By Neil Irwin
Washington Post Staff Writer
Wednesday, February 11, 2009
In rolling out his overhaul of the financial rescue yesterday, Treasury Secretary Timothy F. Geithner lambasted the Bush administration's response to the crisis over the past year.
"Policy was always behind the curve, always chasing the escalating crisis," Geithner said, criticizing his predecessor, Henry M. Paulson Jr. "The emergency actions meant to provide confidence and reassurance too often added to public anxiety and to investor uncertainty."
But yesterday, Geithner seemed to be following the Hank Paulson playbook, according to a wide consensus on Wall Street, in Washington, and beyond.
Many of the specific policies Geithner offered were tweaks, adjustments or continuations of Paulson's strategy. And the more novel elements of the Geithner plan -- the creation of an entity with public and private money to buy up bad assets from banks, a "stress test" of 20 or so of the nation's largest banks, and $50 billion to prevent foreclosures -- came with so few details about how they would work that it contributed to the very public anxiety and investor uncertainty that Geithner criticized.
"The markets are looking for real clarity," said Desmond Lachman, a resident fellow at the American Enterprise Institute, "and Geithner is very good at critiquing what went wrong in the last year, but just seems to be perpetuating it."
Some elements of the Geithner plan -- the ones that were unveiled with the most detail -- are direct continuations of rescue efforts undertaken by Paulson.
The Treasury and Federal Reserve, for example, announced in November $200 billion to jump-start lending for a wide range of consumer loans. Geithner played a major role in designing that program in his former job as president of the New York Fed, as did Steven Shafran, a Paulson aide whom Geithner has retained at Treasury. That program is being enlarged to as much as $1 trillion, and will be expanded to support commercial real estate and residential mortgage lending.
That expansion came as no surprise to Treasury-watchers, however. In announcing the original program, Paulson said in a speech, "The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes."
The newer components of Geithner's bailout program have yet to be fleshed out.
Among them is the creation of a public-private fund to buy up distressed assets on the balance sheets of banks so they have the freedom to resume lending, which in turn can help stimulate the wider economy.
Geithner intends to solve the nettlesome question of how to price them by having private investors put up capital and decide what to buy and for how much. But Treasury officials deflected most questions on how the new fund would be structured, saying that they were laying out only a broad framework and that much work is left to be done.
Geithner also pledged that bank regulators would begin conducting stress tests of banks with more than $100 billion in assets to figure out what would happen to their financial positions if the economy keeps deteriorating rapidly. The results of that review would determine which banks would be pushed to raise new capital from the private markets, or, if they are unable, from the government.
But if it's the latter, on what terms?
Geithner and his staff have given few specifics. And investors have been reluctant to invest private money in banks, in part because of uncertainty about whether the government will wipe them out in the future.
"He says we need to stress-test the banks, but they're already in the middle of the biggest stress test in decades," said Brian Bethune, chief U.S. financial economist at Global Insight. "The question is: Are they able to survive the current cycle, and if they need government help, what will the conditions be?"
One of the main criticisms of Paulson's bailout effort was that it was difficult for the public to discern how the funds were being spent. Geithner pledged to make the financial rescue more transparent, establishing a Web site, http://FinancialStability.gov, which will publish detailed information about what banks are doing with the government investments they have received.
That added transparency does not necessarily mean that banks will ramp up lending. "There's a lot of talk and poetic rhetoric about there being transparency and strings attached, but I'm not sure the banking system even knows how to lend in the way we need it to now," said Lynn Tilton, chief executive of Patriarch Partners, a private-equity firm.
The proper way to measure success, Geithner said, is by looking at how much banks are lending relative to how much they would have lent had they not received the money.
"One problem you run into is that money is fungible," said James Angel, a finance professor at Georgetown University. "Dollars can be substituted left, right and sideways. If you say we gave you a dollar, did you use that for a new loan? It's impossible to trace. You can come up with all the new reports you want, it doesn't change that reality."
Another common complaint from lawmakers about the previous bailout was the absence of aid for distressed homeowners. Geithner pledged to deploy $50 billion from the Troubled Assets Relief Program to help prevent mortgage foreclosures, part of an overall plan to support housing that the Obama administration plans to announce in the "next few weeks."
On Dec. 1, Paulson said "we are continuing to examine potential foreclosure mitigation ideas that may be an appropriate and effective use of TARP resources." More than two months later, Geithner yesterday offered a more solid commitment to execute such a plan. But he still offered no more specifics on how it would work.