Financial Times (Link) - Krishna Guha (January 21, 2009)
The Obama administration will take action on a “dramatic scale” to revive credit markets and strengthen banks so they are able to lend, Treasury secretary- designate Tim Geithner said on Wednesday. Testifying to the Senate committee considering his nomination, Mr Geithner said the Obama team was working on a “comprehensive plan” to deal with the banks and hoped to unveil it soon. “We’re going to have to do more to make sure that the institutions at the core of our system are strong enough that they can lend.”
He refused to offer any insight into how this might work, in spite of pressure from the markets, saying: “We have seen the costs in terms of uncertainty created by tentative signals not followed up with clear actions.” His remarks came as he repeatedly apologised for underpaying taxes in the early 2000s – a revelation that had delayed his confirmation hearing. The vast majority of members of the committee appeared willing to accept his apology.
He added: “We are also going to have to provide much more substantial direct support to credit markets” in order to “get risk premia down, interest rates down and get that basic mechanism of credit markets going again.” This suggests the Obama team will collaborate with the Federal Reserve to provide finance for securitised markets on a much expanded scale, probably building on the existing model of the Term Asset-backed Securities Lending Facility.
This combines equity from the Treasury with loans from the Fed to provide low-cost funding for investors willing to purchase new securities that bundle up the cash flow from consumer loans. New models could also be deployed, possibly with some element of government guarantees on types of lending.
Mr Geithner cited small business funding, student loans, car finance and commercial and residential real estate loans as priority areas.
Asked about the idea of creating a so-called “bad bank” to take on the toxic assets in the banking system, he said “good bank, bad bank-type solutions have been present at the solution to most financial crises around the world”.
The government would not chose between helping the banks and restoring the flow of credit through securitised financial markets. “You have to do both,” he said. He refused to give any flavour of the approach towards the banking sector, saying only that “we have been carefully reviewing a broad range of proposals.” But he said: “It is very important that we look carefully at whether they’re going to be as effective in this context as they have been in some past cases”. “It is possible that something like that will be part of the solution going forward,” he said. But bad bank models were “enormously complicated to get right”.
Some analysts interpreted this as suggesting that the Obama administration had not yet settled on this model as the linchpin of its approach to strengthen and clean up the banking sector.
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