Timothy Geithner pink 88 248.
(photo credit: )
Treasury Secretary Timothy Geithner on Tuesday defended the bank rescue program devised by the Obama administration as the International Monetary Fund predicted US financial institutions could lose $2.7 trillion from the global credit crisis.
Geithner, testifying before the rescue plan's Congressional Oversight Panel, faced several questions about how the Treasury is using the $700 billion Troubled Asset Relief Program and how it intends to help rid financial institutions of their bad loans and securities.
His testimony came in the wake of a watchdog agency report that warned Obama administration initiatives could increasingly expose taxpayers to losses and make the government more vulnerable to fraud.
A special inspector general assigned to the bailout program concluded in a 250-page quarterly report to Congress that a private-public partnership designed to buy up bad assets is tilted in favor of private investors and creates "potential unfairness to the taxpayer."
Geithner said the new plan "strikes the right balance" by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.
"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," he said. "Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."
Geithner said "the vast majority of banks" have more capital than they need to be considered well-capitalized. But he said the economic crisis and the bad assets have created uncertainty about the health of individual banks and reduced lending across the system.
"For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by $8 to $12," Geithner said.
While credit conditions have improved in the past few months, "reports on bank lending show significant declines in consumer loans, including credit-card loans and commercial and industrial loans," he said.
In a letter Tuesday to oversight panel chairwoman Elizabeth Warren, Geithner said $109.6b. in resources remain in the rescue fund. Officials expect the fund will be boosted over the next year by about $25b. as some institutions pay back money they have received.
But under questioning from panel members, Geithner said even if banks want to pay back the money, that does not mean the government would necessarily accept the payment.
"Ultimately we have to look at two things: One, is do the institutions themselves have enough capital to be able to lend, and does the system as a whole, is it working for the American people for recovery," he said.