Date: Thursday, May 21, 2009
Author: Jim Kuhnhenn, Associated Press Writer

Treasury secretary says US financial system starting to heal but that caution is still needed.

Declaring that the U.S. financial system was "starting to heal," Treasury Secretary Timothy Geithner said Wednesday that major banks had raised $56 billion since stress tests showed several in need of more capital — a sign of emerging investor confidence.

Geithner also said a public private program announced in March to rid institutions of their worst assets would be in place by July.

The hopeful assessment was laden with caution, however. Geithner pointedly warned the committee that he would not discuss an "exit strategy" for the government's $700 billion intervention in major private sector institutions.

"It's not quite time yet," he told Sen. Richard Shelby of Alabama, the top Republican on the committee.

Confronting anxiety among both Democrats and Republicans, Geithner said that resolving the business entanglements of insurance conglomerate American International Group would take significantly longer that initially envisioned.

And he disputed Republican assertions that bank repayments of government infusions cannot be used for further assistance to the financial system.

All in all, senators from both parties voiced skepticism about the degree to which the Treasury has intervened in companies and about what it has done or failed to do with the leverage it has gained over those firms. Such doubts are surfacing as Geithner and the Obama administration are preparing to seek congressional action on a financial regulatory overhaul, with some urging quicker action and others counseling a slower pace.

In a recurring line of questioning, Committee Chairman Chris Dodd, a Connecticut Democrat, asked Geithner why major AIG creditors, which include Goldman Sachs and Merrill Lynch, had been permitted to recoup the entirety of their investment in the company. The government has injected $70 billion into AIG and owns about 80 percent of its assets.

"Where's the negotiation going on here? Why aren't we pressing back?" Dodd said. "Hell, we own about 80 percent of this company. Seems to me we ought to be pursuing this more aggressively than paying 100 percent on the dollar to this."

Geithner said the administration didn't have the authority to extract such concessions from AIG creditors. "If I felt we did," he said, "I would do it in a second."

Sen. Sherrod Brown wondered why General Motors, which has received $13.4 billion in loans from the government, is proceeding with a plan to increase U.S. sales of cars made abroad, including importing autos made at its Chinese factories.

"They're talking about closing plants down here and opening plants in China and selling them back," Brown said. "What gives here? What's going on here?"

Geithner replied that the administration's focus was on helping GM restructure so that it can be viable without government support.

"I do not believe that we can do that and also be involved in making detailed decisions about how they run their business and how they do that," he said.

In written testimony provided to the committee, Geithner said that of the $56 billion raised by the nation's biggest banks since they underwent stress tests, $48 billion had been raised by banks deemed in need of additional capital. That puts them nearly two-thirds of the way to their government-imposed goal of $75 billion in new capital.

The Federal Reserve tested 19 major institutions to see if they could withstand a further downturn in the economy. The 10 banks that were found to need more capital after the stress tests, including Citigroup Inc. and Bank of America Corp., have until June 8 to develop such a plan and have it approved by regulators.

"The private money that was sitting on the sidelines is back on the playing field," said Scott Talbott, a senior vice president at the Financial Services Roundtable, an industry group. "It shows confidence by investors in the financial sector in general and in those specific institutions."

Still, the administration and the industry believe bank lending has in part been hindered by the amount of real estate-related loans and securities on their balance sheets. As a result, Geithner said a program that would combine up to $100 billion in government funds with private investments should be operating within six weeks. The program is designed to create a purchasing pool of up to $1 trillion.

Treasury has received applications from more than 100 potential fund managers to help run the program. Geithner says Treasury will inform applicants of their preliminary approval in the "next several weeks."

The program was announced March 23 and some lawmakers have questioned why the program is not yet up and running.

Geithner has projected that financial institutions will repay $25 billion of their government rescue funds over the coming year. He said the money could be used to further assist institutions in need of government help.