Text: Geithner Testimony to Senate Appropriations Committee – Treasury’s Priorities & Financial System Update
Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President’s Fiscal Year 2010 Budget request for the Department of the Treasury.
While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges.
President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America’s global competitiveness and produce more balanced, sustainable growth over the long-term.
Treasury’s Key Priorities
To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans.
To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient.
To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business.
(Source: U.S. Dept. of the Treasury)
It is a pleasure to be back in China and to join you here today at this great university.
I first came to China, and to Peking University, in the summer of 1981 as a college student studying Mandarin. I was here with a small group of graduate and undergraduate students from across the United States. I returned the next summer to Beijing Normal University.
We studied reasonably hard, and had the privilege of working with many talented professors, some of whom are here today. As we explored this city and traveled through Eastern China, we had the chance not just to understand more about your history and your aspirations, but also to begin to see the United States through your eyes.
(Source: U.S. Dept. of the Treasury)
Chairman Dodd, Ranking Member Shelby, members of the Senate Banking Committee, thank you for the opportunity to testify before you today.
On October 3, 2008, during a time of tremendous financial upheaval and economic uncertainty, Congress passed the Emergency Economic Stabilization Act (EESA) with the specific goal of stabilizing the nation’s financial system and preventing catastrophic collapse. Soon after taking office, this Administration rebuilt the EESA programs from the ground up with a new foundation. We also unveiled a financial stability plan to restore the flow of credit to consumers and businesses, tackle the foreclosure crisis in order to help millions of Americans stay in their homes, and comprehensively reform the nation’s financial regulatory system so that a crisis like this one never happens again.
Today, just four months into President Obama’s term of office, there are important indications that our financial system is starting to heal. For example, spreads for investment grade corporate bonds have fallen about 210 basis points and spreads on high yield corporate bonds are down about 770 basis points since the end of November. Spreads on AAA municipal bonds have come down 150 basis points since October. Risk premiums in short-term, inter-bank markets have fallen 280 basis points over roughly the same period and the cost of credit protection for the largest U.S. banks has fallen by about 180 basis points just since early April. Treasury is continuing to look into additional metrics that gauge the markets more broadly, as well as additional economic metrics, to determine the effectiveness of the current strategy and whether additional or different steps are needed.
(Source: U.S. Dept. of the Treasury)
Thank you, Mike and Cam Fine, for your leadership of the ICBA and for your work on behalf of community banks.
Everyone here should know that three days after I was sworn in as Treasury Secretary, Cam Fine was in my office talking about the ICBA.
Community banks play a vital role in our financial system and a central role in our economy.
Yours are the banks where children open their first savings accounts and then come back years later to get a small business loan or to get help buying their first home.
In a time when financial innovation has put more and more distance between borrower and ultimate lender or investor, yours are the banks where staff and customers greet each other by first name, and where relationships still define the business of banking.
Of the over 8,300 banks in America, 92% are small or mid-sized banks, with assets below $1 billion.
(Source: U.S. Dept. of the Treasury)
This afternoon, the Federal Reserve and the national banking agencies released the results of the stress tests – the most comprehensive, forward looking review of our nation’s largest banks ever undertaken. These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario. They will provide the transparency necessary for individuals and markets to judge the strength of the banking system.
Yesterday the New York Times ran a story reporting that executive pay at the nation’s largest banks is again approaching pre-financial crisis levels. This is simply a signal that management teams in New York, Charlotte and elsewhere in banking headquarters are pursuing a business as usual approach to what many believe is the beginning of the end to the recession.
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:
… But is he the Lizard King?
Treasury Secretary Tim Geithner
Congressional Oversight Panel
Good morning. Thank you for the opportunity to appear before you.
The challenges that our financial system faces are complex, interrelated, and the result of developments over many years. Earlier in this decade, a combination of fundamental factors and financial innovations generated unsustainable bubbles in many housing markets across the country. When those bubbles began to burst, starting in early 2006, housing price declines led to a sharp acceleration in mortgage delinquencies and charge-offs. Those unanticipated losses revealed deep-seated problems in our financial and economic systems. A protracted period of rapid innovation, excessive risk taking, and inadequate regulation produced a financial system that was far more fragile than was generally appreciated during the boom times.
Text-Document: Geithner Letter to Congressional Oversight Panel, April 20, 2009 – Status of TARP Funds
I’m An Obama Supporter and This Is An Example of Why It Makes Me Sick That Summers and Geithner Are in Charge of Economy
From the Washington Post tonight:
Lawrence H. Summers, one of President Obama’s top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. …
… But Summers — who, as chairman of the National Economic Council, is a leading architect of the administration’s economic policies and helped shape the response to the global recession — appears to have collected the most income. Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form. Summers reported donating two fees totaling $70,000, including the payment from Merrill Lynch, to charity.
Is it any wonder that the investment class who brought us this Great Recession and blow up of the U.S. financial system is getting off Scot-free with taxpayer bailouts? Larry Summers who brought us the repeal of Glass-Steagal. Tim Geithner who brought us TARP, the original $700 billion bailout.
The point is that there are fundamental problems with what is considered economic activity that delivers real value. Are creatures of Wall Street the right folks to be deciding what a new economic playing field should look like? For instance, what limits should there be on securitization? What should be allowed to be securitized? Should insurance companies be allowed to sell insurance but not call it insurance so it’s not regulated? How much is too much leverage? Etc.
We know what Wall Street’s answers are to these questions. We know that Summers and Geithner are tools of Wall Street. So, we know with them as our economic brain trust we’re fucked — unless of course we’re trading, banking or insuring.
In the end it’s all on the taxpayer …
Joseph Stiglitz writes a wonderful op-ed in today’s NYT, Obama’s Ersatz Capitalism. From the piece:
In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.
The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.
Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!
The Financial Times has a great, interactive graphic that explains the latest Geithner scheme for bailing out U.S. banks. Click the image below to go view it:
(Source: Meet the Press)
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.
(Source: ABC News This Week)
[*] 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.
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.
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.”
Geithner Calls for Major Overhaul of Financial Rules, New York Times:
The Treasury secretary, Timothy F. Geithner, outlined the plan Thursday before the House Financial Services Committee, where he got a decidedly mixed reception. He said the changes were needed to fix a badly flawed system that was exposed by the current financial crisis. Mr. Geithner, in his opening statement, called for “comprehensive reform. Not modest repairs at the margin, but new rules of the game.”
“Very complex, very consequential, very difficult” Mr. Geithner called the changes that he said were necessary, and the sooner the better.
Included in the plan would be the establishment of one single agency “with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.”
Geithner Calls for ‘New Rules of Game,’ Bloomberg
“We have a moment of opportunity now” and “we need to act,” Geithner said. He also called for new standards for executive compensation practices “across all financial firms.”
The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.
The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock like last year’s failure of Lehman Brothers Holdings Inc.
The Treasury chief also said regulators should consider new rules requiring banks to set aside extra reserves during boom times to build up a cushion for economic slumps.
The PDF document below outlines the highlights of comprehensive financial services regulatory reform proposals announced by Secretary fo the Treasury Timothy Geithner on March 26.