Krugman’s column today further adds to the case he’s been making all along during this financial crisis – Wall Street’s emperors have no clothes and taxpayers are footing the bill to rebuild their wardrobe.

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Here’s what I think is most disturbing about recent financial history and the Bush and Obama Administrations’ policies:

GDP, which I believe is due for an announcement this week, has generally grown but over the last two or three decades that growth has been in areas like financial services and based upon “paper value.”  In other words, where we used to count more tangible goods as product, and those goods were made in the U.S. and that economic activity supported a middle class.  The financial services’ contribution to the overall economy has become huge, but their numbers benefit very few – the investment class.  Both the Bush and Obama Administrations have so far let financial services off Scot-free and pushed trillions of dollars that industry’s way.  On the other hand, the nation’s Big Three automakers are being treated as one would expect failing companies to be treated – with healthy skepticism.

• New – or “re” – regulation in the financial services sector needs to be undertaken now.  Treasury Secretary Timothy Geithner and others in the Obama Administration have talked the regulation game, but there’s been no action.  The argument was for a time that we need to stabilize things then move on to resetting the rules.  Apparently, Wall Streeters are shifting comfortably back into business as usual.  The TARP and PPIP have not had the effect both administrations hoped for.  All of the other legislative priorities of the Obama Administration, from health care to energy policy will be derailed by a second wave of the financial crisis.  Regulate now.
• I’m begging on this one … Not One More Bailout.  As currently configured, nearly all the risk of saving the financial system is on the taxpayer.  Future bailouts or federal actions to prop up the system should be approached like the auto industry.  No more carrots without sticks.  It’s past time for accountability from bankers and brokers.
• Finally, for today, it’s astounding to me that revelations last week by New York Attorney General Andrew Cuomo that former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke held a gun to Bank of America’s head to complete the Merrill-Lynch deal.  Furthermore, Paulson and Bernanke allegedly told BofA CEO Ken Lewis to not disclose his and management’s misgivings about the Merrill deal.  Why isn’t the media or Congress all over this?  When Wall Streeters like Geithner, Paulson and Summers are in charge only Wall Street benefits.  Were there SEC rules broken by Paulson and Summers?  Can the government intervene to stop the flow of information to corporate boards and shareholders?

MR. GREGORY:  … But first, here live is Treasury Secretary Timothy Geithner.

Welcome to MEET THE PRESS.

SEC’Y GEITHNER:  Thank you, David.  Good to be here.

MR. GREGORY:  Thank you.  I want to start with some basic terms here.  Can you explain as simply as you can why increasing bank lending is so important to the economy?

SEC’Y GEITHNER:  Absolutely, David.  Economies require banks because they require credit.  Credit is like the blood, it’s like the oxygen of any economy.  And for us to get the economy growing again, we need to make sure there’s going to be credit available to businesses and families across the country so that businesses can meet payroll, so that they can expand, so that families can put their kids through college, can borrow to finance purchase of a car or a new house.  That’s, that’s why financial systems matter, and there is now way to get this economy back on track unless we have a financial system that’s working with the recovery rather than against recovery.

MR. GREGORY:  My mother out in California, I presume, is watching this morning. She’s like a lot of Americans, worried about her job and wondering why not just bank lending, but something called nonbank lending, securitization–what is that, and why does that matter to her?

SEC’Y GEITHNER:  We, we came through a period where people borrowed too much and we let our financial system take on much too much risk.  And the consequences of those choices, made over years, were–was a huge boom.  And that boom–the air is now coming out of that, and that’s causing enormous damage.  And financial crises are, are brutally indiscriminate in the pain they–and suffering they cause.  The burden falls not just on people who took too much risk, but on people who were careful and responsible in their business.  That’s why it’s so unfair.  That’s why Americans are so frustrated and angry And that’s why it’s so important that your government act very aggressively to help contain the damage.

MR. GREGORY:  But I want to go back to what–I want to understand the terms here. What is securitization, and why does that matter?

SEC’Y GEITHNER:  In our system we have banks–community banks, large banks, small banks–that provide credit to businesses and families.  But in our markets we also have these securitization markets where–which, which match investors directly with borrowers through the capital markets.  We need both those to work.  Both are not doing enough now.  They’re not working, doing the kind of job they need to do to get credit going again.  And so to fix this mess we’re in, the mess we inherited, need to make sure banks are strong enough…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …but we also need to make sure these credit markets are working again.

MR. GREGORY:  And let me–on that point, on the nonbank lending, the securitization market is where actually most of the lending goes on right now. Is that right?

SEC’Y GEITHNER:  Well, well, typically in, in our financial system, somewhat less than half of lending for businesses and consumers comes from those markets.  So we need to get those markets going again just as we need to fix our banking system.  And the programs we put in place are already having some effect in helping unfreeze those markets.  So just as an example, last week the Fed announced–the Fed put in place a program with the Treasury, very powerful program that led to about $9 billion in new issuance of automobile loans and credit card loans.  That was more than you saw in the past four months combined.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  That will help bring down interest rates and, again, make it easier for people to get access to the credit they need to get through this.

MR. GREGORY:  All right, we’ve defined our terms a little bit, now let’s talk about the big news this week, your plan to help save the banks.  The bank stabilization plan.  We’ve come up with an example here and we’ll role-play a little bit, because I think this is the easiest way to explain this.  So here’s how a transaction would work.  Bank USA, we’re calling it, has a loan, a toxic asset, and it’s valued on their books for $100 million.  And it’s for sale, right?  So there’s going to be an auction here and investors like me could come in, and I’m going to come in and I’ve got–my highest bid is for $70 million, OK?  That’s the price for the $100 million loan that I’m actually going to pay.  Now, here’s how the transaction actually works, right?  I’m the investor, I put in $5 million.  You, the Treasury Department–you’re really the taxpayer–put in $5 million, and then the government in the form of the FDIC is going to provide 60 million at very good terms, going to guarantee that loan.  So the government’s on a hook for a lot of this.  That’s called leverage, right?  How does it work and what’s the upside?

SEC’Y GEITHNER:  David, let me just step back for one second.  Part of what’s, what’s causing this problem in our financial system is banks made a bunch of bad loans, many of them backed by real estate; residential, commercial real estate.  Those loans are now sitting on the books of the financial system and they’re taking up room, preventing banks from extending new credit on the scale they need.  And we have two choices in this context.  We can leave it as it is, hope banks will earn their way out of this process over time, and I am certain that will create the risk of a deeper, longer recession.  Again, the classic lesson in financial crises, if governments wait to act, they wait too late and that means more damage to the economy, higher deficit in the future, greater cost to the taxpayer.  We’re not prepared to take that approach.

Another approach many people advocate is that the government itself come in…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …and buy these assets, take on all the risk itself.  The government would set a price for the assets and bear all the losses and all the costs in that context.  Our judgment is that would be much more expensive for the taxpayer, create much greater risk for the taxpayer, and we’re not prepared to take that approach.

MR. GREGORY:  And the point in our model, if we can just put that slide up again, where you see investor puts in five million, Treasury puts in five million, the FDIC guarantees it at $60 million in terms of providing the loan.  There’s upside there.  In other words, if the value of that loan goes up, the taxpayer wins, the investor wins.

SEC’Y GEITHNER:  Right.  The investors are taking risk.  Their money is at risk and at stake.  They’re the ones that set the price for which this transactions will take place.  So using their self-interest to get the price better, better than what the government would do in that context.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We’re using their expertise to help manage these assets.  And the–and as you said, the taxpayer will share in the upside.  This is a relatively conservative structure.  It’s not very different from when your family buys a house.  It’s a more conservative structure than a bank typically operates.  But the key thing is it allows the government to work with the private investor to help get through this crisis.

MR. GREGORY:  Hm.

SEC’Y GEITHNER:  That we don’t want the government taking on all the risk and all the losses.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We need to work with the private sector to help get this, get this recovery going again.

MR. GREGORY:  All right, but here’s the key point.  The investor presumably is on board because, you know, they stand to gain a lot.  The government wants to get all of these toxic assets off the banks’ balance sheets.  It’s been estimated between $1.5 and $3 trillion of bad stuff out there.  But will the banks participate?  And here’s my question based on our example.  Hundred million dollar loan, but the auction price is $70 million.  Well, if you’re the bank and you say, “Hey, wait a minute.  This is really worth $90 million or $80 million.  I’m not going to sell that for $70 million and take that loss on my books.” Are you going make them sell?

SEC’Y GEITHNER:  Banks already hold reserves against that $100 million.  So the gap is not between 100 and 70, for example, it’s a narrower gap.  Now, banks are going to have an incentive because they want to raise, go raise private capital from the markets.  And it’s going to be easier for them to do that if they can show their investors a cleaner balance sheet.  And that’ll help improve the incentive for banks to participate.

MR. GREGORY:  But you can’t make them sell, can you?

SEC’Y GEITHNER:  Well, you can make it compelling and economic for them to sell.  And again, if you think about the markets today, if you had to sell your house tomorrow, in a market where no one can get a mortgage, then the price you would get if you sold in that market would be a tiny fraction of its basic value in a more normal.  And our markets are not working today.  People, in effect, in these securities markets, can’t raise financing.  And there is a very good case in that context for the government to provide financing on appropriate terms to help provide a market for these assets.  And by doing that, we’re going to make it more likely that interest rates come down and, and the financial system has the capacity to provide the credit, the oxygen.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  That economies need to grow.

MR. GREGORY:  Isn’t the government on the hook here for a lot of risk?  Isn’t there a lot more risk here for the government than there is for that investor?

SEC’Y GEITHNER:  David, the choice we face is whether to have the government take on all the risk in solving this, which we don’t want to do.  So if you compare this to the classic alternative, which is again, the government sits back, hopes the market solves this, which would be much more damaging to the economy, or the government takes on all the risk, buys all the assets itself, makes up a price, would risk overpaying, provide a much greater subsidy, this proposal is a much better approach to solving this problem.

MR. GREGORY:  Paul Krugman, Nobel laureate, New York Times columnist, been very critical of this plan.  He and others have said this is effectively a transfer of wealth from the banks’ balance sheets to the government’s balance sheets. A bailout for the banks, trash for cash.  You’ve heard all of these terms. And in fact, Krugman writes in a column last Sunday that your approach is very similar to your predecessor’s in the Bush administration, Hank Paulson.  This is what he writes.  I want to have you respond to it:  “The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them.  In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.  And so the plan is to use taxpayer funds to drive the prices of bad assets up to `fair’ levels.  Mr. Paulson proposed having the government buy the assets directly.  Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff.  …  The Geithner scheme would offer a one-way bet:  if asset values go up, the investors profit, but if they go down,” and again, these are all mortgage backed, “the investors can walk away from their debt.  So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.” Respond, please.

SEC’Y GEITHNER:  David, the investor’s money is at risk.  They can lose all their money.  Now, again, you have to compare these to the alternatives.  In the alternative scheme the government, in our view, would be taking on much more risk.  The taxpayer will be much more exposed to losses.  Life’s about choices.  Life’s about alternatives.  This is a better way to help get these markets working again.

But let me just step back for one sec.  What we’re trying to do is to get the entire financial system, our complicated finances working again so that we get credit where it needs to go in the economy.  And that requires strengthening our banking system.  It requires making sure there is enough capital in the financial system to withstand a deeper recession.  And we’re going to make sure that that capital comes with conditions to make sure that banks restructure, that there’s accountability for board and management, that the firms emerge stronger, not weaker, and that there are tough conditions to protect the taxpayer.  That is a critical part of what we’re going to do.

But our, our system is much more–depends on more than just banks, and so we have to do things to get these markets working again by providing financing directly to those markets that small business, consumers depend on.  And, and, but it’s going to require a comprehensive approach.  This particular proposal is not going to solve all our problems, but it is a critical part of the solution and we think it’s the best approach to protect the taxpayer and make sure that the market is working with us.

Now, just, just one more thing.  We’re not going to get through this unless we get a–willing to take risk again.  You know, the financials took too much risk.  The great danger for us now is they’re going to take too little risk, they’re not going to take a chance on a viable business or a family that wants to put their kids through college.  So we need to get them working with us in this context.  And of course, for them to take risk they’re going to need to have more confidence about what the rules of the game are going forward, that there’s clarity about conditions and they don’t face the risk of great uncertainty about those conditions going forward.

MR. GREGORY:  And to that point, are you this morning providing a guarantee to those investors that the rules of the games will not change?  If they make money in these transactions, that Congress won’t try to go get their gains and change the rules?

SEC’Y GEITHNER:  We have to do that or they won’t come.  And it’s a simple proposition.  Again, for these, all these programs to work, all these programs to work…

MR. GREGORY:  So the rules of this, of this program won’t change?

SEC’Y GEITHNER:  No, they cannot change.

MR. GREGORY:  Will the banks need more money?

SEC’Y GEITHNER:  We have a substantial amount of resources that Congress has authorized.  We’re moving forward to use those resources as quickly as we can to get them where they need in the economy.  Just to give you an example, the president’s housing program, which was the first major initiative we launched after I laid out that broad framework for financial recovery, has had a big effect working with the Fed and bringing interest rates down to historic lows, making–allowing millions of Americans who were not able to refinance to refinance.  Just to give you a simple example, typical American lives in a house that’s worth roughly $180,000.  Refinance in this environment could save up to $2,000 a year.  That’s a substantial amount of resource that they can use to spend on things that will help get this economy going again.  Where we are acting, you’re seeing progress and impact.

MR. GREGORY:  I want to turn to the issue of anger on Wall Street and those AIG bonuses.  The president said a couple of weeks ago this:

(Videotape, March 18, 2009)

PRES. OBAMA:  I don’t want to quell anger.  I think people are right to be angry.  I’m angry.

(End videotape)

MR. GREGORY:  You shared–you said in a letter, you shared the president’s outrage, and yet the reality is that these bonuses first came to light back in October of 2008.  You were still at the New York Fed.  They were also the subject of hundreds of e-mails between Treasury and the Fed and AIG during the transition and when you came into office.  In fact, the Treasury Department even negotiated with Senator Dodd with regard to executive compensation when the Treasury Department said, “No, no, don’t have this deal with retroactive bonuses.  We can’t abrogate those contracts.” So if you were so outraged about all of this, why didn’t you deal with this back when these first came up?

SEC’Y GEITHNER:  David, how could people not be angry with this?  With the challenges we’re facing now as a country in part because of risks our financial sector took on, how could people not be angry?  But our obligation and our deep obligation responsibility is, again, to try to fix this problem so that the trauma in the financial system is not causing more damage to the lives and fortunes of Americans and businesses across the country.  That’s the most important thing we do.  Everything we do has to be judged by the test of whether we’re getting the economy going again and recover…

MR. GREGORY:  Well, and that’s all fair.  But if you were so outraged, why didn’t you say that then?  Instead, you said, “I was outraged and we should try to get this money back.” The government knew about these bonuses several months ago.

SEC’Y GEITHNER:  Look, we had no good choices in that context, David.  These were contracts written before the government got involved, before Ed Liddy became CEO of AIG.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  We’re a nation of laws.  We cannot get the economy going again if there’s an expectation the government’s going to come in and break contracts.  Just not a tenable thing to do.  But what we did is–and we had no good choices, David–was when, when I was informed about the details of those provisions, we moved very quickly to ask that they–those that could be renegotiated get renegotiated, the government get those–or reduce those payments going forward.  And we’re going to use the authority we have to go recoup those payments where we have a good legal basis for doing that.  And you’ve already–we’re seeing a lot of those payments returned.  But the important thing is going forward that we establish clear conditions, clear rules of the game, prevent this kind of compensation practice in the future from coming back and putting our system at risk.  And we want to make sure that where the government is putting up assistance for these, for these banks, that that assistance is going to get lending going again…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …not to enrich the people that helped get us in this mess.

MR. GREGORY:  But, but my question is, is this:  If you thought this was so outrageous at the time, why didn’t you put this on the agenda then?  And if you felt that you didn’t have any good choices, that you really couldn’t dissolve those contracts, then when it came to light, why didn’t you and the president stand up and say, “This populist anger is understandable, but you have to understand it has to be put in context and it has to stop”?

SEC’Y GEITHNER:  Well, that–but that’s what the president did say.  And again, we’re trying to make sure that people understand…

MR. GREGORY:  The president said, “We shouldn’t govern in anger,” and then he said, “Yes, I’m angry, too.  I don’t want to quell the anger.” You said this was outrageous.

SEC’Y GEITHNER:  But…

MR. GREGORY:  Did anybody stand up and say, “Let’s put this in context.  We didn’t have good choices.  This is not worth getting so upset about”?

SEC’Y GEITHNER:  But, but, as you’ve seen the president say over the course of the week, the most important thing is we recognize that of course we don’t want to reward failure and we don’t want the government assistance going to reward failure, but we need to make sure we get this economy on–back on track.  That’s going to require the financial system getting fixed and repaired.  Of course we’re going to put strong conditions on the compensation…(unintelligible).  Remember, the first–the second week in office, the president put out very, very broad, ambitious standards on compensation practice.  That was before the Congress acted.  He was a–took early initiative in this area because we knew this was going to be a significant problem.

MR. GREGORY:  Let me turn to the issue of staffing at the Treasury Department. The president nominated you back on November 24th.  He understood the priority of having a Treasury secretary in place to deal with this recession.  And yet here we are at this date in March, and if you go to your own Web site on treasury.gov, the only confirmed Treasury official is you, the secretary of the Treasury.  The Economist writes this in its issue this week:  “Filling senior department jobs is always a torturous business in America, but Mr. Obama has made it harder by insisting on a level of scrutiny far beyond anything previously attempted.  Getting the Treasury team in place ought to have been his first priority.” I know there were some new nominations just this weekend.  Has it been a priority?

SEC’Y GEITHNER:  Absolutely, David.  And, and we’ve had some terrifically talented, dedicated public servants working at the Treasury from day one.  And look at what we’ve done in this period of time.  I mean, you have seen this government do more in eight weeks most governments do in years.  We’re moving much more aggressively, much more pre-emptively.  Look at the scale of programs we enacted and look at the impact they’re having.  You have not seen this scale of action before in this country or many countries.  And even this week we laid out a set of broad, comprehensive reforms to help make sure that our financial system never goes through this kind of crisis again.  We’re moving very quickly.  We’ve got some very strong, talented people.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We announced some new appointees this week.

MR. GREGORY:  But in terms of confirmed people in the Treasury Department, what’s gone wrong?  Is it the vetting standards?  Is it that you don’t want to work with people from Wall Street?

SEC’Y GEITHNER:  Confirmation process always takes time.  It always takes time.  People, people forget when you look back at transitions how long it takes to get people in office.  But we’ve got no choice but to act.  And again, we’ve been doing a huge amount of important, productive, consequential programs in a short period of time because we’ve got terrific people there working with me for the president to help get this economy back on track.

MR. GREGORY:  Do you want people with expertise on Wall Street to come work for you?

SEC’Y GEITHNER:  We need people who have experience in policy, in markets, in banking, in supervision, and we’re going to get terrifically talented people to come work for the country.  Because again, I think Americans know we’re at a moment of crisis and opportunity, and, and if you…

MR. GREGORY:  So Wall Street people don’t have a taint in your book?

SEC’Y GEITHNER:  No.  We’re, we’re going to make sure we take people–we get people with experience, as I said, in markets and in banking.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  Not just in policy.  Because that’s what’s going, that’s what it’s going to take.  You know, we’re trying to protect the interest of the taxpayer.  That requires people that have knowledge and expertise.

MR. GREGORY:  A couple of more moments here.  I want you to take a moment to explain the government regulation that you are proposing, which is very aggressive going forward.  How would this work?

SEC’Y GEITHNER:  Core thing is to make sure that the institutions at the center of our financial system are subject to much more conservative, much tougher requirements on capital and leverage that are applied more evenly and more effectively, frankly.  We need to make sure that hedge funds and derivatives come within a framework of oversight so we protect the system from the risks they may present.  And we need to make sure the government has the authority it needs to come in more quickly, to help contain the damage, restructure the system, so we can have a stronger system going forward.

MR. GREGORY:  But is the government really capable of moving in on companies that may need it?  Does the government have the level of expertise to unwind something like AIG’s financial products division?  You’re having your own problems even staffing up the Treasury Department.  Isn’t that a lot to, to ask the American people to support?

SEC’Y GEITHNER:  But, but there’s no choice.  I mean, how–what would you, what would you prefer, that we live with the kind of choices we saw in Lehman, AIG?  Catastrophic damage, or the government putting huge amounts of taxpayer dollars at risk to help and contain that damage?  We need a better model. What we’re proposing to do is use a model that exists for small banks that was designed by the Congress in the wake of the S&L crisis, build on that model and give the government a capacity to act more quickly, more effectively to contain the damage at least risk to the taxpayer and the economy as a whole.

MR. GREGORY:  Time magazine this week has its cover, and it’s very interesting.  I want to put it up on the screen for our viewers to see.  “The End of Excess: Why the crisis is good for America.” And there’s a big red “reset” button. And everybody talks about reset.  Obviously this is not a good crisis for America right now.  But take a longer view.  In the long run, is this crisis necessary for this economy?

SEC’Y GEITHNER:  I think the adjustment to a period of excess is necessary. You never, you never want to have a crisis to remind people of the importance of living within your means, not borrowing too much or why regulation of the…(unintelligible)…is important.  You never want to have a crisis that’s damaging to make that point.  But we’re going to emerge stronger than this. When we get through this people are going to care less about what they make, more about what they do, what they achieve with what they make, and that will help make this country stronger.

MR. GREGORY:  Will the economy be fundamentally different?  Will people own fewer homes?  I mean, home ownership, will that go down?  Will consumption change? Will our lives change in a meaningful way?

SEC’Y GEITHNER:  I think people will be living within their means more, which is helpful.  We want to have, you know, a stronger, more sustainable recovery. Not a recovery based on a artificial boom that’s not going to be sustained. We need to end this, this, this pattern of having booms and busts at the kind of frequency we’ve seen.  That has to change.  And that’ll make the, that’ll make this a better place to live and a more productive economy going forward.

MR. GREGORY:  Before you go, it’s been a fairly bumpy ride for you so far.  You’ve had Republicans calling for you to resign.  Some on Wall Street have questioned your effectiveness.  Do you think at this stage you’ve been able to shore up your credibility as not only a steward for economic policy, but as a spokesman for the president’s policies?

SEC’Y GEITHNER:  David, when I came into this job I knew two things.  One is I knew we were starting with a set of enormously complicated challenges and a deep sense of anger and frustration about the burden Americans were bearing because of a long period of excessive risk taking.  And I knew we were going to face really tough choices.  We were going to have to do things that are going to be deeply unpopular, hard to understand.  We’re not going to get it perfect everywhere.  But this is a great privilege for me, a great honor to help this president do what it takes to help get this economy back on track. This job, it comes with a lot of heat by definition and there’s nothing surprising in that.  But we have a great moment of opportunity for this country and it is, again, a great privilege for me to be part of an effort to try to make sure we put in place a stronger economy, stronger financial system for the future.

MR. GREGORY:  Secretary Geithner, good luck with your very important work.

SEC’Y GEITHNER:  Thank you.  Nice to see you.

[*] STEPHANOPOULOS: Good morning and welcome to “This Week.”

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: We put in place a comprehensive strategy designed to attack this crisis on all fronts.

(END VIDEO CLIP)

STEPHANOPOULOS: Our headliner this morning, the man behind Obama’s plan.

(BEGIN VIDEO CLIP)

GEITHNER: We made some significant progress.

We have a moment of opportunity now.

We believe we have to provide very substantial forms of financing.

(UNKNOWN): Today we love Geithner. Two weeks ago, we didn’t like him. We thought he was nothing. Today we like him. He’s a genius.

(END VIDEO CLIP)

STEPHANOPOULOS: In his first Sunday interview, the secretary of the Treasury, Tim Geithner.

Plus, Geithner’s most prominent critic.

(BEGIN VIDEO CLIP)

PAUL KRUGMAN, NEW YORK TIMES: It’s a plan to rearrange the deck chairs and hope that that keeps us from hitting the iceberg.

(END VIDEO CLIP)

STEPHANOPOULOS: Nobel Prize winner Paul Krugman joins our roundtable, with George Will, Cokie Roberts and Matthew Dowd.

And as always, the Sunday funnies.

(BEGIN VIDEO CLIP)

(UNKNOWN): Michelle Obama’s planting a vegetable garden on the White House lawn. You know the economy is bad when the Obamas are afraid of running out of food.

(END VIDEO CLIP)

STEPHANOPOULOS: Hello again. Last week, he was under fire; this week, he was everywhere, rolling out new proposals to shore up America’s finances. And today, Treasury Secretary Tim Geithner joins us for his first Sunday morning interview. Welcome to “This Week.”

GEITHNER: Thanks, George. Good to be here.

STEPHANOPOULOS: So you lay out the first phrase of the bank plan back in February. The Dow drops 382 points. This week, you laid out the new phase of the bank plan, 500-point rise over the course of the week. Do you feel like the comeback kid?

GEITHNER: George, we’re facing still a lot of challenges. Can’t judge a plan on the reaction one day one week. But we’ve done a lot in these eight weeks. You know, the president’s housing plan has already helped bring down interest rates. Millions of Americans now are going to be able to take advantage of lower interest rates. If you take a typical family living in a $180,000 home, the rate reductions we’ve already seen could save them as much as $2,000 a year.

STEPHANOPOULOS: And we did see a lot of encouraging signs in the economy this week. New home sales were up. Mortgage refinances, as you pointed out, were up. Even durable goods orders were up, and inventories went down. And of course, a 20-percent rise in the stock market over the last couple of weeks. What does this tell you? What should Americans know right now about where the economy is and whether recover is in sight?

GEITHNER: Well, these are encouraging signs, and it’s good when you see the new surprise on the upside, rather than the other way.

STEPHANOPOULOS: So you were surprised?

GEITHNER: Well, I think these are, again, they came in above expectations, much (inaudible) — that’s a very good sign. But it’s very important for people to understand that, you know, it took us a long time to get into this mess. It’s going to take us a while to get out of this. Progress is not going to be even. It’s not going to be steady. The really important thing is that the administration is going to do what is necessary working with the Congress to making sure we’re putting in place very powerful programs to get Americans back to work.

STEPHANOPOULOS: So you’re barraged by economic statistics every day. I’m sure there are a bunch of screens in your office. What is the single most important statistic that you are looking at, that you’re tracking to say, when this turns, we’re out of the woods?

GEITHNER: There is no single number you have to look at. You need to look at what people are doing with the income and the savings they have. Are they spending? Are businesses expanding? Are they hiring more people? Are interest rates coming down? Is credit starting to flow again? You have to look at that broad suite of things. There’s no single number that gives you the health — the measure of the health of the economy.

STEPHANOPOULOS: What is the next shoe to drop? In talking to business leaders over the last couple of weeks, I hear a lot of concern about the commercial real estate market. And from bankers especially, they’re concerned that as unemployment rises, their credit card defaults could really go through the roof?

GEITHNER: There’s no doubt there’s more losses ahead for the financial system, but George, we’ve had a lot of adjustment already. One of the things about the American economy is, change happens here with brutal force, much more quickly than it happens around the world. And we’ve already had — you know, we’re 18 months into this, and we’ve had…

STEPHANOPOULOS: It’s a long recession.

GEITHNER: It is a long recession, and it’s a — it’s been dramatic and painful and brutal in some ways, in part because adjustments happen here so quickly. But that’s a good thing too, because that means more of that adjustment process is behind us.

Now, the important thing, though, is that we keep at it. You know, the big mistake governments make in recessions is they put the brakes on too early.

STEPHANOPOULOS: Is that what happened during the depression? Is that what Franklin Roosevelt did?

GEITHNER: That’s one thing that happened in the depression. It’s happened in Japan, too. It’s happened in a lot of countries in the world. They see that first glimmer of light, and the impetus to policy fades and people are putting on the brakes, and we’re not going to do that.

STEPHANOPOULOS: But I wonder about, as you look in the long term — and you believe we’re obviously going to come out of this at some point. You believe the recovery will start, what, the end of this year?

GEITHNER: Most private economists believe you’re going to find a more durable bottom in the second half of this year and then have growth come back.

STEPHANOPOULOS: But even if we come out of that, a lot of economists worry that this recovery is going to feel like a recession, that we’re going to have a jobless recovery. Very — I see you nodding your head. You believe that?

GEITHNER: I think a lot — people worry about this. You have a recession like this, which is born out of a period where people borrowed too much, and we let our financial system take on too much risk. The risk in that conduct is you have a longer, slower, more gradual process of adjustment and recovery.

STEPHANOPOULOS: And some experts believe that we’re really entering a brand new world. I was struck by a piece of research I saw from a branch of Citigroup. This was — and I’m going to share it with our viewers. They’re saying, “Don’t be in a state of denial, we are really entering a brand new economic world even after the recovery, because for so long the U.S. has been acting like a leveraged hedge fund.”

And they go on to say: “Not only is the lifestyle and wealth creation likely to be unsustainable going forward, but if you believe, as we do, that we’ve been operating in a leveraged economy, then the new normal in terms of economic data, profitability of companies, et cetera, may be a shadow of the past.”

So do Americans have to get used to the idea that the boom times really aren’t coming back?

GEITHNER: Well, we’re going to emerge out of this stronger. And we’re going to do that because the president and the Congress are going to make sure that we have the government doing a better job of things it needs to do.

So we have a more productive economy in the future, better education outcomes, better health care system, better energy policies, stronger infrastructure.

STEPHANOPOULOS: Stronger, but as affluent as we were in the past?

GEITHNER: Well, you know, we want to have sustainable growth. We don’t have — we don’t want to have a recovery which is going to be artificial and short-lived, just produce the seeds of the next crisis.

We want to have a durable recovery based on a stronger foundation that has a stronger, more productive economy emerging through it where the gains are more broadly shared across the economy as a whole.

STEPHANOPOULOS: So income inequality goes down?

GEITHNER: It should go down. Again, you know, if you look at the record of performance in the ’90s, you know, we had very strong productivity growth during a period of fiscal discipline, fiscal responsibility, strong private investment, and the gains were shared much more broadly.

We can do that as a country, but it requires getting this government to do a better job of doing things only governments can do. That’s why I assume important we get better outcomes. That’s why fixing our health care system and get costs growing more slowly is so important. That’s why we need a better energy policy. And that’s why infrastructure needs to be improved.

STEPHANOPOULOS: But do you really believe we’re going to get back to what we saw in the 1990s in terms of the kind of affluence we saw across the board?

GEITHNER: George, I think Americans should be optimistic about the future of this country. We are a strong, remarkably resilient country. We are still the most productive economy in the world by many measures.

We have a university system that is the envy of the world. People with an idea still want to come to the — America to grow business, build on that idea. That’s a great source of strength for our recovery.

But we need this government, though, to do a better job of doing what governments have to do.

STEPHANOPOULOS: And you are obviously trying to do that with your plans to shore up the banking system. You laid out what to do about these legacy toxic assets in the banking system this week. And a lot of people are wondering, will it actually work? The stock market definitely seemed to like it, so did a lot of experts. As you know, the Nobel Prize-winning economist Paul Krugman was not a fan. And I want to show what he wrote this week in The New York Times.

He said when he read this plan, it gave him a sense of despair. And he went on to say: “Financial executives literally bet their banks on the belief that there was no housing bubble and the related belief that unprecedented levels of household debt were no problem. They lost that bet and no amount of financial hocus-pocus, for that is what the Geithner plan amounts to, will change that fact.”

Financial hocus-pocus.

GEITHNER: George, this is a piece of a series of initiatives we’ve put in place to help get the financial system doing what it needs to do, which is to provide the credit necessary for recovery. You know, economies depend on financial systems. They’re what is — provide the oxygen, the blood that economies need to grow.

STEPHANOPOULOS: But he says it’s just not going to work, that these banks are insolvent, and that even if you put more capital in them, eventually you’re going to have to take them over.

GEITHNER: But I just wanted to — let’s step back for a sec. So this is piece of a broad framework of initiatives we’re undertaking to help restore the strength of the financial system. Part of our plan — a core part of our plan involves making sure banks have enough capital to provide the lending we’re going to need to get recovery back on track.

Now banks are going to need — some banks are going to need some large amounts of assistance, and we’re going to make sure that that assistance comes with conditions, designed to make sure they restructure, provide accountability on boards of management, that these institutions emerge cleaner, stronger going forward.

STEPHANOPOULOS: But one of the things you’re hearing from the banks is in part because they don’t want all of these new restrictions, they may not sell these legacy assets.

GEITHNER: That is a risk. And it’s very important that people recognize that. To get out of this, we need banks to take a chance on businesses, to take risk again. We had a long period where banks were taking too much risk. The challenge for us is that they take too little now.

And for us to get through this, we need investors and banks to be willing to take a change again on providing credit to that business that has got a great idea and needs to grow, expand.

STEPHANOPOULOS: Well, one of the other criticisms is that the investors, especially in the plans to buy up these toxic assets, are not taking all that much of a risk. They’re going to put up $6 and they’re going to get 93 percent from the government. We will share on the upside, yes, but they’re protected against huge losses.

GEITHNER: George, let’s just step back for a sec. The problem we’re facing on our financial system is that we — banks made a bunch of loans, backed real estate that are now facing losses. And those loans are clogging up the financial system.

They’re taking up room that could otherwise be used to provide new credits to a business or a family. Now we have two choices, we can let — leave that as it is, hope that banks earn their way out of this over time. That would be a mistake. That would leave us with a strong — with a deeper, longer recession.

We’re not prepared to adopt that basic strategy.

STEPHANOPOULOS: But there is a third choice…

GEITHNER: There is another choice — let me say, there’s another choice that a lot of people suggest is the government itself comes in, buys these assets, sets the pricing of an asset, takes on all of the risk in that strategy.

And that would leave the taxpayer taking on much more risk, much greater risk of loss over time. We don’t think that’s an appropriate approach.

The approach we’re adopting, though, is to have private investors come in and put their capital risk alongside the government. That helps make sure we’re using their incentive to set the price for these assets, rather than having the government set the price and risk overpaying.

This is a conservative structure. It’s, sort of, basically like what happens when you buy a house, put money down, borrow it to buy a house. It’s a more conservative structure than banks typically run with. And we think it’s a much better way, again, to make sure the taxpayer’s not taking on risk the taxpayer should not take.

STEPHANOPOULOS: So you’re saying your proposal is the middle course. I guess there’s a fourth option that Senator McCain lays out, other Republicans have laid it out. He says, just go in and shut them down.

GEITHNER: Right.

STEPHANOPOULOS: These banks ought to be shut down. He says they should be taken over, their management and shareholders suffer the consequences, and their assets resold to private-sector entities.

What’s wrong with that idea?

GEITHNER: Well, George, the approach we’re adopting, again, is to make sure that there’s capital in the financial system where we need capital. And that capital will come with conditions.

As the senator said, make sure these institutions emerge stronger, not weaker. We don’t want to be sustaining the weak at the expense of the strong. But our system…

STEPHANOPOULOS: But is that plan B, if your plan fails, is that plan B, go in, take them over, shut them down eventually, unwind their assets?

GEITHNER: The way I would describe it, George, is that we need to move to make sure the banking system is able to provide the credit recovery needs.

When they do that, again, with strong conditions to protect the taxpayer, make sure they restructure where they need to restructure.

But, you know, our system doesn’t just depend on banks. In a typical — in a typical market, more than 40 percent of lending comes from outside of banks, so in the securities markets, through the secondary markets that are so critical to student loans, small- business lending, consumer lending.

And so we have a very aggressive program in place to help provide credit directly, going around banks, get those markets working again.

Now, this is not something any country’s faced in the past. We are moving much more aggressively than the U.S. moved in the S&L crisis, than Japan moved in the 90s. We’re moving at a much earlier stage to help preempt failure, make the system stronger, with tough conditions to protect the taxpayer.

STEPHANOPOULOS: But, as you said, this is likely to cost far more in capital injections for the banks. And I guess the big question is, where is that money going to come from?

According to our calculations, there was only about, going into today, about $32 billion, maybe a little more, left in the TARP, the financial rescue program.

Late last night, the Treasury Department said that number is actually far higher, more than $130 billion. That is a huge difference. And it is the first time the Treasury Department has ever put a number on what is left over.

Where did you come up with that extra $100 billion?

GEITHNER: George, we have roughly $135 billion left of uncommitted resources. Less is out the door, but in terms of, if you look at what’s not committed yet, it’s roughly, you know, $135 billion.

Now, that — that estimate includes a judgment, a very conservative judgment about how much money is likely to come back from banks, that are strong enough not to need this capital, now, to get through a recession.

But that’s a reasonably conservative estimate. And it gives us — and this is very important — substantial resources to move ahead with this broad-based suite of initiatives to help get the financial system back in the business of providing credit. STEPHANOPOULOS: So does that mean, now, that with this $130 billion, if you’re correct, you’re going to take care of the auto companies; you’re going to take care of unforeseen problems; these new capital injections in the banks.

Earlier in the year, the president and you seemed very concerned that — and you warned the Congress — we’re going to be coming back for money.

Is that less likely now, now that you have more than $130 billion left in the TARP?

GEITHNER: George, the important thing is that we are going to work with the Congress to make sure that we have the resources needed to do this right.

Again, the lesson of financial crises is governments tend to do too little; they wait too long to escalate.

STEPHANOPOULOS: Right, but I talk to people on Capitol Hill a lot, and there is no support, right now, for adding more money to the TARP.

Can you get through the rest of this year with the money you have?

GEITHNER: We have substantial resources. We’re going to use them quickly, as carefully as we can, make sure they’re diverted to things that are going to get credit flowing again. And we’ll cross that bridge when ewe come to it, in terms of whether we need additional resources.

And, of course, if we come to that point, we’ll go to the Congress and give them the strongest case possible and help them understand why this would be cheaper over the long run, for us to move aggressively…

(CROSSTALK)

STEPHANOPOULOS: But are you farther away from the bridge than you thought you’d be a few months ago?

GEITHNER: No, I think we’re about where we were. You know, this is not easy for people. I mean, this is people — there is a deep amount of public anger and frustration about the fact the American economy is suffering so much damage from the consequence of people who took too much risk.

And, you know, the tragedy of the financial crisis is they are — the damage is brutal; it’s indiscriminate. It affects not just the people who took too much risk but people who were careful and responsible in their decisions.

But the important thing is these things don’t bring themselves out without catastrophic damage.

STEPHANOPOULOS: So Congress should be braced for another request?

GEITHNER: No, I’m not saying that. I just saying that the important thing — and Congress, again, has already moved, really, before the administration took office, to authorize a very substantial amount of resources. And we’re moving very quickly to put those to work for the American financial system. And where we’ve done that…

STEPHANOPOULOS: But they took the funds out of the budget to pay for the next round of bailouts.

GEITHNER: Well, I wouldn’t — you know, that was about ’09 — I mean, that was about the ’010 budget, not the ’09 budget. But look what’s happened already, George. You know, where we had moved, and we moved very, very quickly, much more quickly than governments had typically in the past. And if you look at what’s happened in housing, even in small-business lending, you’re seeing significant effects already in opening up these markets, bringing interest rates down, and that has very powerful effects in the American economy.

STEPHANOPOULOS: Let’s talk about — last week was a much worse week for you than this week. AIG, the whole outrage over the bonuses. And one of the members of Congress you’ve worked closely with, Charles Rangel, the chairman of the Ways & Means Committee, was very tough on you this Friday over the AIG issue. He lumped you and Secretary of Treasury Paulson together as coming out of the culture of Wall Street. Take a look.

(BEGIN VIDEO CLIP)

REP. CHARLES B. RANGEL, D-N.Y.: They drink a different water. They breathe a different air. They don’t know what pain is, and so getting a $6 million bonus is just natural to them. They don’t know shame. They don’t know how to apologize.

(END VIDEO CLIP)

STEPHANOPOULOS: Now, the irony is, you’ve never worked for a Wall Street firm…

GEITHNER: Thank you for saying that. For reminding…

STEPHANOPOULOS: But many of the critics have made exactly the same point, that you’re — because you’ve worked around it for so long, you were too beholden to the Wall Street culture, and that’s what explains the blind spot on AIG.

GEITHNER: Not at all, George. As you said, I’ve worked all my life in public service. I’ve spent my entire professional life helping this government and this country do a better job of dealing with financial crises and helping protect the economy from the damage these causes.

I would not spend a penny on helping a bank for the purpose of helping a bank. Everything we’re doing is for the people that depend on this financial system. Every time we provide assistance to the financial institutions, it’s only because we need them to do a better job of getting credit to help reduce the risk of a deeper recession.

STEPHANOPOULOS: What did you learn from the whole AIG bonus experience? How could you have handled it differently?

GEITHNER: You know, I don’t think our choices would have changed. We had no good choices in those conducts. These were contracts that were set well before the government came in, before Ed Liddy became CEO. We’re a nation of laws. We cannot run this country, expect our country and our economy to work, businesses to function if there is an ongoing fear the government will come in and retroactively change the terms of existing contract. So we had no good choices in that contracts (ph), but we moved very, very quickly to make sure that we were going to get them to renegotiate future payments, that there were strong conditions on compensation going forward. That’s what we’re going to do.

Now, where we have the chance to go back and recoup, where there was evidence of malfeasance of fraud, we will do that.

STEPHANOPOULOS: And some are saying you should go back and recoup on another, much bigger issue having to do with AIG, and that’s all the payments they made to their so-called counterparties. Let me show our viewers who got the money from AIG after they got a government bailout — $13 billion to Goldman Sachs; $12 billion to Bank of America; more than $30 billion to a series of foreign banks. That has upset a lot of members of Congress. Elijah Cummings and 26 other members of Congress have written a letter saying they want to know why an attempt wasn’t made to renegotiate.

Let me read exactly what they said. “Was any attempt made to renegotiate and close out these contracts with haircuts? If not, why not? What was the benefit of the decision to pay 100 percent of face value to the American taxpayers who provided the bailout funds, and how did it support the goal of ensuring the stability of the economic system?”

Now, Goldman Sachs, for example. Their chief financial officer said he had no material economic exposure to AIG. So why weren’t they forced to take a discount?

GEITHNER: George, we came into this crisis as a country without the tools necessary to contain the damage of a financial crisis like this. In a case of a large, complex institution like AIG, the government has no ability, had no meaningful ability to come in early to help contain the fire, contain the damage, prevent the spread of that fire. Restructure the firm, change contracts where necessary, and helped make sure that the financial system gets through this…

STEPHANOPOULOS: But it would have been the right thing to do, right?

GEITHNER: If we had the legal authority, that’s what we would have done. But without that legal authority, we had no good choices. We were caught between these terrible choices of letting Lehman fail — and you saw the catastrophic damage that caused to the financial system — or coming in and putting huge amounts of taxpayer dollars at risk, like we did at AIG, to keep the thing going, unwind it slowly at less damage to the ultimate economy and taxpayer.

STEPHANOPOULOS: So how about now, Goldman Sachs is taking other government money. They got this $13 billion whole from AIG. Congressman Brad Sherman and others have said, they should give that $13 billion back.

GEITHNER: George, the important thing is, we have no legal ability now. That’s why I went to Congress last week, to propose a broad change in resolution authority so that we have the capacity to do what we do with banks now.

STEPHANOPOULOS: But wouldn’t it be the right thing for Goldman?

GEITHNER: To give that money back?

STEPHANOPOULOS: Uh-huh.

GEITHNER: Look, again, the government of the United States in a situation like this has to make sure that we’re containing the damage that might come from default by a major complex financial institution. We need better legal authority to do that, did not have that authority coming into this crisis. It’s a tragic…

STEPHANOPOULOS: So nothing to be done looking back, but going forward, that’s exactly the authority you would want.

GEITHNER: Absolutely. Our obligation now, again, is to defuse and help unwind this deeply complicated problem that AIG presents. But we want to work with the Congress to put in place stronger tools, stronger resolution authority, so the government can come in more quickly, earlier, before things have passed the point of no return, contain the damage, prevent the fire from spreading, restructure the firm, have it emerge stronger, at less risk to the taxpayer. That’s what we need. We should have had this before this crisis, but we didn’t. But we need to move quickly now.

STEPHANOPOULOS: Let’s talk about government debt. A lot of Americans more and more are concerned about that. According to the Congressional Budget Office, in 10 years, the government debt will be 82 percent of GDP. And I’m going to read a question that came in from one of our viewers, Bruce Gower of Rock Hill, South Carolina. He asks, “how do you justify printing money out of thin air and the amount of debt you are subjecting future generations to with this budget? Who cares if roads are smoother if I or my children can’t afford a car to drive because of the hyperinflation that had taken away all their spending power?”

Are you worried about hyperinflation down the road?

GEITHNER: That’s not going to happen in this country, will never happen.

STEPHANOPOULOS: Why?

GEITHNER: Will never happen. Because we have a strong, independent Fed, with a clear authority from the Congress to keep inflation low at — stable at low levels going forward.

STEPHANOPOULOS: The Fed has been putting so much money into the system.

GEITHNER: But that’s not going to create the risk of hyperinflation in the future.

We have a strong independent Federal Reserve with a very strong mandate from the Congress, and they will do what’s necessary to keep inflation low and stable over time.

But George, just step back for one second. You know, when I left the Treasury in 2001, we had large surpluses — large surpluses projected. We started this administration with a $1.3 trillion deficit and a deepening recession, enormously challenging global financial crisis. The cost of fixing that crisis is going to require larger deficits in the short term, but the best way to make sure we get those deficits down in the future is to get recovery established, get — make the economy stronger going forward. That’s the best way to get us back on a path to fiscal responsibility.

STEPHANOPOULOS: And from what you were saying earlier, you’re actually more concerned about putting the brakes on too quickly.

GEITHNER: That would cause more damage to the productive capacity of this economy and would risk larger deficits in the future. Again, the big mistake governments make in financial crises is to sit back, hope it’s going to work itself out, put the brakes on too quickly, not act aggressively enough, and we can’t afford to make that mistake.

STEPHANOPOULOS: Announcement coming tomorrow on autos. And I have a question that my friend George Will gave for you, and he said why is Chrysler too big to fail but Studebaker wasn’t?

GEITHNER: George, I’m not going to get ahead of the president’s announcement tomorrow, but it’s important to know that we want to have a strong automobile industry. We want it to emerge from this period of challenge stronger. That’s going to require a lot of restructuring. We’re prepared as a government to help that process if we believe it’s going to provide the basis for a stronger industry in the future that’s not going to rely on government support.

STEPHANOPOULOS: But is Chrysler really too big to fail?

GEITHNER: George, I’m not going to get ahead of the president’s — as I said, it’s very important for our country that we have a strong automobile industry going forward.

STEPHANOPOULOS: We’re just about out of time, but you — there was a real sign that you had made it in the Washington culture just a couple of weeks ago, parodied on Saturday Night Live just two weeks ago. Here’s what they said.

(BEGIN VIDEO CLIP) (UNKNOWN): This $420 billion will be placed in a special fund and will go to the first individual who comes up with a workable plan to solve the banking crisis.

(END VIDEO CLIP)

STEPHANOPOULOS: So what did you think when you saw that?

GEITHNER: I didn’t see it, but my kids saw it. They thought it was pretty funny. But you know, one of the great things in this job is people have a lot of ideas. We get ideas all the time.

STEPHANOPOULOS: Even from Saturday Night Live?

GEITHNER: Well, not from Saturday Night Live, but we get it — from people who are smart, thoughtful, credible, have been part of solving these crises in other countries, and we listen to everybody. We have got no pride of authorship in ideas, and we’re going to do — the only test that matters to us, is, is it going to work? Is it going to get credit flowing again at acceptable risk, least cost to the taxpayer?

STEPHANOPOULOS: And what’s the most important single thing you’ve learned over the last three months?

GEITHNER: That to get through this, governments need to act. Great obligation responsibility for governments to act to solve these things. The market will not solve this, and the great risk for us is we do too little, not that we do too much.

STEPHANOPOULOS: Secretary Geithner, thanks very much for your time this morning.

GEITHNER: Thank you, George.

END

Below is from a Newsweek piece of Treasury Secretary Timothy Geithner, who seems to be hitting his stride.  I’m not a fan of Geithner or Larry Summers being so key to getting us out of the current mess and into a better, more fair economy.  Summers is one of the reasons we’re where we are today and Geithner is a product of Wall Street.  Every plan the government has come up with has lots for Wall Street, nothing for taxpayers and absolutely no accountability so far for how are money has been spent by the banks and brokerages.  In the following passage, Geithner makes his case against those like Paul Krugman who make this case with more weight and eloquence than I ever will.

Their argument – the case made by the politicians who are bought and paid for by the AIGs of the world – is that these institutions cannot fail.  Either they’re too big or too interconnected.  What’s obvious is that in their size and counterparty risk, they are a menace to society.  Let them fail.

From Newsweek:

Out of view of the cameras, Geithner prides himself on proceeding methodically—the markets be damned. He’s dismissive of critics who rail against the more controversial aspects of his plan for a public-private partnership creating government-backed “funds”—which by this summer are supposed to conduct an auction for bad assets. Among those critics is columnist Paul Krugman, who says the plan is another rich giveaway to Wall Street that won’t make banks more solvent. Geithner scoffs at their proposed alternative, what he calls “preemptive nationalization of the big institutions,” saying his critics have no idea what they’re talking about. One big problem, Geithner says, is that the government doesn’t have the resources to do more now, not with political outrage so high. And Washington cannot just take over banks that are not technically insolvent yet. “We would end up killing the institutions and having the government assume right away all those basic losses … There’s no feasible way we could get in and out quickly.”

The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.” Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.

From Reuters:

While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.

Under one component of the plan, Treasury will provide up to 80 percent of the initial capital, which would go alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.

A separate component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.

From the Wall Street Journal:

The coordinated effort of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. will attempt to address the issue of “legacy” real-estate-related assets that Treasury Secretary Timothy Geithner said is reducing banks’ willingness to take risks and to lend money to consumers.

“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” Mr. Geithner said.

The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.

• Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
• Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
• Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.

The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of “legacy assets” – both real estate loans held directly on the books of banks (“legacy loans”) and securities backed by loan portfolios (“legacy securities”). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.

• Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.
• Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.

The Public-Private Investment Program for Legacy Assets

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

• Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
• Legacy Securities: Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.

• Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
• Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
• Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
• The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:
  • Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
  • Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
  • Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
  • Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

  The Legacy Securities Program: The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.

• Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market: The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).

• • Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
  • Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
  • Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.

• Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
• Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.