Geithner Unveils TARP Overhaul

By Jason Simpkins
Managing Editor
Money Morning

While members of Congress debated the merits of President Obama's $838 billion stimulus plan, Treasury Secretary Timothy Geithner unveiled a raft of new measures aimed at returning functionality to the besieged credit markets.

Geithner painted the picture of the latest U.S. recovery attempt in broad strokes, outlining the "key elements" of his proposal:

  • Promoting greater transparency and stricter oversight of both established and new financial stability programs.
  • Providing capital to institutions in desperate need of a cash infusion.
  • Committing up to $1 trillion to support consumer and business lending.
  • Addressing the housing crisis and reducing foreclosures.

Geithner was critical of the previous administration's handling of the crisis, saying previous attempts to support the economy were "not comprehensive or quick enough," and that "the spectacle of huge amounts of taxpayer assistance provided to the same institutions that helped caused the crisis added to public distrust."

Hoping to rectify this, the first step of Geithner's plan calls for stricter oversight of taxpayer funds.

"The American people will be able to see where their tax dollars are going and the return on their government's investment," the Treasury Secretary said. "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."

This information will be made available on a new Web site:

As far as addressing the crux of the current financial crisis, Geithner described three new programs aimed at strengthening the nation's banks and jumpstart lending.

First, banks that seek financial assistance will undergo a "carefully designed comprehensive stress test" that will determine which institutions are most in need of capital. Those institutions will then be given access to funds from the Treasury, but only if they agree to specific terms named by the government.

In crafting his plan, Geithner reportedly rebuffed calls from some of President Obama's top advisors to implement more austere restrictions of executive compensation and dictate to banks how to spend the rescue money.

Geithner instead opted for economic incentives to encourage lending, arguing that stark, interventionist measures would be more expensive in the long-run and ultimately undermine the government's credibility, The New York Times reported.

Geithner also announced the creation of a Public-Private Investment Fund, which will buy up many of the toxic assets that have bogged down banks' balance sheets. This fund, which has also been referred to as a "bad bank," will be jointly managed by the Treasury and the U.S. Federal Reserve and bolstered by financing from private investors.

"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 crisis," Geithner said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets."

The fund is expected to spend about $500 billion initially, and could easily expand beyond that.

The third and final measure intended to revitalize credit markets involves a vast expansion of the Federal Reserve program for consumer and business loans.

"Working jointly with the Federal Reserve, we are prepared to commit up to $1 trillion to support a Consumer and Business Lending Initiative," Geithner said. "This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again."

In the U.S. financial system, 40% of consumer lending has historically been available because people buy loans, according to Geithner.

In addition to these measures, the Fed and the Treasury will commit $50 billion to reduce mortgage payments for homeowners facing foreclosure. A legislative proposal giving bankruptcy judges more authority to modify mortgages on terms more favorable to borrowers will also be renewed.

"As house prices fall, demand for housing will increase, and conditions will ultimately find a new balance," Geithner said. "But now, we risk an intensifying spiral in which lenders foreclose, pushing house prices lower and reducing the value of household savings, and making it harder for all families to refinance."

"The President has asked his economic team to come together with a comprehensive plan to address the housing crisis," the Treasury Secretary added. "We will announce the details of this plan in the next few weeks."

News and Related Story Links:

  • Treasury Department:
    Secretary Geithner Introduces Financial Stability Plan