10 February 2009
U.S. Bank Rescue Program Gets Overhaul
New approach strives for more transparency, private-sector involvement
Washington — The U.S. government and central bank are moving to attack the financial crisis on multiple fronts in the hope that targeting critical weaknesses will make the financial system work properly again.
Treasury Secretary Timothy Geithner on February 10 announced a new multipronged approach to problems affecting the banking system under the revised financial program known as the Troubled Assets Relief Program (TARP). The bill that established TARP was signed into law in October 2008. The Bush administration spent the first $350 billion of the $700 billion program in 2008 and in December 2008 requested the remaining portion for the incoming Obama administration to administer.
President Obama, who described the banking system as being “close to a meltdown,” questioned the way the first half was spent.
“We didn’t get as big a bang for the buck as we should have,” he told reporters February 9.
He described the new plan — renamed the Financial Stability Plan — and the economic stimulus package working its way through Congress as complementary elements of his administration’s push to revive the economy and create jobs.
Geithner said the critical parts of the U.S. financial system have been damaged and, as a result, the system is working against recovery instead of catalyzing it.
“This is a dangerous dynamic, and we need to arrest it,” he said.
The new approach he proposed relies on three independent initiatives: an infusion of fresh capital into banks, a public-private investment fund that buys and manages bad asset-based securities, and support for expanded commercial lending. These initiatives are designed to restart credit circulation, which has been reduced to a trickle, throughout the economy.
The first initiative will provide new capital to banks that — after a rigorous examination — will be deemed healthy enough to lend even if the economy turns worse. Participation in the review process will be mandatory for banks with $100 billion or more in assets.
The government will buy convertible preferred securities that ultimately may give it ownership stakes and will impose strict conditions on banks, including disclosure of their exposure to bad assets. The initiative would encourage banks to increase lending and “replace public assistance with private capital as soon as that is possible,” Geithner said.
The second initiative, also aimed at attracting private investors, will establish a public-private investment fund with up to $1 trillion in expected financing capacity to address the issue of hard-to-value mortgages and mortgage-backed securities. Those holdings weigh heavily on banks’ balance sheets and impair lending. The Treasury hopes that, by helping to take such “toxic” assets off banks’ balance sheets, the government-seeded fund would free capital for lending. And by inviting private capital and private asset managers to participate, it would provide a market mechanism for valuing those assets, according to Geithner. The details of the program are yet to be worked out.
In the third initiative, Treasury joins the Federal Reserve, the U.S. central bank, in an effort to quintuple the size of a $200 billion commercial lending program on which the central bank has been working since November 2008. It would provide support for small business lending and commercial mortgages in addition to consumer loans.
Geithner said that in the next few weeks the administration will launch a new program aimed at helping struggling homeowners deal with their mortgage payments and avoid foreclosures.
The implementation of the TARP, devised by Bush administration Treasury Secretary Henry Paulson, was mired in controversy. The so-called “ad hoc manner” in which the Bush administration used the funds has been criticized by some lawmakers and private-sector experts as adding to market uncertainty.
Congressional and some private-sector groups contend that the first phase of the plan lacked transparency and proper oversight, that banks mostly hoarded the government money and that the government might have overpaid for some bank assets. In addition, instances of continued spending on corporate perks and lavish executive compensation by the banks receiving government help have angered the general public. In advance of the February 10 announcement, the Treasury said it would cap executive compensation at the banks receiving substantial government assistance. The administration also vowed to monitor how banks spend government money and to restrict their ability to use that money for purposes other than lending.
The ultimate goal of new initiatives is to make the financial rescue plan more consistent and comprehensive, thus making the return of market confidence more likely, according to Obama administration officials.
Geithner said he realized the financial rescue represents a sizable commitment of public funds. But he added that doing nothing or too little would expose the United States to a more serious risk.
“As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation,” he said.
The text of Geithner’s remarks and a fact sheet (PDF) on the Financial Stability Plan are available on the Treasury Web site.
