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Treasury Sec. Geithner Testifies Today on Banking Industry

While the Joint Economic Committee hears from Joseph Stiglitz, Simon Johnson, and Thomas Hoenig, the man of the hour - Tim Geithner - will be meeting with the TARP Congressional Oversight Panel, chaired by Elizabeth Warren. The session begins at 10 am today, and already there's some news out about what today's hearing will focus on: That the TARP has $110 billion out of $700 billion left. (The hearing will be webcast on the panel's web site.)

To date, the Warren panel has pressed Treasury - under both secretaries Hank Paulson and Geithner - on two main issues. The February oversight report focused on TARP transactions and reinforced what many had long suspected and what the Congressional Budget Office had earlier confirmed: TARP had provided significant subsidies to fund recipients. (The oversight panel estimated that 34 percent of funds disbursed were a subsidy; the CBO, which earlier put out a lower figure, recently revised its estimate up to about 50 percent.) The April oversight report, by contrast, focused on the strategy behind TARP, and this is likely to be a central question in this week's hearing.

The April report poses the issue that everyone has been asking for months: Is this a short-term liquidity crisis that will solve itself with some more liquidity and a little economic recovery, or a solvency crisis with broken banks that will impede any recovery and leaves it hanging? The report also argued that, should things turn out worse than Treasury now anticipates, they should be prepared to consider tougher measures, even using the words "liquidation" and "conservatorship."

Geithner, of course, has tried to make a virtue out of refusing to publicly consider those alternatives, and his strategy is largely predicated on the liquidity crisis hypothesis. Still, I expect he will choose his words carefully in describing where we stand today.

If he's feeling bullish, there is a positive story he could tell. Several banks, including Bank of America (yesterday) and Citigroup (last week) have reported positive earnings recently. Goldman Sachs and JP Morgan Chase have even raised the idea of returning their TARP money. The bank stress tests are drawing to a close, and based on prior administration comments, most banks are likely to "pass" in one form or another.

On the other hand, Geithner must know that the economy is on shaky footing at best.

  • Many observers suspect that the banks' Q1 performance is unlikely to be sustainable, and that asset values are continuing to slide. (See here, here, and here for my views.)
  • The stress tests will present a formidable communications challenge: Treasury is worried about revealing that any banks are weak (out of fear of what will happen to those banks), but they should be even more worried about pretending that all banks are healthy, because that will destroy the credibility of the entire exercise. Just how much information about the stress tests will be released should be a key question that the committee will pose and Geithner will probably try to dodge.
  • It is still too early to tell if the public-private investment program will have any impact.
  • Goldman's bullishness has only made Geithner's job harder. Henry Paulson's idea was last October was to force all banks to take TARP money to avoid a separation into winners and losers. Now the competitive spirit is back on Wall Street and the strong are trying to kill off the weak - knowing, no doubt, that the survivors will be even more powerful and profitable than ever before.
  • And most importantly, the real economy is still getting worse, with unemployment at 8.5 percent and increasing. Elizabeth Warren became famous as an advocate for the ordinary consumer, and it would not do to insist that the economy is turning around because a few banks scored some massive profits trading fixed income securities.

On balance, Geithner is likely to stick to the overall "liquidity crisis" story (without putting it in so many words), and I expect the phrase "cautious optimism" to creep in there somewhere. He knows that his strategy - whatever he chooses to call it - will have a few months to show results. But at this point, I don't think he wants to be overconfident that those results will appear.

--James Kwak

By James Kwak  |  April 21, 2009; 6:00 AM ET
Categories:  TARP  
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"Let the banks earn their way out" will be Geithner's position, and we need to nip that particular bit of idiocy in the bud.

One-off accounting BS aside, the banks' earnings are from "riding the yield curve"; i.e., borrowing short-term at extremely low rates fixed by the Fed, and using the proceeds to buy longer-term debt, especially government debt (Treasuries and Agencies). The ultra-low-interest short-term loans, the TALF, and (soon) the PPIP are all designed to transfer of hundreds of billions of dollars of taxpayer wealth to the banks without Congressional appropriation. (Another good question is when exactly Congress authorized the Fed and FDIC to do this... Which statute authorizes FDIC to insure anything other than deposits, for instance?)

Even I could make a profit under those circumstances.

So the Geithner game plan is clear: Give the banks massive non-transparent subsidies, then argue based on the "strong earnings" that they do not require taxpayer assistance and therefore do not need to be seized. The question is, will Congress see through this ploy? Do they want to?

Posted by: _Nemo_ | April 21, 2009 8:06 AM | Report abuse

Also, someone needs to ask about the forced AIG position unwinds at ludicrous valuations:

If this story is true, it represents pure looting of the Treasury, and someone needs to go to jail. Nobody in the media knows whether it is true, but Geithner does.

Posted by: _Nemo_ | April 21, 2009 9:50 AM | Report abuse

It may be too late in the day, but here's a list:

The currently stated position of Treasury assumes that restoring the flow of credit - the "lifeblood of the economy" - is the key to recovery. TARP banks, however, have decreased lending 2.2% over the last quarter... If one excludes home mortgage refinance, this number is substantially lower.

In Sec. Geithner's view, is this decline a healthy number? Is the reason for this decline that banks are still balance-sheet-constrained (even after TARP funds), or that banks are being rationally conservative in the face of current economic risk?

In summary, in Sec. Geithner's view, the banking crisis triggered the broader economic crisis. That was 6 months ago. Is expanding access to bank credit _still_ the primary key to escaping this recession? Should banks be lending even more (for example, to small businesses), in spite of concerns about default? If banks do lend more at the urging of Treasury, will Treasury still hold them accountable if that lending sours?

Since the drop in asset values is primarily due to a liquity crisis (not a real decline), is restoring access to credit broadly still the most important driver for an economic recovery? Have other aspects of the administration's recovery plan become relatively more important?

Is the current allocation of recovery funds, with many hundreds of billions (trillions counting Fed-provided leverage) still going to banks, and much less money going to discretionary federal programs (like infrastructure, energy investment, etc.) still the optimal way for the government to direct precious taxpayer dollars?

Posted by: StatsGuy | April 21, 2009 11:21 AM | Report abuse

Here's my question--one that's being asked by more and more people these days: why must we bail out bank shareholders and bondholders? Why not restructure the debt of insolvent banks?

Posted by: jamesbattin | April 21, 2009 11:39 AM | Report abuse

Please tell me what i am missing here:

mixed messages; the banks will need more money, the banks will not need more money and the 1st qt earnings pleased everyone in the market so all is well now!

the legacy assets are toxic and need to be cleansed, these assets will be held to maturity and are fine and help banks look solid.

PPIP is needed due to 'legacy assets', these assets are fine and will be held to maturity and no help is needed.

the administration is putting aside 1-2 trillion more in aid money, the banks do not needed and will not get more money.

the banks are solid, yet somehow the gov't must convert preferred shares to common shares to help 'solid' banks that say they don't need help and report a good 1st qt.?

what in the world is going on here please. how can both sides of this be true. what is true and why is the congress and media not asking these apparently (to me) obvious and simple and easy to understand questions??

Posted by: mmdonner | April 21, 2009 12:22 PM | Report abuse

A quick question: what will Timothy Geithner be doing after he is fired?

Posted by: zwebwench | April 21, 2009 10:30 PM | Report abuse

What will Geithner be doing after he gets fired? He'll go the road with a redux of the old Smothers Brothers routine. Ever notice the resemblance to Tommy Smothers old act? The mumbled ever changing explanations that, when you really stop to listen, make absolutely no sense. God help us all.

Posted by: boregush | April 22, 2009 12:15 AM | Report abuse

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