*lets hope the markets will respond kindly tomorrow
February 25, 2009, 6:07 pm
Treasury Secretary Timothy Geithner, in an interview with PBS’s Jim Lehrer to air Wednesday evening, offered the Obama administration’s strongest declaration yet knocking down talk of nationalizing banks. “I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy,” he said. Mr. Geithner also defined capital injections that would follow the stress tests as “insurance from the government” designed to improve the likelihood of banks attracting private capital.
Following are excerpts from his interview, based on a transcript released by The NewsHour With Jim Lehrer:
On details of the stress tests and capital program announced Wednesday:
“There’s this careful health assessment designed to sort of look forward, make sure these institutions have an additional cushion of resources necessary to withstand a more severe economic environment. But we’re also providing the details on the terms of capital the government will be willing to provide where that’s necessary. Of course, we want these firms to be able to raise capital in the private markets, but we’re providing sort of a backstop in the form of insurance to make sure that again they’re strong enough to get through a more challenging economic environment.”
What stress tests will look for:
“The basic framework is designed again to look at the scale of losses they might face … if we went through a more challenging environment — economic environment. And again so that they can reassure the world and we can be confident that they’ve got that necessary cushion of resources that allow them to lend to support recovery. Because you know right now there’s this cloud of uncertainty over the economy and the financial system because of uncertainty about how deep and how long the recession might be and that’s making the financial system more defensive. People are hoarding capital and liquidity. And the best way to break that and arrest it is to try to ahead of that and get these institutions to look forward at again the range of — they might face as we go forward and critically to make sure they’ve got the cushion of resources. You can think of this as a form of insurance from the government that they can get through that.”
Might some banks fail the stress test?
“It’s not a pass-fail test. … It’s directed to making sure they have the margin of additional resources they need. …. These banks now have very substantial amounts of capital relative to what you would have seen in the U.S. economy going into previous recessions. But we want to make sure again they have that additional cushion, even if things deteriorate further going forward, that they’re going to be able to lend and be in a strong position.”
On the question of nationalization:
“Jim, I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole, these major banking institutions. Now, there may be circumstances in which we have to provide for the benefit of the economy as a whole exceptional levels of support and when we do that as the President said last night we’re going to be very careful that that comes with conditions to make sure our support is helping support lending, that it comes with conditions to make sure these institutions restructure so they are stronger, so that there is accountability, and so that we make it more likely and not less likely that private capital comes in and replaces the government’s capital as soon as that’s possible.”
On whether the government would run banks in exchange for propping them up:
“I think our system works better if these institutions are managed and remain in private hands. But again we’re going to have to make sure that they have the support necessary to get through this and play their critical role and we’re going to do that.”
What are the strings attached to the financial support?
“The conditions are going to be very important so you will see conditions to make sure that the support generates more lending than would have been possible, that the support does not go to play dividends or excess compensation, to make sure that the conditions come with the kind of changes in the structure of the entity necessary to make them stronger going forward, and they provide accountability. And the terms are very important too because not just to protect the taxpayer but because we want the terms designed so that as conditions normalize, our support is expensive and unattractive and therefore these firms will have a big incentive to go out and get private capital to replace the government’s capital as soon as possible, and this will allow us to solve this more quickly than governments that typically address these crises.
“The big lesson of financial crises is that governments tend to underestimate the scale of the problem, they move too slowly, they’re too tentative and gradual, they escalate late, and that makes crises deeper, that causes more damages to businesses and to households and to families, and they’re ultimately more expensive to the taxpayer resulting in higher long-term deficits. So we’re trying to get ahead of this by moving more aggressively to try to resolve this uncertainty, provide capital to the system and help get those credit markets flowing again.”