The Unbearable Vagueness of Timothy Geithner

On Friday, the Treasury
Department will share the preliminary results of its so-called "stress
tests" with the nation's troubled banks-but this week Timothy Geithner
missed another opportunity to open up the books and tell the American
public what's really happening with the country's financial system.
When the treasury secretary addressed the five-member panel overseeing
the Troubled Asset Relief Program on Tuesday, he stressed the
administration's commitment to "transparency, accountability, and
oversight." Then he proceeded to deliver a characteristically opaque
assessment of the economic crisis, without providing much in the way of
specific information. He didn't provide much clarity regarding TARP
expenditures, the amount of leverage remaining on the books of
imperiled banks, or the volume of toxic assets hovering like storm
clouds on the financial horizon. Never mind that some of this data was
contained in the 250-page report produced by TARP Inspector General
Neil Barofsky, which was released on April 21.

Barofsky
reported that the TARP now spans 12 federal programs, totaling almost
$3 trillion, or "roughly the equivalent of last year's entire Federal
budget." That figure doesn't count the nearly $10 trillion that the
Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and
the Treasury have put up via various loans, guarantees, and other
backing. Of the $700 billion bailout component approved by Congress
(the rest of the $3 trillion is parceled out through an acronym soup of
other programs), $590.4 billion has been committed, of which $328.6
billion has already been spent.

In his testimony, Geithner highlighted the importance of getting the
securitization markets moving again. And he blamed ongoing uncertainty
over the value of "legacy" (a kinder word for "toxic") assets for the
lack of confidence in the banks, and their well-publicized lending
shyness. He failed to mention the fact that many banks continue to
hoard capital to cover the losses they're not exposing.

Elizabeth Warren, chair of the Congressional Oversight Panel (or
COP) has consistently called for greater transparency and evaluation
methods for TARP money, and a more critical view of the securitization
process that introduced so much risk and leverage into the financial
system. Her concerns go to the heart of the question of whether it's
wise to prop up a system that wasn't working by rewarding companies
with cheap capital and the incentive to maintain the status quo, rather
than restructuring the system outright. Geithner should listen to her.

In his remarks, Geithner noted that "foreclosures are particularly
problematic" for people and banks. However, the federal government has
committed just $75 billion to help struggling home owners, while the
Public Private Investment Program (PPIP) Geithner unveiled in late
March frees up as much as $1 trillion for private investors to cleanse
bank balance sheets of toxic assets.

Meanwhile, Barofsky warns that taxpayers are at considerable risk,
both from fraud and the "sheer size" of the PPIP. Already, his office
has nearly 20 fraud investigations under way and is conducting an audit
of the $45 billion that Bank of America received through the TARP
program.

While Barofsky stayed on point during Tuesday's hearing, Geithner
dodged questions ranging from "How is the $700 billion dollar bailout
working?" to "What's the AIG exit strategy?" to "How is Citigroup
doing?" (He said he couldn't talk about "specific institutions.")

Geithner did tell the panel that "currently, the vast majority of
banks have more capital than they need to be considered well
capitalized by their regulators." Back in the real world, however, the
International Monetary Fund had just raised its estimate of global bank
losses to $4 trillion. And the FDIC had requested two credit line
increases from the Treasury to cover expected US bank failures. (So far
it has had to step in to assist or seize 55 banks since 2008-25 so far
in 2009.)

Plus, bank lending is dropping. According to the Wall Street
Journal's analysis of the latest Treasury report, lending by TARP
recipients is down 23 percent since they first got capital injections
in October. One of the banks posting the greatest lending decline is
JPMorgan Chase, which apparently used government guarantees and backing
for acquisitions (Bear Stearns in March 2008 and Washington Mutual in
September 2008) instead of lending.

Meanwhile, we await results of the infamous stress tests of the
biggest 19 banks, which are supposed to made public on May 4. Geithner
promised that, if needed, he will provide these banks with more capital
in the form of preferred stock purchases. This is another win-win for
the industry and another potential boondoggle for American taxpayers.
If a bank's stress tests are poor, it gains more access to federal
money. If results are good, it's gotten a public-sponsored adrenaline
shot of capital that could have otherwise been used to shore up
mortgages for individual borrowers, repairing the loans underlying the
toxic mortgage-backed securities.

Geithner has said that stabilizing the financial system requires the
government "to take risks." That's a scary notion given that
overzealous risk taking is what got us into this mess. When it comes to
digging us out of this financial fiasco, adding more risk to the
equation doesn't seem like a strategy that will bode well for the
future. Equally troubling is Geithner's tendency to skirt even the most
straightforward questions about Treasury's economic recovery efforts.