WASHINGTON — U.S. banks are still broken despite all their bailout billions, Treasury Secretary Timothy Geithner told impatient rescue overseers Tuesday as they pressed him on when things will get better and how much it will cost. A bleak new report estimated U.S. banks and other financial institutions could lose a stunning US$2.7 trillion in all.
How well is the mostly spent $700-billion federal bailout working? “To date, frankly, the evidence is mixed,” Geithner told a congressionally appointed oversight panel.
Confidence in the program is wearing thin on Capitol Hill. With lawmakers back from their spring break, even bailout supporters are skeptical that Congress — weary of bankers’ bonuses and still-scarce credit — would approve additional bank rescue money if requested.
Geithner’s testimony signalled that the administration was not preparing to ask.
Wall Street was cheered by Geithner’s assessment that “the vast majority” of banks could be considered well-capitalized. Bank stocks had slid on Monday but bounced back on Tuesday.
Still, the government’s effort to stabilize the financial sector and unclog credit markets has come under heavy scrutiny. Officials must do a better job in carrying out and explaining its efforts to shore up the financial system, the head of the oversight panel told Geithner.
“The sense of fear and uncertainty has not gone away, but it’s been joined by a new sense of anger and frustration,” said Elizabeth Warren, who is also a Harvard University law professor. “People are angry that, even if they have consistently paid their bills on time and never missed a payment, their TARP-assisted banks are unilaterally raising their interest rates or slashing their credit lines.”
Of the $700 billion authorized by Congress for the Troubled Asset Relief Program last October, Geithner said about $110 billion is left. With about $25 billion expected to be repaid this year, the total available is about $135 billion.
Some banks are manoeuvring to pay back some of the bailout money, unhappy with the strings attached. But Geithner said that doesn’t mean the government would necessarily accept the repayments.
These questions have to be first answered, he said: “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?” A series of “stress tests” are being administered to banks by the administration to help judge their financial health.
The treasury secretary said that while most banks have more than enough capital to satisfy federal regulators, a combination of factors — including worries about the broader economy and the crushing weight on their balance sheets of bad loans and other toxic securities — was feeding “uncertainty about the health of individual banks.”
That, in turn, “has sharply reduced lending across the financial system” and was holding back economic recovery, Geithner said.
Geithner testified on a day that saw a spate of reports suggesting the economic downturn is far from over and is growing ever more expensive:
— The International Monetary Fund said U.S. financial institutions could suffer $2.7 trillion in losses from the global credit crisis through 2010, nearly double the IMF projection just six months ago, and that the global total could surpass $4 trillion. The IMF said governments have made progress getting extra money into the banking system, but must do more.
— General Motors Corp. could get as much as $5 billion more in federal loans, while Chrysler LLC could get $500 million as they race against government deadlines to restructure, according to the report of a special government inspector general. Chrysler has until April 30 while GM has until June 1. GM already has received $13.4 billion in government loans; Chrysler $4 billion.
— An inspector general assigned to the bailout program concluded that a private-public partnership designed to buy up bad assets is tilted in favour of private investors and creates “potential unfairness to the taxpayer.”
— The top 10 recipients of the $700 billion bailout spent about $9.5 million on federal lobbying during the first three months of 2009, a government report showed. The biggest spender was GM, devoting $2.8 million to lobbying in the first three months of 2009. Failed insurance giant American International Group Inc. and banks Citigroup Inc. and JPMorgan Chase & Co. each reported spending more than $1 million to influence the government.
Geithner was asked by panel member Rep. Jeb Hensarling of Texas, one of two Republicans on the five-member panel, “What is the exit strategy from AIG?”
The treasury secretary could not provide an answer, saying “very difficult judgments” were involved and that the government still lacked the express authority to fully manage the company, even though roughly $180 billion in taxpayer support has been pledged to the giant insurer, and the government effectively owns 80 per cent of the company stock.
Geithner noted Obama administration efforts to gain legislative authority to more closely regulate sprawling financial institutions like AIG that are not banks.
Former Republican Sen. John Sununu of New Hampshire told Geithner that uncertainty over the bank stress tests and the prospect that the government might take a more active shareholder role in bailed-out banks was leaving “more questions unanswered than answered.”
Geithner insisted steps taken by the administration were helping to cushion the economic pain from what he called a continuing “very severe financial crisis, the worst in generations.”
Despite government help to banks, “the cost of credit is still very high. Reports on bank lending show significant declines in lending for consumer loans, for commercial and industrial loans, although mortgage refinancings have picked up considerably,” he said.
Meanwhile, Nobel Prize-winning economist Joseph Stiglitz said stricter rules on the use of bailout money is needed as well as a signal that there is no more money in the pipeline.
“I think it is imperative that Congress narrow the breadth of this new corporate welfare state,” he told the Joint Economic Committee at a separate hearing. “It is people that we should be protecting, not corporations.”
Senator Chuck Schumer (D-N.Y.) said giving banks more money is “out of the question” right now. In an interview with The Associated Press, Schumer said he supports converting future TARP loans for banks into government-owned shares in the companies. He acknowledged that such an approach is less than ideal. “There’s legitimate worry that political, instead of economic decisions are made,” Schumer said.
Associated Press Writers Jim Kuhnhenn, Martin Crutsinger, Julie Hirschfeld Davis and Anne Flaherty in Washington and Tom Krisher in Detroit contributed to this report.