Treasury Secretary Timothy Geithner spelled out plans for how the government will spend trillions of dollars to deal with unfreezing credit and taking troubled assets off the books of financial institutions.
Geithner described on Tuesday a range of approaches the Treasury will take in partnership with other government agencies to deal with the second half of the $700 billion allocated to the financial rescue package, as well as draw on additional facilities to expand credit and lending.
“Without credit, economies cannot grow at their potential, and right now critical parts of our financial system are damaged,” he said. “Instead of catalyzing recovery, the financial system is working against recovery.”
He said his Financial Stability Plan would restart the flow of credit and provide aid to homeowners and small businesses. The plan involves a coordinated effort by the Treasury, the Federal Reserve, the Federal Deposit Insurance Corp., and other agencies. “We have different authorities, instruments and responsibilities, but we are one government serving the American people, and I will do everything in my power to ensure that we act as one,” he said.
Geithner announced a new Web site will be set up, FinancialStability.gov, which will allow the public to see how the conditions that are being placed on banks are being met, how boards are compensating executives, and the contracts signed by the Treasury with the financial institutions and firms participating in the plan. The new Web site will be similar another one that President Obama touted on Monday, Recovery.gov, which will show the public how money from the economic stimulus package is being spent and give people a chance to blow the whistle about any misspending they uncover on the projects that are being funded.
Geithner said the Treasury is establishing three new programs aimed at shoring up banks, attracting private capital to restart lending, and going around the banking system to aid markets that serve consumers and businesses. The banking program will require financial institutions to go through what Geithner called “a carefully designed comprehensive stress test.” The program will provide capital support for institutions that need it, but will require additional disclosures about the balance sheet.
“We are going to bring together the government agencies with authority over our nation’s major banks and initiate a more consistent, realistic and forward-looking assessment about the risk on balance sheets, and we’re going to introduce new measures to improve disclosure,” said Geithner.
Institutions that need additional capital will be able to access a new funding mechanism that uses money from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that banks provide more lending, and the institutions will be encouraged to replace public assistance with private capital as soon as possible.
The Treasury’s investments in the banks will be placed in a new Financial Stability Trust. The Federal Reserve, the FDIC and the private sector will also establish a Public-Private Investment Fund that will provide government capital and financing to encourage more private capital to buy up troubled loans and assets now clogging the books of many banks.
“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,” said Geithner. “Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets.”
The parameters of the fund have not yet been established, but Geithner said the program would ultimately provide up to $1 trillion in financing capacity. The Treasury will start the program with about $500 billion in capital, and expand it based on what works.
In partnership with the Federal Reserve, Geithner said the Treasury is also prepared to commit up to an additional $1 trillion to support a Consumer and Business Lending Initiative that would kick-start the secondary lending markets to bring down borrowing costs and help get credit flowing again.
Geithner also wants to restart the securitization markets to encourage investors to buy up consumer and business loans, bundle them together and sell them. A new lending program will be built on top of the Federal Reserve’s Term Asset Backed Securities Loan Facility with additional capital from the Treasury and financing from the Federal Reserve. The program will now target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages.
Geithner also announced steps to make it easier for small businesses to obtain credit from community banks and large banks through the Small Business Administration. The Treasury will increase the federally guaranteed portion of SBA loans and give the SBA more power to expedite loan approvals. “We believe we can turn around the dramatic decline in SBA lending we have seen in recent months,” said Geithner.
The federal government also plans to launch a comprehensive program to address the housing crisis. The Obama administration’s economic team is working on the details, which will be announced in the next few weeks, but Geithner said the focus would be reducing mortgage payments and mortgage interest rates using resources already authorized under the Emergency Economic Stabilization Act.
Geithner will be traveling later this week to Italy to meet with the finance ministers and central bank governors of the G7 countries to work on stabilizing and repairing the global financial system. The Treasury also plans to work with the International Monetary Fund and the World Bank to distribute aid to countries most at risk from the financial crisis.
