US Treasury Secretary Timothy Geithner said on Wednesday that the Obama administration was making headway in calming financial markets and would have a program to cleanse toxic assets from banks’ balance sheets up and running by July.
He told the Senate Banking Committee that the US financial system was “starting to heal” after a period of severe trauma, crediting an array of emergency government programs for helping ease a crisis sparked by a surge in mortgage defaults.
But Geithner said the outlook remained fragile and the administration had to be cautious about how it uses the dwindling money left in a US$700 billion financial rescue fund the US Congress approved in October.
“We still face a very challenging economic and financial environment, and we need to be careful to preserve substantial resources and flexibility to deal with future contingencies,” he said.
Geithner estimated there was about US$123.7 billion left in the fund, but he said that reflected a conservative forecast that banks would repay just US$25 billion they have received. He added that Treasury might not finance other programs as fully as it currently plans.
While public attention has largely centered on big banks, including the 19 that underwent “stress tests” to see whether they needed to raise more capital, Geithner drew attention to small banks’ reluctance to seek bailout funds for fear of giving the government a chance to exert control over their business. This, he said, was something that must be dealt with because it could undercut the government’s crisis-fighting efforts.
“We need to try to counteract that, because the insurance this capital provides is not valuable unless people are willing to come take it,” Geithner said.
He said small banks also will get an expanded chance to qualify for taxpayer aid, but offered no insight into how to ease the stigma tied to government aid.
Geithner said these companies would now have six months to make themselves into bank holding companies that would qualify for aid, or to reapply for aid if they are already eligible.
Geithner also said a plan to entice private investors to buy distressed assets from banks by putting up government capital alongside private money — a cornerstone of the administration’s financial rescue plans — would begin operating over the next six weeks.
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