Wednesday, May 20, 2009

Geithner Says Toxic-Asset Plan to Start in Six Weeks

Posted on Bloomberg by Rebecca Christie and Robert Schmidt:

Treasury Secretary Timothy Geithner said policy makers plan by early July to begin helping banks sell distressed assets, in the U.S. government’s next step to end the worst credit crisis in decades. (The prepared statement can be downloaded here.)

“Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks,” Geithner said in testimony to the Senate Banking Committee today in Washington.

The Treasury’s Public-Private Investment Program will use $75 billion to $100 billion of government funds to finance sales of as much as $1 trillion in distressed mortgage-backed securities and other assets. The effort has two components, which the Treasury will manage in conjunction with the Fed and the Federal Deposit Insurance Corp.

“A variety of troubled legacy assets are congesting the U.S. financial system,” he said. “This constraint on capital reduces the ability of financial institutions to provide new credit and uncertainty about the value of legacy assets is constraining the ability of financial institutions to raise private capital.”

Geithner also said that the Treasury has about $124 billion left in the $700 billion Troubled Asset Relief Program, including $25 billion in expected repayments over the next year. This compares with the department’s previous estimate of about $135 billion remaining as of late March.

He told the panel the Obama administration has no plans to ask Congress to approve more money for the rescue.

Commercial Real Estate

Geithner said the Treasury and the Fed also expect to expand programs, such as the Fed’s Term Asset-Backed Securities Loan Facility, designed to help asset-backed securities markets. The central bank yesterday announced it would add older commercial real estate securities to the TALF by July, marking the first time the program has included legacy assets as well as newly issued securities.

“The Treasury and the Federal Reserve will continue to monitor and enhance the ABS programs to bring in new, more niche asset classes and make sure that the number of eligible borrowers and issuers continues to increase,” Geithner said.

The Treasury chief reiterated his view that “there are important indications that our financial system is starting to heal,” highlighting diminished premiums in corporate, municipal and interbank lending markets.

Less Leverage

“Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk and banks are funding themselves more conservatively,” Geithner said.

The department is investigating “metrics” to use in judging the health of markets and the economy to determine “whether additional or different steps are needed,” he said. The “process of financial recovery and repair will take time.”

Banks have taken steps to strengthen their capital reserves since the conclusion of regulators’ stress tests on the biggest 19 lenders, he noted. Geithner repeated that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”

Geithner said the Obama administration is still working with General Motors Corp. as that company seeks to meet a government-imposed deadline for restructuring. The company has until the end of this month to come up with a new plan or enter bankruptcy, as Chrysler LLC did.

‘Significant Efforts’

“We will continue to work with GM and its stakeholders in the lead-up to the June 1 deadline,” Geithner said. “We will also continue our significant efforts to ensure that financing is available to creditworthy dealers and to pursue efforts to help boost domestic demand for cars.”

He told senators that “we do not want to have the government involved in day-to-day management decisions” at bailed out companies such as the automakers. If board members are installed by the administration, they would have a duty to maximize shareholder value over time, he added.

On China, Geithner said the U.S. is encouraged by recent gains in its currency, the renminbi or yuan.

“There’s been very substantial change over the last two years; they’re committed to further evolution,” Geithner said. “We’re going to continue to encourage it.”

China is playing “a very constructive, stabilizing role as the world goes through the worst recession in decades,” he said.

The Treasury “shortly” will finish details of a plan aimed at helping small businesses by making as much as $15 billion of TARP funds available to unlock the secondary market for the government-guaranteed part of Small Business Administration Loans, Geithner said.

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