Geithner Says, "Thanks, but No Thanks"

Treasury Secretary Timothy Geithner said Tuesday that some financial institutions may be in a position to repay government loans early, providing as much as a $25 billion boost for the federal bank rescue program within a year. However, federal regulators will consider the needs of the economy as a whole — including whether banks are issuing loans — in deciding whether to accept repayment, Geithner told the congressional panel overseeing the Troubled Asset Relief Program. "Our central objective, our obligation, is to ensure that the financial system is stable, and it's able to provide the credit necessary for economic recovery," he testified.

In recent weeks, several banks have announced that they want to repay TARP money as a show of strength to investors — and to avoid government restrictions on executive compensation. But Geithner said that may not be desirable. Financial institutions must not only be stable enough to repay government loans, he said, they must also be able to provide enough credit to support a growing economy. Currently, reports on bank lending show a significant decline in loans for consumers, businesses and industry, though mortgage refinancing has increased.

Geithner said the uncertainty over the value of toxic assets held by banks is impeding their ability to lend. The Treasury Department is in the midst of assessing the banks' health through "stress tests" that he said should reassure investors and get credit flowing. The Treasury secretary said most banks have more capital than they need, but the toxic assets and poor economy have reduced lending. "For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by $8 to $12," he said. Nearly $110 billion of the $700 billion approved by Congress still remains in the TARP fund. Institutions are expected to repay about $25 billion within the next year.

Geithner's testimony came in the wake of a 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," Geithner said in his remarks. "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."