Geithner Says Government to Reduce Role in Markets
U.S. Treasury Secretary Timothy Geithner said the government is moving to withdraw some of its support for financial markets and cautioned that the recovery will have “more than the usual ups and downs.”
“As we enter this new phase we must begin winding down some of the extraordinary support we put in place,” Geithner told the Congressional Oversight Panel that monitors the $700 billion financial-rescue program. “We are now in a position to evolve our strategy as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.”
Almost a year after Lehman Brothers Holdings Inc. filed for bankruptcy, Treasury officials are trying to portray their efforts to stabilize the banking system as a success and lay the groundwork for an economic recovery. Geithner said the rebound in growth won’t be quick, and he urged passage by year end of legislation to toughen oversight of financial markets.
“Given the extent of damage done to the financial system, the loss of wealth for families and the necessary adjustments after a long period of excessive borrowing around the world, it is realistic to assume recovery will be gradual, with more than the usual ups and downs,” he said.
Capital Injections
The Obama administration inherited the Troubled Asset Relief Program from the Bush administration, which used it to make capital injections into banks after scrapping an earlier plan to buy troubled assets directly. Since last year, the Treasury has invested more than $200 billion in U.S. banks; as of Sept. 4, the Treasury had received $70.4 billion in repayments.
Banks that have repaid the government include Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, according to a Treasury tally.
The Treasury expects another $50 billion to be repaid in the next year to 18 months, Geithner said.
In response to questions from members of the panel, Geithner tempered his optimism by saying that “we are not close to being through this” crisis. Even so, a banking system with “much more capital” is better insulated against losses and a weakening economy, he said.
Geithner refused to rule out extending the bailout program when it expires at the end of this year. The law, passed last October, allows the Treasury secretary to keep it running for another nine months if it is “necessary to assist American families and stabilize financial markets.”
Extending TARP
The Obama administration “is going to think that through very carefully,” Geithner said, adding that some of the efforts, such as mortgage relief, are likely to continue past Dec. 31. “The classic mistake people make is they declare victory too soon,” he told the panel.
The Treasury will continue to pursue programs that have not yet started, such as its plans to buy small-business loans and to remove toxic assets from bank balance sheets through the Public-Private Investment Program, a Treasury official told reporters earlier today on condition of anonymity. The first PPIP funds are expected to begin operating later this month or in October, the official said.
Other, unused programs will be allowed to expire, including a program guaranteeing money-market mutual funds and the Capital Assistance Program, which was established earlier this year to provide extra money to banks that needed it and couldn’t access private markets.
‘Move Cautiously’
“We can plan to reduce the government’s direct involvement in the financial system, but we must move cautiously or risk a relapse,” the Treasury said in a document distributed at the briefing in Washington.
The Treasury also has pledged TARP money for a range of other programs, from foreclosure-prevention efforts and auto- company assistance. The Treasury plans to move forward with its housing programs and is also looking at ways to help small banks through the economic downturn, the official said.
This year, the department will press Congress to pass the Obama administration’s regulatory agenda, intended to tighten supervision of financial firms that could pose a systemic risk. The future of Fannie Mae and Freddie Mac, the two government- backed mortgage companies currently in conservatorship, won’t be tackled until next year, the official said.
Geithner, 48, said that when he took office in January, the government had outstanding commitments of capital in the banking system totaling about $240 billion. That figure now is about $180 billion, he said.
Sustained Recovery
“All these steps underscore our commitment to unwind these extraordinary programs put in place during the crisis as soon as conditions permit,” the Treasury secretary said. “At the same time, though, we have to recognize that we have to continue to reinforce this process of repair and recovery until it is truly self-sustaining, led by private demand.”
The Treasury expects that unemployment may rise, financial system losses will continue and 6 million families could face foreclosure over the next three years, according to the document provided to reporters.
“Despite having pulled back from the brink, the nation still faces serious challenges,” the Treasury said.