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Treasury's Tim Geithner offers tough love to Wall Street but market tanks

February 10, 2009 |  9:56 am

Treasury Secretary Timothy Geithner

In outlining his proposal to jump-start job creation while getting credit flowing again, Treasury Secretary Timothy Geithner acknowledged today that no one in government or finance understood the depth of the financial meltdown when they acted last year.

"The force of government support was not comprehensive or quick enough to withstand the deepening pressure brought on by the financial crisis," he said.

But ever since, headlines about financial institutions that took spa vacations or gave executives multimillion-dollar bonuses have made it even harder, he said, to sell the rescue plan.

And now that Wall Street has fueled public distrust, "our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has — to this point — used taxpayers' money in ways that will benefit them.

So now, Geithner said in his inaugural media appearance since his tax-plagued confirmation hearings,  everyone -- including those bonus-addicted bankers on Wall Street -- will have to be more transparent.

We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term. We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it.

The secretary spoke at length (see his full remarks below) about all the reasons the last infusion of funds wasn't enough to pull the economy out of its downward spiral, about all the things the new administration is going to try, about how the plan is going to take longer and cost more than anyone could have imagined. He spoke as the New York Times was reporting that he had prevailed over some in the administration, like adviser David Axelrod, who wanted to come down even harder on Wall Street.

Still, even as he spoke, the stock market tumbled hundreds of points.

-- Johanna Neuman

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Photo: Getty Images

Geithner's remarks, released by the Treasury Department.

TREASURY SECRETARY TIMOTHY GEITHNER: Thank you, Senator Dodd.

And thanks to all of you for coming here today.

President Obama said in his inaugural address that our economic strength is derived from the doers, the makers of things, the innovators who create and expand enterprises, the workers who provide life to companies. This is what drives economic growth.

The financial system, your banks, are central to this process. Banks and the credit markets transform the earnings and savings of American workers into the loans that finance a first home, a new car, or a college education. And this system provides the capital and the credit necessary to build a company around a new idea.

Without credit, economies cannot grow at their potential. And right now, critical parts of our financial system are damaged. The credit markets that are essential for small businesses and consumers are not working.

Borrowing costs have risen sharply for state and local governments, for students trying to pay for college, and for businesses large and small. Many banks are reducing lending. And across the country, they are tightening the terms of loans.

Last Friday, we learned that the economy had lost 3 million jobs last year and an additional 600,000 jobs just last month. As demand falls and credit tightens, businesses around the world are cutting back the investments that are essential to future growth.

Trade among nations is contracting sharply as finance dries up. Home prices are still falling as foreclosures rise, and even credit- worthy borrowers are finding it harder to finance the purchase of a new home or to refinance their existing mortgage.

Instead of catalyzing recovery, the financial system is working against recovery. At the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it.

It's essential that every American understand that the battle for economic recovery must be fought on two fronts. We have to jump-start job creation and private investment, and we must get credit flowing again to businesses and to families.

Without a powerful economic recovery act, too many Americans will lose their jobs and too many businesses will fail. And unless we restore the flow of credit, the recession will be deeper and longer, causing even more damage to families and businesses across the country.

Now, today, as Congress moves to pass the economic recovery plan that will help create jobs and lay a foundation for a stronger economic future, we are outlining a new financial stability plan.

Our plan will help restart the flow of credit, it will help clean up and strengthen our banks, and it will provide critical aid for homeowners and for small businesses. And as we do each of these things, we will impose new higher standards for transparency and accountability.

I'm going to outline the key elements of this plan today, but before I do that, I want to say a bit about how we got here.

The causes of this crisis are many and complex. They accumulated over a long period of time, and they will take time to resolve. Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit, pushed housing prices and financial markets to levels that defied gravity.

Investors in banks to do risks they did not understand. Individuals, businesses, and governments borrowed beyond their means. The rewards that went to financial executives departed from any realistic appreciation of risk. There were systematic failures in the checks and balances in our system by boards of directors, by credit rating agencies, and by government regulators.

Our financial system operated with large gaps in meaningful oversight and without sufficient constraints to limit risk. Even institutions that were overseen by our complicated and overlapping system of multiple regulators put themselves in a position of extreme vulnerability.

And these failures helped lay the foundation for the worst economic crisis in generations. And when the crisis began, governments were slow to act. When action came, it was late and inadequate. Policy was behind the curve always chasing an escalating crisis.

And as the crisis intensified and more dramatic government action was required, the emergency actions that were meant to reassure to provide confidence, too often, added to public anxiety and to investor uncertainty.

The dramatic failure or near failure of some of the world's largest financial institutions caused investors to full back from taking risk. Last fall, as the crisis intensified, Congress acted quickly and courageously to give your government the emergency authority to help contain the damage.

Your government used that authority to help pull the financial system back from the edge of catastrophic failure. And those actions were absolutely essential, but they were inadequate. The force of government support was not comprehensive or quick enough to withstand the acute pressure brought on by a weakening economy and the spectacle of huge amounts of taxpayer assistance provided to the same institutions that helped caused the crisis added to public distrust.

And this distrust turned to anger as boards of directors at some institutions continued to reward rich compensation packages and lavish perks to their senior executives. Our challenge is much great today because the American people have lost faith in the leaders of some of our financial institutions, and they are skeptical that their government has used taxpayer's money in ways that will benefit them.

This has to change. To get credit flowing again, to restore confidence in our markets, and to restore the faith of the American people, we are going to fundamentally reshape our program to repair the financial system.

Our work will be guided by the lessons of the last 18 months and by the lessons of financial crises throughout history. And the basic principles that will shape our strategy or the following.

We believe that policy has to be comprehensive and forceful. There is more risk and greater cost in gradualism than there is in aggressive action. We believe that action has to be sustained until recovery is firmly established. In this country, in the 1930's, in Japan in the 1990's, and in many cases, elsewhere around the world, crises lasted longer and they caused greater damage because governments applied the brakes too early.

We cannot make that mistake. We believe that access to public support is a privilege, not a right. When our government provides support to banks, it is not for the benefit of banks. It is for the businesses and families to depend on banks. And it's for the benefit of the country.

Government support has to come with strong conditions to protect the taxpayer and with transparency that allows the American people to see the impact of those investments. We believe that our policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital.

When government investment is necessary, it should be replaced with private capital as soon as that is possible. And we believe that the United States has to send a clear and consistent message that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy.

Guided by these principles, we will replace the current program with a new financial stability plan designed to stabilize and repair the financial system and to report -- to support the flow of credit that is necessary for recovery.

This new financial stability plan will take a comprehensive approach. The Department of the Treasury, the Federal Reserve, the FDIC, and all of the financial agencies in our country will bring the full force of the United States government to bear to strengthen our financial system so that we get the economy back on track.

Now, these agencies, each have different authorities, instruments and responsibilities, but we are one government, serving the American people, and we will work together as one.

Now, here's what we will do: Our work begins with a new framework of oversight in governance on all aspects of our financial stability plan. The American people will be able to see where their tax dollars are going and the return on their government's investment.

They will be able to see whether the conditions placed on banks are being met and enforced. They will be able to see whether boards of directors are being responsible with the taxpayer dollars and how they are compensating their executives. And they will be able to see how these actions are affecting the overall flow of lending and the cost of borrowing.

These new requirements, which will be available on a new Web site, financial stability.gov, will give the American people the transparency they deserve.

Now, these steps -- these steps build on things we have already done. We have acted to ensure the integrity of the process that provides access to government support so that it is independent of influence from lobbyists and from politics.

We've committed to provide the American people with the information on how their money is spent and under what conditions by posting these contracts on the Internet. And, importantly, we've outlined some strong conditions on executive compensation.

Now, under this framework, we are establishing three new programs to clean up and strengthen the nation's banks, to bring in private capital to restart lending, and to go around the banking system directly to the markets that consumers and businesses depend on.

Let me describe each of these three steps. First, we're going to require banking institutions to go through a carefully designed comprehensive stress test. This borrows the medical term. We want their balance sheets cleaner and stronger, and we're going to help this process by providing a new program of capital support for those institutions that need it.

To do this, we're going to bring together the agencies with authority over our nation's banks and initiate a more consistent, realistic, forward-looking assessment about the exposures on bank balance sheets, and we're going to introduce new measures to improve disclosure. Those institutions that need additional capital will be able to access a new funding mechanism that uses capital from the Treasury as a bridge to private capital.

The capital will come with conditions to help ensure that every dollar of taxpayer assistance is being used to generate a level of lending greater than what would have been possible in the absence of government support.

And this assistance will come with terms that should encourage these institutions to replace public assistance with private capital as soon as that is possible. The Treasury's investments in these institutions will be placed in a new financial stability trust.

Now, second, we will work together with the Federal Reserve, with the FDIC, and with the private sector to establish a public-private investment fund. And this program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this financial crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuating -- for valuing these assets.

Now, we're exploring a range of different structures, and we'll seek input from the public as we design this program. But we believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of about $500 billion, and we will expand it based on what works.

The third piece of this program: Working jointly with the Federal Reserve, we are prepared to commit up to $1 trillion to support consumer and business lending. This initiative will help kick-start the secondary lending markets to help bring down borrowing costs and to help get credit flowing again.

In our financial system, roughly 40 percent of consumer lending has typically been made available because people buy loans, put them together, and sell them. And because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart the securitization markets for sound loans made to consumers and to businesses large and small.

This program will be built on the Federal Reserve's Term Asset-Backed Securities Loan Facility that was announced last November with capital from the Treasury and financing from the Federal Reserve. We've agreed to expand this program to target the markets that are critical for small-business lending, for student loans, for consumer and auto finance, and for commercial mortgages.

Now, in addition, because small businesses are so important to our economy, we're going to take some additional steps to make it easier for them to get credit from community banks and from large banks. By increasing the federally guaranteed portion of small business association -- administration loans, and by giving more power to the SBA to expedite loan approvals, we believe we can turn around the dramatic decline in SBA lending we've seen in recent months.

Now, finally -- and this is critically important -- we will launch a comprehensive housing program. Millions of Americans have lost their homes, and millions more live with the risk that they will be unable to meet their payments or refinance their mortgages. Many of these families borrowed beyond their means, but many others fell victim to terrible lending practices that left them exposed, overextended, and with no way to refinance.

On top of that, homeowners around the country are seeing the value of their homes fall because of forces they did not create and cannot control. This crisis in housing has had devastating consequences, and our government should have moved more forcefully to help contain the damage.

As housing prices fall, demand for housing will increase and conditions will ultimately find a new balance, and you're seeing that happen in parts of the country today. But now we risk an intensifying spiral in which lenders foreclose, pushing house prices lower, and reducing the value of household savings, making it harder for all families to refinance.

The president has asked his economic team to come together with a comprehensive plan to address this crisis, and we will announce the details of this plan in the next few weeks. But our focus will be on using the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates. We'll do this with a substantial commitment of resources already authorized by the Congress under the Emergency Economic Stabilization Act.

Now, I want to add that, looking forward, President Obama is committed to moving quickly to reform our entire system of financial regulation so that we never again face a crisis of this severity. We are consulting closely with Chairman Chris Dodd in the Senate, Chairman Barney Frank in the House, and their colleagues on both sides of the aisle on the broad outlines of a comprehensive program of reforms.

The president's working group on financial markets is beginning to develop detailed recommendations, and we will start working closely with the world's leading economies on a set of broader reforms to the international financial system in preparation for the G-20 summit in London on April 2nd.

The success of this plan, the success of our financial stability plan is going to require an unprecedented level of cooperation here in the United States and around the world.

Federal Reserve Chairman Ben Bernanke, FDIC Chair Sheila Bair, John Dugan, the comptroller of the currency, and John Reich, the head of the Office of Thrift Supervision, I want to thank them for helping shape this plan, and I want to thank them for their commitment to making it work.

This program is going to require a substantial and sustained commitment of public resources. Congress has already authorized substantial resources for this effort, and we're going to use those resources as carefully and as effectively as possible. We're going to consult closely with the Congress as we move forward, and we're going to work together to make sure that we have the resources and the authority to make this work.

Later this week, I'm going to be traveling to meet with the G-7 finance ministers and central bank governors in Italy, and there we will start the process of working with our international partners to ensure that we're working together to help strengthen the global economy and to help repair the global financial system.

And we will work closely with the leadership of the IMF and the World Bank so that they can deploy resources quickly to help those countries around the world that are most at risk from this crisis.

Now, many of the programs I've discussed involve very large numbers. But it's important to recognize that these programs involve loans and investments with terms and conditions that will help protect the taxpayer and help compensate the government for the risk we are taking. And because of these terms and conditions, the risks to the taxpayers will be less than the headline numbers.

Our obligation is to design these programs so that we are achieving the largest benefit in terms of supporting recovery at the least cost to the taxpayer. And we take that obligation extremely seriously.

But I want to be candid: This strategy will cost money, it will involve risk, and it will take time.

But 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 and for businesses and for our nation.

We are going to have to adapt our program as conditions change. We will have to try things we never tried before. We will make mistakes. We will go throughout periods in which things get worse and progress is uneven or interrupted.

But we will be guided by these core principles of transparency and accountability, dedicated to the object of restoring credit to families and businesses and committed to moving our nation towards an economic recovery that is as swift and widespread as possible.

This is a challenge more complex than any challenge our financial system as faced. It's going to require new programs and extraordinary action. But the president and his entire administration are committed to seeing it through because we know how directly the future of our economy depends on it.

Thank you very much. Thank you for coming.

(APPLAUSE)

END

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