The Malaysian Insider

WASHINGTON, Oct 21 — The Obama administration will shutter programmes at the heart of a US$700 billion (Rm2.4 trillion) financial bailout but remains focused on supporting a fledgling economic recovery, Treasury Secretary Timothy Geithner said yesterday.

 

“We are now at the point where we can begin to wind down the programmes that really defined Tarp in its initial stages,” Geithner told Reuters in an interview, referring to the Troubled Asset Relief Programme.

Instead, the administration will focus on “more-targeted programmes directed at what are the principal areas where there’s still weakness in access to credit,” he said, specifically citing housing and small businesses.

While some programmes would wind down, Geithner said the administration has not yet made a formal decision on whether to extend the life of the overall bailout programme passed its scheduled expiry at the end of this year.

A Treasury official said three programmes will be shut down by year-end: the Capital Purchase Program that was used to pump funds into banks, a rejigged version called the Capital Assistance Program that was never tapped and the Targeted Investment Program that supplied US$40 billion of additional capital to prop up Citigroup and Bank of America.

The official also said the total of bailout funds dedicated to a Federal Reserve securities loan programme and to a public-private investment programme for so-called toxic assets would be capped at US$30 billion each.

Congress approved the financial rescue fund a year ago as the financial crisis was raging to allow Treasury to buy up troubled assets clogging bank balance sheets, but then-Treasury Secretary Henry Paulson quickly decided pumping money into banks was more critical.

Paulson called leaders from the nine largest US banks to the Treasury and forced them to accept taxpayers funds, fearing that if only the weakest banks were given support they might be tainted in the public’s eye.

To date, Treasury has invested US$204.64 billion in over 600 banks with the Capital Purchase Programme, and some US$70.72 billion has been repaid. Insurer American International Group and automakers General Motors and Chrysler have also received government support.

Geithner said that while many areas of the economy showed signs of recovering from a deep recession, it was too soon to turn attention to reining in huge US budget deficits. He said the administration would lay out plans to trim those deficits in its proposed budget in February.

“For there to be a recovery that’s self-sustaining over time ... people have to be confident that we’ll bring those deficits down over time and that’s a difficult balance,” he said, “Right now, the overwhelming imperative we face is still to make sure that we reinforce this nascent recovery.”

The US budget shortfall hit a record US$1.4 trillion in the fiscal year that ended September 30. At 10 per cent of US GDP, it was the largest budget gap since World War Two.

“The only strategy that makes sense is to make it clear that you will do what’s necessary to establish conditions for growth” and then “get back to living within your means when you have growth established,” Geithner said.

The prospect of continued huge budget deficits has worried some investors and has helped drive the US dollar to 14-month lows against a basket of currencies.

Geithner reiterated that a strong dollar was important to the United States, and said Washington needed to pursue policies that strengthen long-term US economic prospects, including putting the budget on a more sustainable track.

He suggested that some factors pushing down the dollar were positive. As the global economy regains its footing and investors become more willing to take risks, they lighten up on safe-haven assets like US Treasuries, pressuring the dollar.

Some big Wall Street banks have already been permitted to repay capital injections they received from the government, and Geithner said more want to do so. “I think we’re getting at the point where it’s quite likely you’re going to see significant further repayments,” he said.

As banks return to better health, some that received bailout money have ignited public fury by returning to old practices of paying big bonuses to top employees and Geithner said he personally felt the public anger was justified.

“The frustration they have is completely understandable,” Geithner said, though he added that there was a move among some firms to tie pay more closely to performance.

“I don’t think they’ve gone far enough yet,” he said, but he noted the Federal Reserve will soon propose sweeping rules to reform pay at banks.

Geithner said Congress was making solid progress in overhauling financial market rules — something the Obama administration has said it wants completed by year-end. But he stressed lawmakers need to act quickly, while memories and anger over the financial crisis, that resulted in part from reckless lending, are still fresh. — Reuters