Geithner defends bad bank planFebruary 12, 2009 - 7:49AM
US Treasury Secretary Timothy Geithner told Congress he needs time to work out the details of his strategy to shore up the financial industry, a day after stock traders punished the initial outline.
``I completely understand the desire for details and commitments,'' Geithner told lawmakers today at the Senate Budget Committee in Washington. ``But we're going to do this carefully, consult carefully, so we don't put ourselves in the position again'' where there are ``quick departures and changes in strategy,'' he said.
In his second day of grilling by lawmakers, Geithner indicated he's trying to rebuild the credibility of the Treasury's financial-rescue program after his predecessor, Henry Paulson, abandoned the approach he committed to with Congress. The Bush administration first sought to buy the toxic securities choking banks' balance sheets, then abandoned the idea in favor of buying stakes in lenders.
The Standard & Poor's 500 Stock Index slumped 4.9% yesterday, the most in three weeks, after Geithner unveiled plans to address toxic assets without an explanation of how they will work.
Geithner's program has three main elements: Injecting fresh government capital into some of the country's biggest financial institutions; establishing a public-private partnership to buy as much as $US1 trillion ($1.5 trillion) of banks' bad assets; and starting a credit facility with the Federal Reserve of as much as $US1 trillion to promote lending to consumers and businesses.
Senators today pressed Geithner on how much more money he may seek for the Treasury's $US700 billion bailout fund, renamed yesterday to be called the Financial Stability Plan. The secretary said officials are assessing whether and how much will be needed, as they work out the details of their strategy.
``It's incumbent on you very soon to help us understand if additional funds are going to be needed and in what amount,'' said Senator Kent Conrad of North Dakota, who chairs the budget panel. He warned against any repeat of the ``asterisks'' in administration budget requests that left the costs of the Iraq war unaccounted for in past years.
Cost of plan
``We'll do it as quickly as we can,'' Geithner responded. So far about $US387 billion of $US700 billion fund formerly known at the Troubled Asset Relief Program has been spent, he said. Conrad noted that after accounting for a $US50 billion mortgage plan, that leaves $US263 billion - less than most economists say is needed to stabilize the financial industry.
Conrad estimated the Treasury will need to seek congressional approval for $US300 billion to $US500 billion in additional funds.
Officials yesterday said it may take months to set up the fund that will buy illiquid securities. No private investors have so far committed, they told reporters in Washington. The Fed has also yet to begin the effort to spark new lending by offering credit to investors in securities backed by new credit-card, auto and student loans.
``This is the beginning of the process of consultation,'' Geithner said today.
The risk is that the reaction from investors sabotages the plan before it gets under way, forcing Geithner to change his approach in response - a position that his predecessor, Henry Paulson, frequently found himself in. That may mean the plan ``may just end being an interim step,'' said Kenneth Rogoff, a former chief economist at the International Monetary Fund who's now a professor at Harvard.
``Geithner did a great job in painting the broad strokes of the problem and laying out general principles, but it was a big disappointment not to have more details,'' Rogoff said.
President Barack Obama, speaking at a Feb. 9 press conference, said it was critical that the government restore investor trust in the financial system. ``We've got to restore confidence so that private capital goes back in,'' he said.
The trouble is that investors abhor uncertainty and Geithner only seemed to add to that with a proposal short on specifics.
``He should have waited until he had his ducks in order,'' said Ward McCarthy, of Stone & McCarthy Research in Skillman, New Jersey. ``The lack of detail leaves too much room for confusion, misinterpretation and speculation.''
Reflecting an outcry against the compensation of Wall Street executives as taxpayer funds flow to the nation's biggest banks, Senator Bernard Sanders of Vermont challenged Geithner on why the government hasn't fired more chief executive officers.
Geithner responded that management changes will be made if it ``makes sense.'' Pressed on whether he would fire Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein, he responded that the decision is up to the bank's board of directors.
Congress today held a separate hearing with the chief executive officers of eight of the largest US banks to investigate the use of the capital received from the government.
``There is a substantial public anger and alleviating that public anger, not with mumbo jumbo but with reality, is essential if we're going to have the support of the country,'' House Financial Services Committee Chairman Barney Frank said at his panel's hearing.
Geithner's plan also includes a $US50 billion allocation to efforts to stem mortgage foreclosures. That strategy has also yet to be worked out. The Treasury chief is scheduled to meet on the matter later today with industry representatives and Housing and Urban Development Secretary Shaun Donovan.
``In the next few weeks, the president and his team will outline a comprehensive program to help address the housing crisis, Geithner said. ``Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates.''