Geithner talks tough against Wall Street

Secretary of the Treasury Timothy Geithner has a message for angry taxpayers: Washington has been tougher on Wall Street than you think.

True, the US hasn’t pushed out the chiefs of any big banks that have received government aid, as it did General Motors CEO Rick Wagoner. But it did oust the management of mortgage giants Fannie Mae and Freddie Mac, and insurer AIG, after the federal bailout of those firms, said Secretary Geithner on April 21.

And in general his job is to look out for the interests of the nation as a whole, not fat cat financiers, said Geithner in an appearance before a congressionally-appointed bailout oversight panel. It was perhaps his sharpest defense yet of the administration’s often-criticized bank rescue effort.

“We are not a private investment firm. We are the government of the United States. When we act, we don’t do it for the benefit of those banks,” said Geithner.

Geithner in the hot seat

Geithner’s appearance before the Congressional Oversight Panel was somewhat contentious. It was his first public grilling by the panel’s five members, and their questions reflected much of the populist anger that has built up in recent months over bailout terms.

In addition, the hearing came on the heels of a release by the bailout program’s special inspector general, which concluded that the public-private partnership designed to rid financial institutions of their mortgage-based “toxic assets” is tilted in favor of private investors.

The program’s incentives to lure private money to participate are so lucrative they create “potential unfairness to the taxpayer,” said inspector general Neil Barofsky.

Geithner emphasized that the Treasury and Federal Reserve are in essence still struggling to right a financial system that veered wildly off-track in the final quarter of 2008.

There are some good signs, he noted. The interest rate on interbank overnight loans has fallen considerably since last November, and investors are once again beginning to buy asset-backed securities. Mortgage refinancing has picked up. But the cost of credit is still very high, and business lending is weak.

“The evidence is mixed” as to the effectiveness of the financial stability efforts undertaken by the Bush and Obama administrations, said Geithner.

TARP paybacks accepted? Maybe.

Asked whether the US would allow banks to repay bailout money from the Troubled Asset Relief Program, as Goldman Sachs and J.P. Morgan have indicated they would like to do, Geithner said that under certain conditions “we would welcome it”.

Repaying TARP cash could help indicate which financial institutions are the strongest, said the Treasury chief.

In recent weeks, US officials have sounded leery of such repayments, saying they might also highlight which banks are weakest, perhaps further destabilizing the nation’s financial system. And Geithner did indicate that considerations besides a bank’s individual position would enter into TARP repayment decisions.

“Again, the critical thing we care about is whether the system as a whole has the capacity to support the credit the economy requires,” said Geithner.

'Stress tests' controversial

So-called “stress tests” run on the nation’s biggest banks may soon provide Treasury with a better idea as to how the financial system is doing. Asked whether the results of these tests will be made public -- a controversial issue on Capitol Hill -- Geithner punted, saying that the Federal Reserve and other bank regulators are in the process of deciding what to do.

“They are careful and pragmatic people and they’ll get it right,” said Geithner, in a response that drew a sardonic smile and rolled eyes from at least one commissioner.

The Treasury Secretary indicated that his staff is drawing up proposed regulations that may apply limits on executive compensation to participants in the public-private asset program. And he reiterated that there is no handbook for reestablishing stable financial systems, and that he and other administration officials are doing what they believe is in the nation’s interest, with due regard for US free market traditions.

“Anybody who lived through the fourth quarter of last year should be somewhat chastened … in thinking about how we get that balance right,” said Geithner, who served as head of the Federal Reserve Bank of New York under President Bush.