Posted on Tue, Feb. 10, 2009
last updated: February 10, 2009 05:31:36 PM
WASHINGTON — Treasury Secretary Timothy Geithner unveiled an ambitious and comprehensive plan Tuesday to revive the struggling banking sector, thaw the credit markets, spark more lending to consumers and reverse a nationwide housing slump.
Geithner took the wraps off the Obama administration's bank rescue plan shortly before the Senate passed an $838 billion economic stimulus plan. President Barack Obama is counting on both efforts to halt the worst economic downturn since the Great Depression.
Financial markets registered disappointment that the new plan lacked many key details. The Dow Jones Industrial Average was down 381.99 points Tuesday to 7888.88. The S&P 500 was off 42.73 to close at 827.16 points, the Nasdaq finished down 66.83 points to 1524.73. Oil was off�$1.46 to $38.10 in after-hours trading as traders feared a falling demand as the economy worsens.
Speaking in the Treasury Department's ornate Cash Room, Geithner said that federal bank regulators would be empowered to conduct "stress tests" on big banks to determine their financial health. These tests eventually could lead to bank closures to prevent their problems from worsening and compounding the economic contraction.
Geithner acknowledged that there'll be another round of capital injections into ailing banks. The Bush administration injected almost $300 billion into 319 financial institutions, but the piecemeal effort has been heavily criticized for a lack of transparency and scant accounting of how the money was used. The new Treasury plan will impose far more reporting requirements for new capital injections and tougher limits on executive compensation.
All the measures Geithner announced seek to restore dormant credit markets, public trust in the financial bailout process and investors' confidence in turbulent financial markets.
"Instead of catalyzing recovery, the financial system is working against recovery," he said. "And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it. It is essential for every American to understand that the battle for economic recovery must be fought on two fronts. We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families."
The plan also will expand the role of the Federal Reserve. The nation's central bank will aggressively help finance the purchase of new complex securities whose underlying collateral is pooled loans for cars, students, credit card debt and even motorcycles. About $100 billion in all could be targeted in this effort, hoping to spur purchases of up to $1 trillion of these securities.
Over the past two decades, lending expanded greatly as loans were pooled together and sold into a secondary market to investors in a process called securitization. The market for these asset-backed securities has gone dormant, however, as many of the securities turned sour when their underlying borrowers failed to pay their loans, and investors have little appetite for new risk. Enter the Fed, which will step in as the buyer of last resort to spark consumer lending.
The Obama administration also is preparing a comprehensive effort to help halt foreclosures nationwide, which rose 81 percent last year. At least $50 billion will be set aside to help modify distressed mortgages and prevent foreclosures, in the belief that more foreclosures will lower home prices and add to the glut of homes on the market.
The Geithner plan offered scant detail on what form this foreclosure relief might take. He said that details would come in the days and weeks ahead. The fact that the treasury secretary disclosed so little about how he'll tackle a fundamental part of the nation's financial crisis disturbed the markets. It was one of two important areas in which Geithner provided little detail.
He also outlined a public-private partnership to corral distressed mortgages and other bad assets that banks hold. Details are still being finalized, but the idea is to have the private sector, not taxpayers, purchase these assets, with some government sharing of potential losses or rewards.
The cost: $500 billion to $1 trillion, with the government providing limited money and loan guarantees to encourage private-sector participation.
The lack of detail also disappointed lawmakers. The Senate Banking Committee grilled Geithner on Tuesday afternoon, and Chairman Christopher Dodd, D-Conn., told the secretary that he'd have put housing higher on the priority list of things to fix.
The top Republican on the panel was more blunt.
"It's hard to test the merits of a plan that's not spelled out," said Sen. Richard Shelby, R-Ala, adding that "an essential detail of any plan should be cost."
Geithner defended his plan, saying that the complexity of the nation's financial problems makes it difficult to be too specific while rescue efforts are still being drafted. He signaled clearly, however, that the costs are likely to go beyond the $700 billion that Congress authorized last year.
"I want to be candid, though, that I think this is going to be an expensive problem for the nation and it's going to require substantial resources," Geithner said.
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