“Credit conditions overall, which dragged our economy into a deep recession in 2007, no longer pose an obstacle to growth,” Geithner said today in testimony to the Congressional Oversight Panel. Corporations are raising money in capital markets “and have built up record cash reserves, which will eventually be reinvested and fuel growth.”
Geithner defended the government’s management of the $700 billion Troubled Asset Relief Program, which he said “played a critical role” in loosening access to credit. The program, criticized by both Democratic and Republican lawmakers as favoring Wall Street over small businesses, will cost taxpayers $105 billion by Geithner’s latest estimate, down from an estimate of $341 billion in August.
Congress authorized TARP in October 2008 to prevent a collapse of the U.S. financial system. Companies including Goldman Sachs Group Inc. and Bank of America Corp. that took funds have since repaid the government.
Elizabeth Warren, the panel’s chairman, told Geithner at today’s hearing she is concerned that “many banks still haven’t digested the toxic mortgages on their balance sheets.” The challenges firms face “are straining their ability to lend to the small businesses that might otherwise be driving an economic recovery and reducing unemployment.”
The House voted June 17 to authorize a $30 billion fund proposed by the Obama administration to help small businesses. The program may not be enough to help the economic recovery, the oversight panel said in a report last month.
Geithner said the Treasury plans to sell the remainder of its stake in Citigroup Inc. in an “orderly fashion” by year end.
Prospects for the government’s investments in the auto industry have improved, and Treasury plans to begin to recover its stake in General Motors Co. after the company has an initial public offering later this year or in 2011, he said. Losses from government investments in GMAC Inc. “will be less than forecast last year,” he said.
Geithner said the Obama administration doesn’t plan to extend TARP past its Oct. 3 expiration and called today’s hearing “a eulogy” for the program.
Geithner pointed to what he said were signs the economy is rebounding. “The business sector as a whole has very, very strong balance sheets and is sitting on a lot of cash,” he said.
Panel member Damon Silvers said he didn’t share Geithner’s optimism.
“Most economists would say that the fact that businesses are sitting on a lot of cash is not necessarily a good thing in relation to our recovery,” said Silvers, director of policy and special counsel at the AFL-CIO, the largest U.S. labor federation.
Geithner, 48, also said the U.S. planned a “fundamental” overhaul next year of mortgage-finance companies Fannie Mae and Freddie Mac, which were placed under federal conservatorship in September 2008.
The U.S. may continue to have a “limited” role in housing finance after the revamp, he said. Fannie Mae and Freddie Mac posted combined losses of $18.2 billion in the first quarter.
“There is going to be a good public policy case where the government is still promoting the objectives of access to reasonable housing options for low-income Americans,” Geithner said. The administration likely will determine that “there’s going to be an appropriate role for the government to provide some form of guarantee to help make sure that the broader housing-finance markets are able to provide credit to housing in recessions and downturns,” he said.
The Treasury has disbursed $386 billion of the total amount of funds Congress authorized for TARP, and $194 billion of it has been repaid, Geithner said.
Bailed-out insurer American International Group Inc. is “making progress in restructuring its operations, in order to repay taxpayers and reduce its risk to our economy,” Geithner said. TARP investments in AIG “will likely still result in some loss,” he said.
In a June 10 report, the oversight panel said the bailout of AIG had a “poisonous” effect on the U.S. financial system because it demonstrated that the government would protect Wall Street firms from their own risk-taking.
The bailouts “did what they were supposed to do,” he said. The economy wouldn’t have started to rebound “without the dramatic actions we took, however unpopular, to bring down the cost of credit and stabilize the system.”