My plan for bad bank assets

By Timothy Geithner

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Over the past six weeks, we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans.

Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.

This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.

For all the challenges we face, we still have a diverse and resilient financial system. The process of repair will take time, and progress will be uneven, with periods of stress and fragility. But these policies will work. We have already seen that where our government has provided support and financing, credit is more available at lower costs.

But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.

Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

Mr Geithner is the U.S. Treasury secretary.

Reprinted with permission from The Wall Street Journal

© The Wall Street Journal

©2021 GPlusMedia Inc.

Login to comment

as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently

You gotta be jokin'! TRUST??? ...use taxpayer $ PRUDENTLY???! What is there to trust? After the hosing that said tax payer just took/ is taking, throwing future billion$ & trillion$ to the greedy govt bailout corruption machine? The time for being nice is over. The very fear mongering politicians who advocated "save the banks at all costs"now pontificate about the outrageousness of AIG bonuses? Taxation without representation is tyranny. Hello? We have Tyranny. Tyranny with more taxation is simply because people are brainwashed and the govt can get away with robbery.

My plan for bad bank assets? Let them all fall! Let the banksters lose their homes, jobs & eat from garbage dumpers & live in tent cities!!! Let the credit card companies burn in hell, and maybe people can learn to save again and use cash, instead paying interest to spend money they don't have. Let the power stay with the people. Wake up America!

0 ( +0 / -0 )

Wow, go get a pitchfork dude.

0 ( +0 / -0 )

Wow, one whole comment so far. It is a bit of an important topic you know. Anyways, good luck to Geithner, but we will see if he has any idea what he is doing. The "as a nation we borrowed too much" comment after saying there are no simple causes, and his desire to get securitization going again don't give a lot of confidence. Borrowing too much was not the problem, that is what powered the US economy, it was the inability to continue borrowing too much that was the problem. And the trick of securitizing American debt and getting foreigners to subsidize the American economy is dead. He seems to want to get things back to the way they were and keep the status quo alive, instead of dealing with the possibility that those days are gone forever. Maybe a very expensive mistake.

0 ( +0 / -0 )

Agree fully with the first poster. Geithner represents the interests of one group and one group only: the bankers. As long as they get what they want, Obama will keep his job and the US public will be economically raped. If, however, Obama actually goes beyond empty rhetoric and attacks the root of the problem with some real results, he might suffer an "accident" of sorts...

The Fed, of which Geithner was (is) a member, intentionally caused this crisis to concentrate money and power even further in the hands of the elite by creating credit for people who could not afford it and trapping them in debt. Notice how none of the banking and political elite have been negatively affected by this whole ordeal and have even had the temerity the expect bonuses?

0 ( +0 / -0 )

=Give US the money or we will print it anyway!

-Any self-respecting Neo-Com can appreciate that.

0 ( +0 / -0 )

When one bank falls over it is manageable. When the whole system falls over that is serious. Japans situation in 1991 was worse than what the US faces today. The Japanese are good savers and were encouraged to place abundant savings in banks and buy public debt at almost zero interest rates. Nothing has improved, the extent of Government debt now is astronomical at almost double GDP. The Japanese banking system retreated into their bunkers way back then and seem shy still to place their heads out. Japan got by because the rest of the world seemed okay and kept trading and expanding and continued to buy Japanese goods. It seems the Japanese Government has secretly been subsidizing its manufacturers via loans hence the massive public debt. The difference for the US in 2009 is both bank and public debt (85% of GDP) are massive, but the US consumer has stopped spending after running out of "other peoples" money. There is no one else!

30061015's comments are probably going to come true under Timothy Geithner's plan. Eccomann seems on the ball too. The elite in the US are taking action to try and save themselves rather than looking at a realistic program that is going to solve the issues. The same people that caused it all are still managing it the same way. They didn't know what they were doing before and nothing has changed. Just because Obama's father is from Kenya, it doesn't mean Obama needs to copy President Mugabe of Zimbabwe.

A real banker never celebrates a deal until he gets all his money and interest back. A real banker never lends on an unbankable proposal. These current bankers got bonuses just getting depositors money out the door. Imagine the quality of the expensive sewage they sent down the toilet in they years of largesse.

Western bankers delighted in imitating each others follies, for example the sacking pogroms of all the forty plus male genuine loyal, ethical, highly skilled bankers in the late eighties and early nineties. They thought why pay a guy a genuine bankers salary when you can replace them with a low cost unskilled forty-ish housewives who will happily do as the computer screen instructs. Forget about the service and credit standards, just look how cheap they are. Look how it makes all our cost ratios fall. Hey, and why not sell our customers, Credit Default Swaps, on our terrible loans, they seem happy to enjoy our abuse - they cop anything we serve up. Pity help anyone with "CDS's" on Government debt.

Obama talks of the need to solve 21st century problems with 2ist century techniques. Um, two and two still adds up to four Mr President, not six, eight, ten or twelve as your wet behind the ears MBA bankers and stockbrokers seem to think. There is a way out, I have done it before in 1991 in my country. These turkeys have no hope, and sadly if you have not been prudent you may suffer too. In hard times money returns to its rightful owners!

0 ( +0 / -0 )

Login to leave a comment

Facebook users

Use your Facebook account to login or register with JapanToday. By doing so, you will also receive an email inviting you to receive our news alerts.

Facebook Connect

Login with your JapanToday account

User registration

Articles, Offers & Useful Resources

A mix of what's trending on our other sites