TOPICS > Economy

Geithner: Bank Nationalization Is the ‘Wrong Strategy’

February 25, 2009 at 6:10 PM EST
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Treasury Secretary Timothy Geithner details the Obama administration's economic recovery plan and clarifies how the government plans to address the banking crisis.
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JIM LEHRER: I talked with Secretary Geithner at the Treasury Department in Washington earlier today about his plan to fix the banks.

Mr. Secretary, welcome. Where are you now in implementing the stress test for the banks?

TIMOTHY GEITHNER, Treasury Secretary: Jim, today we launched this careful, more forward-looking assessment of the financial health of the nation’s major banks.

You know, stress-testing is like a core part of what banks do and what supervisors do, but we wanted to bring a more consistent, more conservative, more forward-looking approach so that we help lift this cloud of uncertainty that’s hanging over our financial system that’s getting in the way of credit flowing again.

JIM LEHRER: So you started it today?

TIMOTHY GEITHNER: Yes, the process started today. And we announced today how it’s going to work, what it’s designed to achieve, and, very important, we announced the capital assistance program the government is going to provide to make sure there’s going to be capital available for these institutions as they go forward.

JIM LEHRER: So…

TIMOTHY GEITHNER: So think about it as — so think about it as a two-part thing. There’s this careful health assessment designed to sort of look forward, make sure these institutions have an additional cushion of resources necessary to withstand a more severe economic environment. But we’re also providing the details on the terms of the capital the government will be willing to provide where that’s necessary.

Of course, we want these firms to be able to raise capital in the private markets, but we’re providing sort of a backstop form of insurance to make sure that, again, they’re strong enough to get through a more challenging economic environment.

JIM LEHRER: And that’s what the test is designed to determine, how much government money is needed to keep the bank healthy? Is that it?

TIMOTHY GEITHNER: If any. It’s like an assessment of the scale of resources they may need, additional resources, to make sure, again, they have this additional buffer of strength to get through a more damaging economic environment.

JIM LEHRER: And there are 9,000 banks that are in the United States.

TIMOTHY GEITHNER: There are.

JIM LEHRER: Are you going to test all of them?

TIMOTHY GEITHNER: This program is focused on the nation’s major banks. They account for the vast bulk of assets in the system.

JIM LEHRER: That’s 20, 20 of them?

TIMOTHY GEITHNER: Roughly 20.

JIM LEHRER: Roughly 20.

TIMOTHY GEITHNER: And that’s the right place to start, again, because they play a very central role in how our markets work. And we want the world to be confident that they’re going to be able to play that role on an ongoing basis going forward.

JIM LEHRER: Are there tests — I mean, tests within the tests that you could explain to us that we would understand beyond the technical side? In other words, what is it that you want to know about these banks before you make a decision about whether to help them further or whatever?

TIMOTHY GEITHNER: Right. The basic framework is designed, again, to look at the scale of losses they might face…

JIM LEHRER: Might face?

TIMOTHY GEITHNER: … they might face, if we went through a more challenging environment, economic environment, and, again, so that they can reassure the world and we can be confident that they’ve got that necessary cushion of resources that allow them to lend, to support recovery.

Because, you know, right now, there’s this cloud of uncertainty over the economy and the financial system because of uncertainty about how deep and how long the recession might be, and that’s making the financial system more defensive. People are hoarding capital and liquidity.

And the best way to break that and arrest it is to try to get ahead of that and get these institutions to look forward at, again, the range of potentials they might face as we go forward and, critically, to make sure they’ve got the cushion of resources — you can think of it as a form of insurance from the government — that they can get through that.

Credit, capital part of plan

Timothy Geithner
Treasury Secretary
So we're trying to just make -- make the banking system stronger, but we'll get credit flowing again directly to those parts of the market that are, again, so central to small-business lending and to households.

JIM LEHRER: Is it possible that one of these banks might fail the test all together, that you might conclude, "Hey, wait a minute, this is not worth -- this bank is not worth propping up?"

TIMOTHY GEITHNER: It's not a pass-fail test.

JIM LEHRER: It's not?

TIMOTHY GEITHNER: And, again, it's directed at making sure they have the margin of additional resources they need to be able...

JIM LEHRER: But they're OK now, you think?

TIMOTHY GEITHNER: Yes. Yes, these banks now have very substantial amounts of capital relative to what you would have seen in the U.S. economy going into previous recessions.

But what we want to make sure is, again, they have that additional cushion, even if things deteriorate further going forward, that they're going to be able to lend and be in a strong position. And that's what's critical, because right now the financial system is working against recovery.

And for this very powerful economic Recovery and Reinvestment Act that the Congress passed just recently to be fully effective, you need the financial system stronger so that, again, the businesses that might benefit from the program of investment incentives that the recovery act passes are able to borrow money to put people to work and make those investments so critical to our future. That's why these things are so important to go together.

JIM LEHRER: But that's the key to your assessment, is it not, as to whether or not these banks are going to be in a position to lend money, right?

TIMOTHY GEITHNER: It's really to insure them...

JIM LEHRER: If they can't...

TIMOTHY GEITHNER: ... make sure they have the additional cushion of resource necessary they could be comfortable lending and providing the credit necessary for recovery. That's the central goal and central objective.

But we're not just doing this. The program that we've laid out is not just trying to make sure that the banks can lend and support credit and that our resources are devoted to that objective, but we need to do some very substantial things to try to get the credit markets going again, too, because they're essentially frozen now, and that makes it harder for a small business, for a family that wants to buy a car or finance a college education or buy a house to be able to do so on reasonable terms.

So we're trying to just make -- make the banking system stronger, but we'll get credit flowing again directly to those parts of the market that are, again, so central to small-business lending and to households.

JIM LEHRER: But these are parts of the credit market system beyond the banks, you're saying?

TIMOTHY GEITHNER: That's right. Yes, we have this complicated system that relies not just on banks, but on the credit markets, the securitization markets. And those markets are, frankly, badly damaged. And to get them working again, working with the Fed, we're going to provide a substantial level of financing to help open them up again.

JIM LEHRER: All right. Now, back to the banks for a moment. Much has been said and discussed about nationalizing the banks. Fit that word into what we've just been talking about.

TIMOTHY GEITHNER: Jim, I think that's the wrong strategy for the country, and I don't think it's a necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole, these major banking institutions.

Now, there may be circumstances in which we have to provide, for the benefit of the economy as a whole, exceptional levels of support. And when we do that, as the president said last night, we're going to be very careful that that comes with conditions to make sure our support is helping support lending, that it comes with conditions to make sure these institutions restructure so they are stronger, so that there is accountability, and so that we make it more likely, not less likely, that private capital comes in and replaces the government's capital as soon as that's possible.

JIM LEHRER: But the government is not going to be running these banks in exchange for propping them up financially, if it becomes necessary?

TIMOTHY GEITHNER: I think our system works better if these institutions are managed and remain in private hands. But, again, we're going to have to make sure that they have the support necessary to get through this and plays a critical role, and we're going to do that.

Federal support has conditions

Timothy Geithner
Treasury Secretary
You will see conditions to make sure that the support generates more lending than what would have been possible, that the support does not go to pay dividends or excess compensation...

JIM LEHRER: But the president made a big point last night that there are strings attached to this.

TIMOTHY GEITHNER: Absolutely.

JIM LEHRER: What are the strings?

TIMOTHY GEITHNER: The conditions are going to be very important. So you're going to -- you will see conditions to make sure that the support generates more lending than what would have been possible, that the support does not go to pay dividends or excess compensation, to make sure that the conditions come with the kind of changes in the structure of the entity necessary to make them stronger going forward, and they provide accountability.

And the terms are very important, too, because not just to protect the taxpayer, but because we want the terms designed so that, as conditions normalize, our support is expensive and unattractive, and therefore these firms will have a big incentive to go out and get private capital to replace the government's capital as soon as possible.

And this will allow us to solve this more quickly than governments have typically addressed these crises. You know, the big lesson of financial crises, that governments tend to underestimate the scales of problem, they move too slowly, they're too tentative and gradual, they escalate late, and that makes crises deeper, they cause more damage to businesses and to households and to families, and they're ultimately more expensive to the taxpayer, resulting in higher long-term deficits.

So we're trying to get ahead of this by moving more aggressively to try to resolve this uncertainty, provide capital to the system, and help get those credit markets flowing again.

JIM LEHRER: But here, again, using -- forget the word "nationalization." What does the government get in exchange from the banks for what they're doing? Do they get stock? Do they get ownership?

TIMOTHY GEITHNER: Yes, the government gets an ownership stake in the company proportionate to the level of assistance we're providing.

JIM LEHRER: Just like anybody else would if they bought stock, right?

TIMOTHY GEITHNER: Just like anybody else would if they get stock. So the government is getting a return on these investments to help compensate for the risk we're taking.

But the ultimate test, of course, is what we're doing to help solve our crisis and get recovery back. That is the ultimate return of these investments for the taxpayer.

It's not just the financial terms that are conditions come with, ownership in the companies at whatever level is necessary with whatever terms. It's the benefit to the overall economy that you see when you see confidence return and credit start to flow again.

JIM LEHRER: So when that happens, when confidence returns and money starts flowing again, what happens to the stock that is now owned by the federal government?

TIMOTHY GEITHNER: Well, then they will have -- they will have -- they will be able to repay that at appropriate benefit to the country as a whole and replace that stock with stock from private investors.

JIM LEHRER: What is your explanation for the -- for want of a better term -- the kind of thud that happened on Wall Street when you first announced this plan a couple of weeks ago? What is it that Wall Street was reacting to in such a negative way?

TIMOTHY GEITHNER: Well, I think it's important to see this happened against the backdrop of a deepening recession here and around the world, and that is the fundamental cause of the uncertainty you're seeing in markets everywhere and the fragile confidence we see generally.

And people want to know that we're going to move quickly to address this, and they want to see what we're going to do, and they want to see the details of our proposals and our strategies.

And what we did, Jim, was to lay out early the broad principles and objectives that would guide our approach, because we wanted people to understand what was going to change and that we were going to bring a comprehensive approach, try to move more aggressively, and that we would follow that broad framework with a detailed set of programs in each of these areas.

So week one, we moved -- the president announced a comprehensive strategy on the housing crisis, as we said we would. We're now in week two. We've laid out the terms of this program to provide a form of capital insurance, a buffer against a more adverse downturn in the United States.

And we're going to move forward relatively quickly to lay out these very large, aggressive, dramatic direct lending programs to get credit markets flowing again.

Changes will take time

Timothy Geithner
Treasury Secretary
We're going to make sure we do enough soon enough to resolve it, because the cost to the economy of stretching it out and taking a more tentative approach will ultimately cause much more damage to the economy.

JIM LEHRER: So you expect now a positive reaction to what you've just laid out, correct?

TIMOTHY GEITHNER: Well, this is going to take time to work, Jim. It's going to take time to work. And...

JIM LEHRER: The plan itself, though, you don't think will be greeted in a positive way?

TIMOTHY GEITHNER: Well, you know, we're doing something that is going to be tough, and it's going to take some time to work, and you're not going to see traction immediately.

But the basic judgment that the president has made is, the necessary thing for the country is to try to move aggressively, not just to get a recovery investment plan in place working with resources and incentives, moving very quickly, but that we move aggressively to try to clean up and strengthen our financial system, as we move on housing.

But that process is going to take some time. And, you know, the test of the effect on confidence is going to come over time as the pace of decline in growth slows and as credit starts to flow again.

JIM LEHRER: Is the confidence deficit -- let's put it in all kinds of weird terms -- but is it the confidence deficit that bothers you the most that is there now among those who must invest in banks? In other words, that's the people who are not really...

TIMOTHY GEITHNER: Yes, that's what we have to fix.

JIM LEHRER: ... get this yet?

TIMOTHY GEITHNER: That's what we have to fix, because right now -- this has been true for the last 18 months, 12 months, 6 months, 3 months, 1 month, it's true today -- right now, there is this cloud of uncertainty over the financial system that's making it hard for banks to raise equity because of concern about the losses ahead.

And the only way to arrest that is to try to bring a more forward-looking, realistic, honest approach to assessing relative strength and weakness, and to make sure, again, that there's going to be resources to support them with this additional insurance or buffer for confidence. That's the only way to do it.

The alternative strategy would be to just say, "Let's hope it gets better. Let's let that uncertainty persist." And that would feel easier to some people, but it would be the wrong strategy, and it would leave a system that's still being defensive and pulling back on credit, working against the stimulus plan and recovery, and it will leave us with a deeper, longer recession.

JIM LEHRER: Do you have to also fight at this point the fact, as you mentioned, the first go at this in the other administration didn't work, and there is a lack of -- there's a skepticism there. What is it in general that you can say, as the secretary, this secretary of the treasury, "Hey, we've got a better idea here," and what is -- and give some level of your own confidence that these things are actually going to work?

TIMOTHY GEITHNER: They're absolutely going to work, Jim. And we're going to keep at it.

JIM LEHRER: Absolutely going to work?

TIMOTHY GEITHNER: Absolutely. And we're going to keep at it until we fix it. And we're going to make sure we do enough soon enough to resolve it, because the cost to the economy of stretching it out and taking a more tentative approach will ultimately cause much more damage to the economy.

So we're going to keep at it, and we're going to move on all fronts comprehensively to address all the underlying sources of weakness in our financial system and try to begin, bring, you know, a more aggressive, frankly, forceful force to do it.

And our judgment is -- it's going to be hard -- our judgment is that's the only way to get the system strong enough soon enough that you get recovery -- this economy back on track more quickly.

JIM LEHRER: So I take it, without question, that you're 100 percent in agreement with what the president said last night, that it takes all of these things to work?

TIMOTHY GEITHNER: Absolutely, right.

Imperative to move 'aggressively'

Timothy Geithner
Treasury Secretary
Nothing we do for banks is for banks. It's all for the benefit of the people that depend on banks -- the businesses, the families, the students -- that require credit in order to do things that are important to their future.

JIM LEHRER: It's not just this plan or the banking plan or the housing plan or the stimulus package. They all have to work?

TIMOTHY GEITHNER: Right. The president's economic agenda and the American economic imperative is to move very aggressively to get people back to work, support private investment, to get credit flowing again, to try to arrest this damaging housing crisis.

At the same time, we're beginning to make these critical long-term investments in reducing health care costs, in reducing our dependence on foreign oil, improving energy efficiency, in helping improve the basic outcomes our education system provides, and at the same time -- and this is what's terrifically hard, but important -- that we make people understand that, when we get recovery firmly established, we're going to bring our fiscal position back to a more sustainable position, to bring our resources and expenditures more into balance, so people know that we will be living within our means.

But that ultimate objective depends on moving very aggressively on all these fronts to try to arrest this crisis we face in the economy that's already caused so much damage. And what we're not prepared to do is to stretch this out, to be tentative, to do too little because it feels easier. We're not prepared to do that, because ultimately we think that will be more costly.

JIM LEHRER: So you're going to do it big and you're going to do it soon?

TIMOTHY GEITHNER: We are. And it's going to be hard, and it's going to be tough, but there's no other way to do it.

JIM LEHRER: Finally, Mr. Secretary, on the banks, is the banking -- are the bankers and the banking industry, have they gotten your message now? Do they realize there's a new world here for them?

TIMOTHY GEITHNER: They will, Jim. I hope they do. I want you to know that I spent my life in public service.

I am deeply offended by the quality of judgments we've seen in the leadership of our nation's financial institutions. They've caused a very damaging loss of confidence. Financial systems require confidence; they're built on confidence. They've created a deep hole of public distrust and anger, which is enormously damaging.

And they have a huge obligation to try to restore that basic trust and confidence. And we're going to make sure they do it by making sure that our assistance comes with conditions that will help restore confidence in the American people, that we're going to do things that are going to help get credit flowing again.

Nothing we do for banks is for banks. It's all for the benefit of the people that depend on banks -- the businesses, the families, the students -- that require credit in order to do things that are important to their future.

JIM LEHRER: Mr. Secretary, thank you very much.

TIMOTHY GEITHNER: Thank you, Jim.