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.
April 21, 2009; 6:00 AM ET
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