Market balks at bailout rollout
Geithner plan lacks detail, critics say
WASHINGTON – Treasury Secretary Timothy Geithner vowed Tuesday to bring the “full force” of the U.S. government to battle the financial crisis, assembling an unprecedented coalition of agencies and mustering federal resources on a scale rarely seen except at wartime. But the lack of detail in his plan dismayed lawmakers and investors, triggering a steep sell-off on Wall Street.
Treasury officials said they would commit $1.5 trillion in public and private funds, just for starters – with the possibility of more than $2 trillion – to aid banks, unfreeze consumer credit markets and stem the soaring foreclosure rate.
How Geithner would accomplish some of those tasks remained unclear Tuesday. The Treasury provided only the most general descriptions of how struggling homeowners and small businesses would be helped. And officials said they have yet to design a program that is a core part of the plan: a public-private initiative that would encourage investors to buy up the toxic assets now weighing down the books of banks and threatening to overwhelm the firms with losses.
Cleansing the financial system of these assets, which are backed by failing mortgages and other troubled loans, has vexed officials since Congress approved the $700 billion rescue package in October. But financial analysts said Geithner, who took a strong hand in casting the new plan, appeared to have no better grasp on a solution than his predecessor, Henry Paulson.
“What they did is over-promise and under-deliver,” said Thomas Barrack, chief executive of Colony Capital, a private investment firm in Los Angeles. “They said there was going to be a plan, so everybody expected a plan. And there was nothing.”
Minutes after the plan was made public, stock markets plummeted. The Dow Jones industrial average ended the day down 4.6 percent. The S&P 500 index, a broader measure, fell 4.9 percent.
In unveiling his plan, Geithner did not ask Congress for more than the roughly $320 billion that remains in the Treasury’s initial rescue package for the financial system, known as the Troubled Assets Relief Program, or TARP. For now, the balance of the money to fund the new effort, called the Financial Stability Plan, would come from the Federal Reserve and other government agencies, as well as private-sector contributions.
But in a hearing before the Senate Banking Committee, Geithner indicated that such a request may be on its way.
“I’m not standing here before you today to ask you to authorize more resources,” he said. “I want to be candid, though, that I think this is going to be an expensive problem for the nation and it’s going to require substantial resources.”
Geithner announced a multipronged strategy that attempts to address the problems of the traditional banking sector, the credit markets that provide financing to banks, as well as homeowners and small businesses.
He promised the overall response to the crisis would be “forceful.”
“We believe that policy has to be comprehensive,” Geithner said. “We believe that the United States has to send a clear and consistent message that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy.”
An initiative to help small businesses and community banks would be detailed in the next several days, Treasury officials said. They did not reveal the cost of the program.
A second program would broaden the scope of a Federal Reserve initiative aimed at unclogging the credit markets for auto, student and other consumer loans. That initiative may expand the program to as much as $1 trillion, using $100 billion from the Treasury’s rescue funds, and include aid for commercial real estate mortgage markets.
The Treasury will also offer direct help to at least two dozen of the nation’s largest banks that hold more than $100 billion in assets. Regulators, using uniform standards, are planning to conduct a review of these firms to determine how much they may need. Any federal aid would come with conditions giving the banks incentives to pay the money back as soon as possible. The review would determine the ultimate price of this program.
Treasury officials said a major aim of this “stress test” is to help regulators figure out whether these firms could withstand a downturn even worse than the current one, administration officials said.
Another initiative to help homeowners facing foreclosure is not expected for at least a week and may be announced by President Barack Obama instead of the Treasury Department. Treasury officials said they would spend $50 billion on this effort, the low end of the range provided by the administration last month.