Treasury Secretary Tim Geithner defended the Obama administration’s bank rescue plan in front of the Congressional Oversight Panel Tuesday. The questions revolved around the potential risks laid at the feet of taxpayers and potential for fraud from such a massive amount of government funding being funneled into the private sector. Furthermore, the Treasury Secretary was confronted with a report by the International Monetary Fund claiming that U.S. financial system could claim $2.7 trillion in losses associated to the credit crisis and in turn will need further recapitalization.
Geithner was quick to refute the report by the IMF saying vaguely that the “vast majority” of U.S. banks have more than the necessary amount of capital to be considered well-capitalized. While he admitted that lending has been slowed because of uncertainty created by the credit crisis and toxic assets, he also said, “For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by $8 to $12.”
In refuting the IMF report, he really did not provide any data to back up his claims of bank’s capitalization. He did however, offer details of what would need to be done in order to make sure that those institutions remain well capitalized, if worse comes to worse. Banks will be forced to reign in lending, which comes as a surprise as I thought one of the main points of the TARP was to restart the lending process, albeit a healthier lending cycle with stricter standards. Which begs the question, is the government’s plan to unclog the credit market to force reduced lending?
Banks had better be very careful how they utilize these funds because even if they want to return the TARP money to the government, they may not be allowed to. Geithner made a point of saying that the government will be the authority on when and how the banks pay back the TARP funds. The criteria are as follows, “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,” Geithner said. Again, the vague language is disheartening, who is to say whether it is “working for the America people for recovery”? In my view, Geithner has prompted more questions than he has answered.
The market seemed content with Geithner’s generalities and statement that banks have enough capital, although he admits that lending has been restrained recently. According to Geithner there is a general sense that the credit market is “thawing” as confidence returns and lenders report better results. Furthermore, he said that the program may have about $135 billion left to loan to the banks should any problems arise. That total assumes about $25 billion of the TARP funds will be paid back in short order.
Banks must be asking themselves, how do you correctly play a game when the rules change nearly every day? You are seeing banks make major decisions in order to repay the TARP as quickly as possible, such as Bank of New York (BK) cutting their dividend and Goldman Sachs’ (GS) large secondary offering in order to raise capital to pay the government back. It would seem only fair to let the banks know what standards they will need to meet in order to repay the TARP. The results of the stress tests (expected May 4th) will shed light on the government’s standards, but will that be the final say in whether a company is ready to pay back the funds? By giving some set of standardized criteria by which they will judge would help these banks allocate their resources more appropriately in order to return to their stand alone status.