TOPICS > Economy

Geithner Revamps Bank Rescue Plan

February 10, 2009 at 6:00 PM EDT
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The Treasury Department outlined an overhaul of the financial rescue plan Tuesday as the stimulus bill moved forward. Economists and analysts react to the developments.
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JIM LEHRER: There were two major moves today on the effort to boost the economy. The Treasury Department announced a revised plan to aid banks and other financial institutions, and a stimulus bill cleared the Senate.

Judy Woodruff has our lead story report.

JUDY WOODRUFF: In the ornate Cash Room of the Treasury Department, Secretary Tim Geithner unveiled the revamped plan to tackle the still-unfolding crisis.

TIMOTHY GEITHNER, Treasury secretary: This is a dangerous dynamic, and we need to arrest it. It’s essential that every American understand that the battle for economic recovery must be fought on two fronts. We have to jump-start job creation and private investment, and we must get credit flowing again to businesses and to families.

JUDY WOODRUFF: The existing $700 billion rescue effort for banks would continue, but some of that money would go to attract even larger sums from the Federal Reserve and the private sector.

One part would be a joint Treasury-Fed program, encouraging investors to buy bad mortgage-related assets from banks. Geithner said the initial cost would be $250 billion to $500 billion.

Another part would expand an existing Fed program to spark the market for commercial, student, auto and credit card loans. It could have a price tag of a trillion dollars.

Geithner warned the road ahead won’t be easy or cheap.

TIMOTHY GEITHNER: I want to be candid. This strategy will cost money, it will involve risk, and it will take time. But as costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families and for businesses and for our nation.

JUDY WOODRUFF: Later, Geithner pressed his case at the Capitol where senators said they need more information on what’s in the works.

SEN. RICHARD SHELBY, R-Ala.: It appears here that your plan is offering only at this point a conceptual plan, with many details yet to be filled in. It’s hard to test the merits of a plan that is not spelled out, as you well know.

TIMOTHY GEITHNER: Senator, you’re right that what we did today was lay out the broad architecture of the programs we think are necessary to help solve this thing. And we’re going to be very careful to flesh out the details and design of these things in ways that protect the taxpayer and get the maximum potential benefit for the resources we’re going to spend.

JUDY WOODRUFF: At a separate House hearing, Federal Reserve Board Chairman Ben Bernanke insisted the Fed’s efforts have already helped, and he defended the new plan.

REP. CAROLYN MALONEY, D-N.Y.: Obviously, the bank system is the wheel that has to get our economy going, yet we hear that part of the new program is there’s going to be a business and consumer loan program coming from the Federal Reserve. Why is that coming from the Federal Reserve? Shouldn’t that be coming from our financial institutions? Why can’t we get them working properly?

BEN BERNANKE, Federal Reserve chairman: Congresswoman, one very important fact about the American financial system is that only about half the loans in normal times come through banks. The other half goes through other kinds of markets like securitization markets.

And all the programs I described today are about getting credit card lending, auto loans, student loans, commercial paper loans, mortgage loans, commercial mortgage-backed securities, all those things going again. That program will help get credit flowing outside the banks, so that’s an important part, because that’s about half of our credit system.

Senate approves stimulus bill

Harry Reid
Senate Majority Leader
The bill that was just voted on here with 60 votes has $840 billion in it. So we're going to work at a number that satisfies the House and the Senate.

JUDY WOODRUFF: On Wall Street, doubts about what the Fed and the Treasury plan to do sent stocks tumbling in their worst day in weeks. The Dow Jones Industrial Average fell 382 points to close below 7,889, and the Nasdaq was off nearly 64 points to close at 1,524.

But even as the markets panned the rescue plan, the Senate approved an economic stimulus bill.

SEN. MARK UDALL, D-Colo.: Are there any senators wishing to vote or to change their votes? If not, on this, the ayes are 61, the nays are 37. H.R. 1 as amended passes.

JUDY WOODRUFF: Just three Republicans joined the Democrats in supporting the bill. The measure would cost $838 billion, about $20 billion more than the House version.

But the two bills differ broadly in the particulars. The Senate included an additional $110 billion in tax cuts; it also removed $16 billion for school construction and repairs; and it cut aid to states by half to about $40 billion.

Senate Majority Leader Harry Reid said the challenge is to craft a compromise and keep enough support to beat back Republican opposition.

SEN. HARRY REID, D-Nev., Senate majority leader: Well, we started this, as you know, the bill that was just voted on here with 60 votes has $840 billion in it. So we're going to work at a number that satisfies the House and the Senate. And when I say the Senate, of course, we have the three Republicans that we are working with all the time.

JUDY WOODRUFF: But Arizona's Jon Kyl and most other Senate Republicans made clear they are standing fast against anything like the bill that passed today.

SEN. JON KYL, R-Ariz.: There's been a false choice presented that Republicans need to accept this bill as the only choice. In other words, it's either do nothing or accept this bill. Of course, that's a false choice. Republicans believe we need to do a lot but that this legislation needs to be changed a lot.

JUDY WOODRUFF: On the other side of the Capitol, House Speaker Nancy Pelosi said she would prefer a final product that more closely resembled the House version.

REP. NANCY PELOSI, D-Calif., speaker of the House: Any one of us can write the bill that we like better. Isn't that the way it always is? But we build consensus. We're proud of the product that we put forth.

And it has a strategic vision, a strategic mission, so all the parts of it have to come together in a way that keeps the promise that we are making of bold, swift action to create jobs.

JUDY WOODRUFF: But House Minority Leader John Boehner contended neither of the bills moving through Congress will meet that goal.

REP. JOHN BOEHNER, R-Ohio, House minority leader: But the bills that we see moving through the House and Senate continue to produce very few jobs. And I thought the goal, according to the president, was to create and preserve jobs in America.

Our idea is produce twice as many jobs at half the price. So we want to continue to work with the president to get this package enacted and get it enacted soon, but we have to do this prudently.

JUDY WOODRUFF: The fundamental disagreement between the two houses over the final shape of the stimulus bill will play out in a joint conference committee. And there's pressure to get that work done as soon as possible.

President Obama had said he wanted a bill ready for his signature by Presidents Day, next Monday, but that deadline may be slipping.

The president took his case to the public again today, fresh off his first primetime news conference. He flew to Florida to appear at a town hall-style meeting in Fort Myers. And he was joined by the state's Republican governor, Charlie Crist, who backed John McCain in the presidential election.

GOV. CHARLIE CRIST, R-Fla.: This issue of helping our country is about helping our country. This is not about partisan politics. This is about rising above that, helping America and reigniting our economy.

U.S. PRESIDENT BARACK OBAMA: And Governor Crist shares my conviction that creating jobs and turning this economy around is a mission that transcends party. When the town is burning, you don't check party labels. Everybody needs to grab a hose. And that's what Charlie Crist is doing right here today.

JUDY WOODRUFF: A little later, Mr. Obama interrupted the question-and-answer session to report the news from Washington.

BARACK OBAMA: I just wanted to announce that the Senate just passed our recovery and reinvestment plan. That's good. So that's good news.

JUDY WOODRUFF: The people of Fort Myers could use some good news. They've had the country's highest mortgage foreclosure rate and unemployment that is 3 percent higher than the national average. Their economic distress was evident in today's questions, including this from a woman who said her family is living in a car.

HENRIETTA HUGHES: The housing authority has two years' waiting lists. And we need something more than the vehicle and the parks to go to. We need our own kitchen and our own bathroom. Please help.

BARACK OBAMA: OK, Ms. Hughes, well, we're going to do everything we can to help you, but there are a lot of people like you. We're going to do everything we can.

JUDY WOODRUFF: The president told the audience he will unveil an overall housing strategy in the weeks ahead.

Later, he returned to Washington to meet with conservative House Democrats. It was his latest attempt to win support for a final version of the stimulus bill when it comes to a vote.

In the meantime, Treasury Secretary Geithner promised there will be more on the broader financial rescue effort in the days ahead.

JIM LEHRER: Gwen Ifill takes it from there.

Will the rescue plan work?

Alice Rivlin
Former White House Budget Director
His plan is bold. It's comprehensive. It isn't very detailed. But I think it is a courageous try to use a lot of different tools to fix the problem. And I think it's likely to have success, but none of us can tell.

GWEN IFILL: The moment Secretary Geithner's plan landed today, Washington and Wall Street began trying to make sense of it. The basic question: Will it work?

We get an assessment from four prominent voices. Paul Krugman was awarded the Nobel Prize for Economics last year. He's a professor at Princeton University and a columnist for the New York Times.

Ken Rogoff is a former chief economist at the International Monetary Fund. He's now a professor at Harvard University.

Alice Rivlin has served as vice chair of the Federal Reserve and was White House budget director during the Clinton administration. She's now with the Brookings Institution.

And Donald Marron is a longtime leader in Wall Street finance. He's now the founder and chairman of Lightyear Capital, a private equity firm that invests exclusively in the financial services industry.

Welcome to you all.

Secretary Geithner said today, Ms. Rivlin, that the American people have lost faith in the banks, in the financial system, and in government's ability to fix it. Was his plan today the turnaround?

ALICE RIVLIN, former White House budget director: I'm afraid he's right about the problem: There is a lot of disappointment with the banks and anger out there.

His plan is bold. It's comprehensive. It isn't very detailed. But I think it is a courageous try to use a lot of different tools to fix the problem. And I think it's likely to have success, but none of us can tell.

The one thing we do know is we need a functioning banking system and we need credit flowing again, because unless we have that, nothing else matters. The stimulus plan will create jobs, but unless banks give credit and people are able to get car loans and consumer loans and so forth, the economy just won't function.

GWEN IFILL: Paul Krugman, a courageous try?

PAUL KRUGMAN, columnist, New York Times: I wouldn't have put it quite that way. I mean, there was nothing -- there's a possible interpretation of the plan which makes it a good plan. But the truth is it was very vague.

And a lot of people -- as you can see, Wall Street was disappointed. And a lot of people, myself included, were disappointed that it wasn't a clear path forward.

Above all, there was no clear answer to the question of what happens if you find out, as they probably will, that a number of major banks are basically not solvent. So a key element to the plan which I like is the idea of a stress test. We're going to go out and have government auditors go and look at the books of major banks and really see, you know, what have they got? What shape are they in?

But the plan is very vague about what happens if the news that comes back from those auditors is bad. So I think, actually, this plan was in a lot of ways kicking the can down the road. It didn't resolve the big issues.

GWEN IFILL: Ken Rogoff, did it make an effort, a courageous effort at trying, or did it just kick the can down the road?

KENNETH ROGOFF, Harvard University: Well, I think you can say there was no decisive move in the wrong direction, but it was very convoluted and obscure, this public partnership, public-private partnership. How much are they going to pay? What are the incentives? It's not clear.

They say they're going to look at the banks and put capital in the ones that can lend. How are they going to figure this out? There's going to be a housing plan. They didn't give details, and so forth.

I think we really need simplicity, clarity, transparency at this point. Secretary Geithner talked a lot about needing transparency from the private sector, from the banks. What about the government?

Lack of details hurts markets

Paul Krugman
New York Times
The way a lot of us have been looking at this is that it looks as if a substantial part of the banking system -- quite a lot of the major banks -- are probably actually not viable right now.

GWEN IFILL: Don Marron, I want to ask you, from the point of view of the private equity world, we saw what happened on Wall Street today. It wasn't well received at all. Is this something that people were expecting to be much more than it was?

DON MARRON, Lightyear Capital: Well, first, I have to say it's really great to be on a program with three extraordinary economists. I have to be careful of what I say in terms of numbers.

I think the first thing to say is there are three things that have to be done, and it's a simultaneous equation. The United States has saved the banks, but they haven't fixed them. The housing crisis I think got us into this, and they have to work on getting it out. And, third, the consumer in the end has to find a reason to come back into the market.

Now, this plan is aimed to address these things. I think the first thing you have to say, the fact that it wasn't very specific -- which is, of course, what hurt Wall Street today -- shows how complex the problems are.

Here is the secretary of the treasury, Tim Geithner, arguably the man -- he understands these businesses, who has the most information about what's going on, and some time to have worked with this plan, yet he hasn't yet been able to present highly specific things. So it is an issue.

But you have addressed the key issues here in the plan, really, which is the only way you're going to solve this with the banks, getting rid of the toxic assets and creating new assets, is for the government either to lend most of the money to the buyers or to guarantee the downside, or maybe some combination of the two, and you can see that that plan addresses the problems in that fashion.

GWEN IFILL: Alice Rivlin, not a lot of details, everyone seems to agree, but there were some ideals that were laid out today by the treasury secretary, one of them Paul Krugman referenced which is this idea of a stress test, basically making these financial institutions monitor themselves or have someone else monitor them to find out whether they're worthy of this kind of support. Is that something you think is a good idea, that's workable?

ALICE RIVLIN: Absolutely. I think this improves on the last plan, the so-called TARP, which actually kind of handed out money in a fairly random fashion. This says that the collection of regulators, not just the Treasury, but the Federal Reserve and the Federal Deposit Insurance Corporation, they will all go in together and they will look at the banks in great detail, their strengths and their weaknesses and their balance sheets, and they will stress test in the sense that they will play a game.

They will say, "Suppose the economy gets a good deal worse. What will happen to this bank?" Now, that's a good thing to do. And based on that analysis, they will decide, "Is this bank OK? Or does it need an injection of capital? Or is it so weak that it isn't going to make it?" And then they will have to do something else, and they haven't specified what.

GWEN IFILL: Well, that's the problem. What is the something else? Is it just to allow it to fail?

ALICE RIVLIN: No, it would be some kind of orderly resolution of the problem. One can hope there aren't very many of those institutions. There are surely going to be some.

But the main thing is to get capital to the banks that are strong enough so that they can use it and start lending again and not so strong that they don't need it.

GWEN IFILL: Paul Krugman, were you trying to get in there?

PAUL KRUGMAN: Yes, I think the -- I disagree that there are not going to be very many. I mean, the way a lot of us have been looking at this is that it looks as if a substantial part of the banking system -- quite a lot of the major banks -- are probably actually not viable right now. They actually -- if you were really going to look at what the market would be willing to pay for their assets, they actually are insolvent.

And what you -- what's called for, ultimately, is something like what happens with a failed bank. The government does not shut it down. The government seizes it, cleans out the stockholders, what was done with failed savings and loans. The government takes the bad assets, also pays off some of the debt, essentially a temporary nationalization, getting banks back. They did not bite that bullet, but they did not rule it out, either.

GWEN IFILL: They bit part -- he went kind of halfway on that, didn't he?

PAUL KRUGMAN: Yes. I mean, in fact, look, the favorable interpretation from my point of view is that this whole thing with the stress testing may end up being sort of a Trojan horse to smuggle the good guys into the fortress, that the public isn't ready, Congress isn't ready for major nationalization, but this is a way to set things up so that, if that proves to be necessary when you can take a good, hard look at the books, we sort of got the mechanism in place.

That's what we're hoping the plan means, but, you know, it was really pretty unclear what exactly is going on.

GWEN IFILL: I wonder what Ken Rogoff thinks about that.

KENNETH ROGOFF: Well, I agree with what Paul said. I mean, they're going to look at the books and go, "Oh, my gosh, look how deep the hole is. It's a couple trillion dollars," if we're realistic.

And the question is, what are they going to do? How much are the taxpayers going to go in? I think we do need some form of receivership, FDIC workout, call it nationalization, to try to clean up the banks and re-privatize them.

I worry that, if they're not planning to do that pretty quickly, we're going to be a year from now, we're going to have spent the stimulus money without having the banking system jump-started at the same time, we're going to have spent a lot of this money -- which could end up trillions, really -- on the banking system, and we're not going to have got things going.

I think they need to move decisively soon and not just sit on this. Hopefully what Paul said is right. This is a stocking horse; they're going to do it. But I would have liked to see something much more decisive now.

Preparing for huge-scale spending

Kenneth Rogoff
Harvard University
Well, I think, before this is over, we're going to be talking many more trillions of dollars. I think that's just going to get spent. And the issue is to spend it productively.

GWEN IFILL: Don Marron, if Paul Krugman and Ken Rogoff are right, will that send the financial service industry into a tailspin, the prospect of some form of nationalization?

DON MARRON: Well, I don't think that nationalization is something anybody would like. On the other hand, if you take the money from the government, you have to play by the government's rules.

And I think the issue here is, the banks got into these kinds of businesses and these kind of securities because they were highly profitable back in the old days, in '07 and '08.

What the government is going to have to look at now is, if you take that business out of the bank -- that is, you buy those toxic assets or you neutralize them -- is what you have left, an intelligent, healthy business, which carries out the major function of the bank, which is to take your money safely and give it back to you when you want it, and to make loans to you, and the "you" are individuals, they're small businesses, and they're big corporations.

I think for many of the big banks what they're going to find is their basic business is fine but they may be in too many businesses. Hard to manage. So they may ask these banks to cut back on the things that they're doing. But many banks have a very good model.

Also, if you talk about regional banks or community banks, they serve a very important purpose in their community, one that would be very hard to replicate in some other fashion. So the question is, do these banks have a real basic strong franchise without the toxic asset business that they got themselves into?

GWEN IFILL: You know, Alice Rivlin, one of the lines that the secretary and the president appear to be trying to walk here is this argument about saving the taxpayers versus saving the banks.

To that extent, we've heard the secretary talk about housing, a still un-detailed housing rescue program. And we also heard this same language being used to -- as part of the appeal for the stimulus package that passed the Senate today.

How much of what the secretary announced today, in terms of providing bridge loans or helping out small-business, consumer loans, how much of that is workable? How much of that needs to be the focus of this?

ALICE RIVLIN: Oh, I think that is a very interesting part of this program. The part of the economy that is closest to the consumer is the consumer loan, the auto loan, the small-business loan, and those need to be flowing again.

And the reason they're not flowing again is that we habitually securitize those. We package them into securities, and there's no market for those securities.

So what they're saying is, we're going to make a big effort to pull in the private sector, but with government money and government inducements we're going to get the secondary market in those kinds of loans moving again.

GWEN IFILL: Paul Krugman, what do you think about that?

PAUL KRUGMAN: Yes, I mean, that part is the part that bothers me least, you might say. I mean, I think there's a reasonable chance. The Fed has been doing stuff like this already with some success. Believe it or not, those markets are actually a little bit better functioning than they were a couple of months ago, so that's been some success.

And they basically -- that's the least controversial, I would say, part of the plan, is to provide some money. But that's -- you know, that doesn't get at the core issue of the basically crisis-level problems of the banks.

So, sure, that part is basically helping the Fed do more of loosening up the markets, but we're hoping for something much bigger than that. And the big disappointment was that they have not, in fact, come up with any clear plan about what it is they're going to do about the fundamental weakness of the banks.

GWEN IFILL: Ken Rogoff, we're talking trillions of dollars here just so far. Is it enough? Is it too much?

KENNETH ROGOFF: Well, I think, before this is over, we're going to be talking many more trillions of dollars. I think that's just going to get spent. And the issue is to spend it productively.

The fiscal package is a way to jump-start the economy, but it needs to be done in conjunction with a realistic banking program. I'm not sure we're seeing it yet. I worry that time is just going to drag on and we're still going to be in the soup. I think this is going to end up costing many trillions of dollars.

PAUL KRUGMAN: Gwen, can I just weigh in? I mean, what we know from previous crises -- a lot of it, actually, Ken Rogoff's work -- is that these things tend to be very, very expensive.

And one of the problems we're having right now, which I think is part of why everyone was disappointed with this announcement, is that nobody is really ready to wrap their minds around the scale of what needs to be done. And even the Obama administration is not ready to wrap its mind around that.

GWEN IFILL: Well, let me ask Don Marron about scale. That seems to be the big question in the end. No matter how good these ideas are, is anybody prepared for this scale?

DON MARRON: Well, the answer is that the government has to put in as much money as it needs to get this done. The key issue here is that these securities and the things that underlie them are not liquid. In our markets, the more liquid something has, the more value it has, usually. Right now, they can't be sold, partly because they can't be valued and partly because they're just way too complex.

So the government is approaching it two ways. It's talking about the new things that Alice was talking about, new securitizations, new packaging of new loans. Now, that is crucial to get the banks restarted in lending; that should be able to be done. They'll get private equity firms like ours and others to come in and buy those loans. They'll have to offer, importantly, easier terms, in terms of loans and guarantees.

The rest of it is, all the rest of those things that are on the balance sheets of the banks, they're not liquid. They can't be totally valued. They say they're going to deal with the market out there to do it. That is the hardest thing, because in the beginning, the market's going to be scared of the downside, not looking it at the upside.

I think they're going to have to provide a floor under these assets, even though in some cases it may provide an extra profit for some.

GWEN IFILL: Don Marron, Ken Rogoff, Paul Krugman, and Alice Rivlin, thank you all very much.