Unveiling a new “Financial Stability Plan” today, Treasury Secretary Tim Geithner said banks receiving federal funds under the plan will be required to increase their lending.
“Many banks are reducing lending, and across country they are tightening terms of loans,” said Geithner. “As demand falls and credit tightens, businesses around the world are cutting back the investments that are essential to future growth …. Instead of catalyzing recovery, the financial system is working against recovery.”
Geithner said that new government loans to banks will come with conditions to ensure “a level of lending greater than what would have been possible in the absence of government support.”
A fact sheet issued by the Treasury department also said that banks availing themselves of the new capital-assistance program would be banned from paying quarterly dividends of more than a penny, buying back stock, or pursuing acquisitions.
The plan also dramatically expanded the amount of government aid aimed at restarting the frozen securitization markets and hinted that government assistance might be extended in the near future to “assets collateralized by corporate debt.”
Geithner also announced the formation of a public-private investment fund — widely referred to in recent weeks as the “bad bank” concept — intended to help financial institutions clean up their balance sheets by buying the troubled securities whose valuations currently weigh heavily on them. “This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions,” said Geithner. According to the Treasury Department, the fund would use public financing to leverage private capital up to $500 billion, with the potential to expand up to $1 trillion.
While Geithner himself did not delve into accounting minutiae, both his speech and the Treasury department’s accompanying fact sheet suggests policymakers should continue to seek ways to solve the financial crisis without overturning existing fair-value accounting methods.
“Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets,” said Geithner. The Treasury’s fact sheet noted that one of two major benefits of the public-private investment fund was the private sector pricing of assets.
“Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases,” the fact sheet explained, “it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets.”
Geithner also outlined a plan to help consumers and businesses by reviving the moribund securitization markets. The “Consumer and Business Lending Initiative” will commit $100 billion of government funds in an effort to generate up to $1 trillion in private investments in newly securitized loans.
The plan represents a five-fold expansion of the dollars slated for the Term Asset-Backed Securities Loan Facility (TALF) that was announced under Geithner’s predecessor, Henry Paulson, but that had not yet been implemented.
“No financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses — large and small,” Geithner said, noting that 40 percent of consumer lending has historically depended on securitization. According to the fact sheet that accompanied his speech, the government will invest only in AAA-tranches of new securitizations. The plan also extends the original TALF proposal to securitization of mortgages.
The fact sheet also noted that, “Treasury will continue to consult with the Federal Reserve regarding possible further expansion of the TALF program to include other asset classes, such as … assets collateralized by corporate debt.”
The American Securitization Forum quickly issued a statement praising the measure, noting that it encouraged the consideration of additional asset classes.
Geithner also devoted a significant portion of his speech to addressing the public perception of recent government actions and pledged increased transparency. “The spectacle of huge amounts of taxpayer assistance being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust,” he said, noting that excessive compensation awards at some institutions changed that distrust into anger.
Under the plan, certain firms accepting government money will be required to cap executive pay to $500,000 in total annual compensation cap plus restricted stock payable.
“Our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions. And are skeptical that their government has — to this point — used taxpayers’ money in ways that will benefit them. This has to change.”
Geithner said all of the new requirements being applied to banks, as well as contracts between the government and financial institutions, would be posted to a new website, financialstability.gov, to “give the American people the transparency they deserve.”