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Geithner sees confidence back in markets

Treasury Secretary Geithner said a number of government rescue efforts in place since the Wall Street crisis are no longer needed.
/ Source: The Associated Press

Citing emerging financial sector stability, Treasury Secretary Timothy Geithner said Thursday that a number of government rescue efforts in place since the Wall Street crisis are no longer needed and that banks will repay $50 billion in rescue funds over the next 18 months.

Geithner, testifying before a congressional watchdog panel, said the nation still has a ways to go before “true recovery takes hold.” But he said improved conditions in the banking industry have prompted Treasury to begin winding down emergency support programs implemented after the collapse of Lehman Brothers last year.

“The financial system is showing very important signs of repair,” Geithner said. He added later: “I would not want anyone to be left with the impression that we’re not still facing really substantial enormous challenges throughout the US financial system.”

The cautious but upbeat tone reflects a growing push by the administration to present the government financial rescue efforts as a success amid lingering public apprehension about the economy.

Geithner was testifying before the Congressional Oversight Panel that monitors Treasury’s $700 billion financial bailout that President George W. Bush and President Barack Obama used to shore up not only banks but the auto industry as well.

Banks have already paid back $70 billion of the $250 billion that the government injected over the past year to boost their liquidity. Geithner noted that only $11 billion of that infusion has occurred since he became Treasury secretary earlier this year. He said dividends on those infusions and the repurchase by banks of warrants held by the government has also generated $12 billion for the government. Overall, he said, the government realized a 17 percent return from 23 banks that have paid back the government in full.

Geithner said a major Treasury program that had been used to guarantee up to $3 trillion in money market mutual fund assets would be closed down on schedule on Sept. 18. The program had no direct cost to taxpayers and actually earned more than $1 billion in fees paid by the mutual fund industry.

That program was established at the height of the financial crisis a year ago after a large money market fund called the Reserve Primary Fund “broke the buck” — meaning the value of its underlying assets fell below $1 for each investor dollar put in.

Still, unemployment stands at 9.7 percent and administration officials say it could rise to 10 percent in the coming months. Foreclosure rates are surging and the mortgage market remains tight. Geithner acknowledged that the economy would still face “more than the usual ups and downs.”

“The classic mistake people make is they declare victory too soon,” he said.

Given the still weak economy, Donald Kohn, vice chairman of the Federal Reserve, said it would be a while before the central bank dismantles all of its emergency lending programs.

“That time is not likely to come for an extended period,” Kohn said in a speech to the Brookings Institution, a liberal think tank in Washington.

The Fed has been developing “tools” to rein in the money it has pumped into the economy to spur lending and lift the economy out of recession, Kohn said. That’s important to avoid a bout of inflation when the economy is on firmer footing.

The government’s bailouts have not been popular with the public and Geithner’s testimony emphasized the positive returns from the various measures.

Still, one protester sitting behind Geithner held up a pink sign asking: “Where did the $ go?”

Speaking later at a town hall meeting organized by CNBC, Geithner said “people should be angry” about the costly bailouts, but that the economic devastation last fall made it “the fair thing to do.”

Elizabeth Warren, the oversight panel’s chairwoman, said: “Taxpayers still want to know how their money has been used and what difference their enormous investment has made.”

The panel has been critical of government steps, arguing that in the past it has not received full value for repaid infusions of money into financial institutions. More recently, the panel contended that a significant portion of the government assistance to the auto industry will likely not be repaid.

Geithner pointed out that the number of large financial institutions has grown smaller since the economic crisis. But Warren cautioned that some of the remaining firms were larger than before.

“Are we more at risk on the question of concentration than we were a year ago?” she asked.

“I don’t think so,” Geithner replied. “But it depends largely on what Congress ultimately decides in terms of financial reforms.”

The administration has called for a series of regulatory changes, including requiring large, intertwined institutions to have access to more money to cover their risks.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has pushed back his panel’s consideration of the legislation from September until October.

Spokesman Steve Adamske said the committee wanted more time to hold hearings on the issues, as well as draft the bill, which includes more than a dozen major sections.

“The chairman believes the House is still on track to complete our work and get the White House a final product by the end of the year,” Adamske said.