rave reviews. Although the effort scored its first “success” earlier this month, when Mexico signed a new debt accord with commercial banks, critics say the scheme may actually have worsened the debt situation.

Brady’s plan has ended any incentive for banks to provide new loans to Third World debtors. Yet such loans are the only way that debtor countries can gain enough money to pay for needed economic overhaul programs and thereby earn money to service the debt. Moreover, the plan is so tightly structured that just a handful of debtors can qualify. Already, some critics are calling for its replacement.

“For all practical purposes, it’s dead,” a senior government official outside the Treasury said.

Beyond such problems with his programs, even some insiders complain that Brady’s leadership has been lackluster. Officials say privately that key budget and tax policy decisions are increasingly made by Darman’s Office of Management and Budget. And Administration positions on the Federal Reserve Board’s monetary policy seem to be hatched at the White House.

That means that Treasury’s traditional role in economic policy-making is decidedly less dominant than in the past. The Treasury-headed, Cabinet-level Economic Policy Council still functions as a clearinghouse, but it does not have the clout that it did under previous secretaries.

In sharp contrast with his immediate predecessor--now-Secretary of State James A. Baker III--Brady has stayed almost completely out of foreign trade policy. The handling of the “Palm Springs summit” between Bush and Japanese Prime Minister Toshiki Kaifu on March 2 and 3 was ceded almost entirely to Baker.

And Brady’s appearances before congressional committees have been judged so vapid that they have left lawmakers agog. “I’m always kind of amazed that he doesn’t have more depth,” a respected Democratic lawmaker says.

International Front

Perhaps the most damaging consequence of all this, Brady’s critics say, is that U.S. leadership on international economic issues has all but evaporated. While Baker was an activist on international issues, the current Treasury chief’s style has been visibly less dynamic.

Despite breathtaking changes on the international economic scene in recent months, the Group of Seven--the informal organization of finance ministers and central bankers that Baker used skillfully as a vehicle for advancing U.S. international economic interests--has been “inert” under Brady, said C. Fred Bergsten, director of the Institute for International Economics, a Washington think tank.

Brady toured European capitals in late February for his first private chats with other finance ministers in six months and emerged to announce that the Group of Seven, which last convened in October, will finally meet again April 7.

But the United States may go to Paris squabbling internally. Some Fed officials are privately concerned that Treasury may side with the Europeans in their demands that Washington try to nudge interest rates down to help push the dollar lower. A lower dollar would ease interest rate pressures in Europe, where West Germany will have to finance its reunification with East Germany. But it would also intensify inflation pressures in the United States.

Brady himself dismisses the criticism. Although the S&L; rescue admittedly has some problems, he noted during a recent interview that it still is in “the incubator” stage.

“Has it got some imperfections? Yes. Is it faulted? No. If people want to make political hay of that, let them,” Brady said. And, he added: “I do not subscribe to the theory that we’re holding (the S&L; rescue effort) up.” As for complaints about his Third World debt plan, Brady said: “I don’t understand what the criticism is. The (critical news) stories and realities don’t match up, to me.”

Whatever outsiders may say, there is no overt evidence so far that Brady has lost his ability to inspire confidence in the one place where it counts: the Oval Office. Administration officials say Brady, who has been a close friend of Bush’s for more than a decade, continues to provide him with confidential advice on both economic and political issues.

And the two see each other socially more than ever. At Cabinet meetings, they trade good-natured barbs that show no signs of tension.

“They tickle each other,” a Brady aide says of their joking exchanges.

Still, the speculation that he may soon step down continues and appears to be intensifying. After Brady underwent a hip operation earlier this year, rumors that he might leave grew so fierce that the Treasury’s public affairs office denied them before outsiders had even raised the question.

The criticism, too, has sharpened, particularly in reaction to the recent controversy over administration of the S&L; rescue.

And, although top Brady aides deny it vehemently, key officials in other agencies say the secretary ran into criticism from the White House earlier this month after senior Treasury negotiators apparently overstepped their authority in bargaining with the French over what the U.S. share should be in the Paris-inspired European Development Bank, which is being established to make loans to emerging East European democracies. On orders from the White House, the United States has changed its stand and is seeking a larger stake.

Perhaps as a result, Brady has begun to circle his wagons. When a squabble over the pricing of zero-coupon bonds to Mexico burst into the public eye recently, Brady quickly issued a gag order, channeling all inquiries to a second-level public affairs officer who had no expertise in the issue. Even now, Treasury procedures demand that reporters’ phone calls to officials be monitored--a first in any recent Administration.

Baker Factor

Part of Brady’s problem may be that he has had a tough act to follow. Although new to the Treasury himself, Baker--who assumed the post early in 1985--was a consummate activist. He started an international effort to drive down the value of the dollar, gave the United States a trade policy that seemed more aggressive, unveiled a new Third World debt plan and turned the Group of Seven into a hotbed of economic derring-do.

What is more, Baker had enough political flair to set heads turning around the world. (Baker himself had an easy act to follow: His own predecessor, Donald T. Regan, was so cavalierly laissez faire that even some conservatives were hungering for more activism.)

The relationship between Brady and Baker is an enigma. Some who have watched the two note that Brady’s star began to rise in earnest just after the election, when Bush was incensed over suggestions that Baker--who had proved himself a skillful campaign chief--might become Bush’s Disraeli, the British prime minister who ruled from beside the throne. Brady spent most of that first December at the White House huddling over the Administration’s crucial start-up decisions, while Baker seemed to be shut out.

Later, although Baker opposed Brady’s Third World debt plan and was not enthusiastic about the S&L; rescue proposal, Bush approved them anyway, at least partly, some insiders suggest, to keep his new secretary of State in line.

Even today, there are hints of some strains between the President’s two best friends. Although Brady aides insist that the two Cabinet members get along well, they unfailingly point out that Brady is not as interested in fostering his own “image”--an indirect slap at Baker, who is legendary for courting (some say manipulating) the press. The two men “fight about some things when they have to, but they work well together after,” a Brady lieutenant said.

Brady’s performance as a crisis manager has won him somewhat better grades. During the small stock market plunge last year, when the market fell 101 points on a Friday, he spent all weekend on the phone with his counterparts at the Fed and the Securities and Exchange Commission and was back and forth to Wall Street leaders in a bid to head off a panic the following Monday.

The effort succeeded. As Brady predicted, the markets weathered the storm intact. “He was extremely active in defusing the situation,” an aide said.

But not everyone is as persuaded. “If you take the Treasury as a whole, it seems to have a much lower presence than has been the case for some time,” said Alan J. Stoga, manager of Kissinger Associates, a New York consulting firm.

“All of the key issues seemingly are being deferred--all because there is a lack of any real focal point. It’s hard to argue that his economic policies have done much to address the nation’s fundamental economic problems.”

Brady’s relationship with Fed Chairman Alan Greenspan has improved markedly since the early days. Although Greenspan and Brady have had their differences--both over money and credit policies and the continuing Third World debt problem--they still meet for breakfast several times a week and work together well enough.

Even so, Brady is candid about his belief that Greenspan is keeping interest rates too high. “I don’t agree with them,” he said of the Fed.

While conceding that some differences are inevitable, he added: “The band between (our) two ways of looking at things is too wide now.”

Low-Key Style

Brady runs the Treasury with an unusually light touch. Eschewing formalities, he works in shirt sleeves, ambling down the marble hallways to chat with aides or career staffers. This style evokes intense loyalty from staff members. The Treasury’s intramural baseball team sports T-shirts identifying it as The Brady Bunch.

On off hours, Brady can be seen in a tattered blue cardigan and well-worn chinos. Weekends are spent on the telephone or entertaining at his waterfront farm on Maryland’s scenic Eastern Shore, where he frequently invites top congressional leaders.

Born into a moneyed New Jersey family, Brady was chairman of the Wall Street investment firm of Dillon, Read & Co. for years, meeting Bush in the late 1970s when he headed the New Jersey effort in Bush’s first presidential campaign. Except for a brief stint as a U.S. senator (filling the remainder of the term of Harrison Williams, who was convicted in a bribery scandal), he eschewed active government service. Later, he headed the commission that investigated the October, 1987, stock market crash.

Stepping into the Treasury post in September, 1988, when Baker left to head Bush’s then-faltering presidential campaign, Brady made it clear that he would serve mainly as a caretaker until after the election. But Bush persuaded him to stay on in the new Administration, as well.

Aides said Brady has changed little during the Bush Administration’s first 13 months, except perhaps to become more knowledgeable about specific issues and more comfortable with public appearances and the like. But Brady himself conceded that he has learned to consult more with other Cabinet officers and lawmakers.

“The process of government is more complicated than I thought it was,” he conceded. “You understand that a lot better after you have been on the firing line.”

For the moment, at least, it looks as though George Bush’s embattled Treasury secretary intends to stay the course. A year ago, Brady said, he had hoped to “clear out the underbrush” that was facing the Administration on the economic front--such as the S&L; problem and the Third World debt situation--so he could concentrate on such long-term “sequoias” as spurring more saving and reducing the cost of capital here. He still has two such giants left: reducing the budget deficit and eliminating the so-called double taxation of corporate income, which is subject to tax both as earnings and as dividends to stockholders.

In the meantime, the secretary and his critics have agreed to disagree.