Geithner: 'Credit flowing again' the goal

by Mark Silva

Timothy Geithner, the somewhat embattled Treasury secretary whose strategy for settling the "toxic assets" clogging the nation's financial markets -- as Treasury's Henry Paulson and Federal Reserve Chairman Ben Bernanke warned at the close of the Bush administration -- says the Obama administration is intent on righting the banking system.

"It's the next step in the series of efforts we're taking to make sure that the banking system is doing what it should do, which is to provide credit for the economy,'' Geithner said in an interview aired by CNBC today after his announcment -- a day on which the stock market was responding favorably, for a change, to a Treasury announcement.

""We've already taken a bunch of actions to help get mortgage interest rates down, to help millions of Americans refinance their homes, to take advantage of lower interest rates,'' Geithner told CNBC's Erin Burnett. "We launched a very powerful small business lending program, for obvious reasons. Last week we launched this new program to get securities markets going again. We saw almost $9 billion in new issuance, more than we've seen in the last four months together. That'll help bring interest rates down, too.

"So all these things are designed to help get credit flowing again at lower cost to businesses and families across the country.''

Here, courtesy of CNBC, is the rest of the interview:

BURNETT: If you thought about it like a pie, I mean, there's so many different programs out that--there that you've done, and as you said, some of them are starting to work, what's the biggest piece of the pie? I mean, there is this perception, `oh, toxic assets, legacy assets. If we just deal with the elephant in the room, things will be all right,' and that would make you think that's the biggest piece of the pie. Is it?

Sec. GEITHNER: It's not the biggest. It's not the biggest piece, but it's important piece. Because, you know, right now you have a bunch of loans people made over the last four years before the recession. They're still sitting on the system, and they're making it harder for people to lend, have confidence. And we're trying to provide a mechanism to help the market take those assets off the balance sheets of banks. That'll free up capacity for lending. It'll make banks--easier for banks to help go raise equity in the markets, and again, that'll help get lending going again. But it's an important part, but it's not the critical part of this overall plan.

BURNETT: Ben Bernanke said last week on "60 Minutes" that one sign of stability would be if the banks were able to raise private capital. It's interesting. The banks have come out recently and said they're profitable. They've all said that. They're doing well. But none of them have raised equity, and none of them have raised debt without government backing.

Sec. GEITHNER: Some have.

BURNETT: A very small amount.

Sec. GEITHNER: Right.

BURNETT: And the question is, are things a lot worse than we think with the banks, that--or are they, need to take the training wheels off and stop freeloading off the taxpayer?

Sec. GEITHNER: I think you're going to see people start to raise equity again. I think they will.

BURNETT: Soon?

Sec. GEITHNER: Not sure how soon, but I think that'll happen. Again, by helping get these markets for real estate...(unintelligible)...loans going again, if you're helping provide financing to get the securities markets going again, you're going to make it more likely that these guys are able to clean up their balance sheets and raise private equity again. I--it'll come.

BURNETT: How quickly is this--I mean, it seems like it's contingent on this plan starting to work. Some investors I've spoke with have said we could start to have auctions as soon as right after Easter. Is that too aggressive of an expectation?

Sec. GEITHNER: We're moving as quickly as we can, and as soon as we have the terms designed in a way we think it'll work for the taxpayer, and soon as we get the operational infrastructure in place, we're moving. But I think the--and this is joint Treasury/Fed/FDIC program. We'll--we're going to move as quickly as we can.

BURNETT: Taxpayers obviously have a lot of questions about this--you've been trying to protect them in some ways, but the government's obviously providing low interest loans to investors and going in dollar for dollar. That is helping the investors, the private investors, with taxpayer money. If you had to explain to America, what kind of term are they going to get? What's your hope?

Sec. GEITHNER: They're going to get a market orient--they're going to get a return that private investors get alongside the market in this case. You know, this isn't the best way, in our view, to protect the taxpayer. The alternative approach is--which you have the government buying all this stuff, taking on all the risk under a balance sheet, which would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit on the balance sheets of banks who are at risk, creating a much longer, deeper recession.

BURNETT: And see, because some of the banks say to me they could do that. They could sit on the stock.

Sec. GEITHNER: They could.

BURNETT: They are making loans, but the real lending problem is in the nonbank system, which did account for half of the lending in the country. And they say, `We could sit on it. In fact, we're not really sure we're going to like the pricing here. And maybe we will sit on it.

Sec. GEITHNER: Well, you know, parts of our banking system are growing and expanding. We have plenty of capital. But there are other parts of the system that are going to need a bit more insurance, a bit more assistance to get through this and be able to lend. But, you know, what guides what we're doing, again, is what's what's--we're going to try to do what's--all that is necessary...

BURNETT: Mm-hmm.

Sec. GEITHNER: ...to get the financial system back to the business of providing credit to businesses and families. Everything we're doing is motivated by that basic objective, because that's critical to getting a recovery back on track. So we have economic recovery, this very powerful reinvestment recovery program, but we're going to need financial recovery, too, for that to work. We need to do both those things together.

BURNETT: And are you confident it's going to happen by the end of the year? I'll say I've been surprised; more bank CEOs from regional banks have been expressing some confidence. There've been more signs of stability. The Fed chairman referred to that last week. But then there are some very major companies in this country who have said to me, `We see red flags everywhere.' Do you really think that we can be growing in this economy by the beginning of next year?

Sec. GEITHNER: Well, I agree, you are seeing some encouraging signs, but this is going to take some time. You know, this took--take--these problem took a long time to build up, they're going to take some time to work through. And that's why we're moving so aggressively with the Congress to put in place as powerful a set of programs we can to get Americans back to work.

BURNETT: You just said "with the Congress." Were you shocked at the legislation out of the House on bonus compensation last week?

Sec. GEITHNER: Look, there is a enormous amount of outrage and frustration across the country, and it is completely understandable. I share that frustration and outrage. People have watched--people who were careful and responsible in their personal decisions are being terribly damaged by the actions who--of people who were terribly irresponsible. And they are frustrated and angry. And we have a deep obligation to make sure that everything we're doing is designed to get, again, get recovery back on track, end this recession as quickly as we can, and get the financial system back to doing what it needs to do. And that's going to require we put strong conditions on taxpayers' money to make sure we're not rewarding failure, and that our assistance's going to help generate more lending, not reward executives got in this mess. But we also need to make sure again that we get credit flowing again. That's our core obligation. But the American people are right to be frustrated and angry.

BURNETT: Right.

Sec. GEITHNER: And we need to move, for their sake, to get this recovery back on track.

BURNETT: You mentioned--and obviously there are some serious questions out of this--you mentioned the success of the TALF program last week. There were some initial auctions to try to get it, in the case of credit card and car loans, moving. A lot of people on Wall Street said there was some success, and they didn't want to minimize that. But they strongly emphasized the participation was not what it should have been. And the--and the honest reason for that is, a lot of this private investor money doesn't want to deal with the government. Because the government might come in and say, `Well, we're going to take your bonus from last year,' or, `We're going to say you can't hire anyone born in the United States of America.' Is there going to be an assurance, as part of this toxic asset plan, that the government isn't going to go change the rules retroactively?

Sec. GEITHNER: Understand the concern out there. For us to--for this to work, again, for us to get the economy back on track, we're going to need investors to take risk. We're going to need banks to take risk again. And we need to make sure that they're able to take risks so that the government's not faced with the decision of taking all the risk itself. That would be much more expensive to the taxpayer, and it would be a bad strategy for the country.

BURNETT: There's no decision, then, on the compensation?

Sec. GEITHNER: But there--but we're going to work through this. As the president said, you heard him say, we need to balance again the important principle that we don't want to be rewarding failure and having taxpayers' money go to benefit the executives who got us in this mess. But we all need--also need to make sure we're getting the banking system working again, credit flowing again. We're going to work through this.

BURNETT: Right.

Sec. GEITHNER: And we completely understand that we need to make sure that the conditions we establish are not going to deter private investors from taking risk alongside the government. Because, again, we don't want the government taking all that risk ourselves.

BURNETT: Right. So it is interesting, because the hedge funds are saying, and a lot of the private equity folks are saying, `We're not going to get involved till we know, till President Obama stands up and says, "Private investors who are going to come in along--not the in--not the--not the people who work at the banks that got TARP money, private investors who are going to help buy the assets from those TARP banks,"' and it sounds like that's not yet determined.

Sec. GEITHNER: Very important that these programs be designed in a way, and these conditions be designed in a way so that these broadly available programs that're so important for the housing initiative, for these lending programs, and for this new legacy asset financing program, are able to work. And again, that requires that investors are willing to come in and take risk in this context, and we're going to work with the Congress to make sure that's...

BURNETT: Do you believe they will take that risk without having assurances the government will not change rules on compensation or claw back compensation?

Sec. GEITHNER: Well, as I said, we need to work with the Congress to try to make sure that there's enough clarity and consistency about the rules of the game going forward so that they're willing to come in and take this risk alongside the government again. And I think--I think there's broad recognition that we get these banks lending again, investors taking risk again, because that'll help us get recovery back on track as quickly as possible.

BURNETT: Along these lines, someone said last week, who is a very respected investor, `I'm now putting a risk premium--as in, the risk that my investments could go bad--to invest in the United States like I would in Venezuela.' That investor was only partially joking. And part of that was because there is uncertainty about the rules, there's uncertainty about whether the rules are going to change after, you know, you said, `I'm going to do it this way,' and then, `Oh, guess what, I'm going to go change it.' You're one of the guys trying to set the rules. You're sort of that broker between the administration and between the people who are going to invest money. How does that make you feel when you hear someone says invest in the United States like investing in Venezuela?

Sec. GEITHNER: Our obligation is to make the American people confident that we're going to use taxpayer resources in ways that, again, that are get--going to get credit flowing again, get recovery back on track, and are not going to be abused to reward failure. That's a--that's a difficult balance to strike, but we're going to work through this and, working with the Congress, we're going to find the right balance.

BURNETT: In terms of the G20 coming up, obviously part of that you were going to be talking about new regulation reform, and part of that did include compensation. Do you have any sense as to whether you're going in the direction of formal salary caps on all US publicly traded companies, or perhaps caps that would say an executive at a publicly traded company can only make X times the average worker?

Sec. GEITHNER: The reforms we're going to propose to the Congress and internationally are going to be designed again to make the system more stable in the future, to end this cycle of boom/bust, major financial crises every five years or so. To end that we need to make sure the system has much stronger set of standards, protections, constraints on risk taking, more effectively enforced, and that we have a better capacity for dealing with these kind of failures in the future, better resolution authority, better capacity to deal with future AIGs, future Lehmans. As part of that, part of this effort to constrain risk taking in the future, we're going to have to reform compensation practices. Those compensation practices just got way out of whack with fundamentals.

BURNETT: Right.

Sec. GEITHNER: People were getting compensated without any due regard for risk. It's outrageous what happened in our country over the last five years or so. And we're going to have to bring, as the president proposed in early February, some very comprehensive reforms to that. But you need to look at this in the context of a broader set of regulatory reforms that're designed to make the system more stable, make sure that consumers and investors have more protection. We have a more streamlined regulatory structure.

BURNETT: Does the administration believe that you need to be specific about? It's one thing to be paid...

Sec. GEITHNER: To be proscriptive or specific?

BURNETT: Specific. That it's one thing to say compensation got out of whack, and we all know, the average executive in this country made 400 times the average worker last year, and that's obviously a--if you look at Japan, you look at Canada, you look at Britain, in that sense it was out of control. But it's one thing to say that, and it's another to sort of hold it over everyone that you're going to change it, but not say exactly how. When are we going to know how?

Sec. GEITHNER: I think the government--I think government needs to let out broad standards that meet this basic test to try to make sure that the people running these institutions responsible for controlling risk are compensated for being careful and prudent, not compensating for taking--for taking risks they don't understand. And those are the kind of standards we're going to--we're going to lay out.

BURNETT: And so it'll broad, it will not be specific?

Sec. GEITHNER: Well, we're going to find the right balance again, but I think the right approach is to have broad standards more evenly, more carefully enforced. Because again, you know, risk management requirements, checks and balances, capital--they all basically failed to contain risk. And to make those more effective in the future, you want not just to get those more effectively designed, but you need to make sure that compensation practice are working with the kind of approaches we do to make the system more stable in the future, not against those...

BURNETT: There's been so much coverage, you know, people on the Comedy Central talking about people with pitchforks, and in some sense it's been humorous, but in a lot of sense it isn't. And it seems that we're sort of at the precipice of there being a--people with money and people without money, as opposed to just people at--who are getting rewarded at TARP-recipient banks. Does the administration believe that a key part of being American is for people to be entrepreneurs and be able to make as much money as they can on their own, or not?

Sec. GEITHNER: Absolutely. But they want it--people be rewarded for success, not for failure. And what's hard for every American to understand is why people who took their institutions to the brink of failure and are now dependent on the government to get out of that mess, are still enjoying what seem to American simply outrageous kind of compensation...(unintelligible). And that's a completely understandable reaction. Again, the tragic thing of financial crises is that the damage is indiscriminate, and it hurts the people who were careful and prudent, through no fault of their own, and they are understandably frustrated and angry. And that's why it's so important that the government act now.

BURNETT: Mm-hmm.

Sec. GEITHNER: To try to make sure that all Americans have better opportunity in the future, and that we restore a basic sense of responsibility and values to this basic core part of the American dream.

BURNETT: Last week you'd said that you'd looked into those AIG bonuses, and legally they had to pay them. Larry Summers said this country does not abrogate contracts. But then the president came out and said, `Secretary Geithner, go back and find a way to get that money back.' Are you going to get it back?

Sec. GEITHNER: The president asked us to explore--and we're working very carefully with Justice to examine all legal means to see whether we can recoup those payments. I believe said he's working with--working to get that money back. And we're going to make sure that the taxpayer is compensated for any funds that aren't returned.

BURNETT: So you may add it to the tab, 170 billion plus 165 million. OK. In terms of your position, obviously it's been tough. You've been described as embattled. Richard Shelby, on a weekend news program, said you're on shaky ground. That does not jive with what a lot of the--certainly Wall Street contingent says about you. The president on "60 Minutes" said if you offered his resignation, he'd say, `Sorry, buddy, you've still got the job.' How brutish and nasty has this job been?

Sec. GEITHNER: I feel a great privilege serving the president's capacity. It comes with this great sense of responsibility and obligation that we do everything possible to fix this system, to fix the mess we inherited, get the economy back on track. This comes with the job. We have to make hard choices. We're not going to satisfy everybody. But we're doing our best, again, to move as aggressive as we can to try to fix this mess, get recovery back on track here.

BURNETT: Are you going to be able to hire people? I mean, that has been a huge concern.

Sec. GEITHNER: Absolutely. Absolutely. And we have a terrifically capable group of people here working all hours of the day, and we have done extraordinary things in a very brief of time--brief period of time. Again, if you look at what's happened on the housing front, on mortgage interest rates, on refinancing, on this program to help small business lending get going again, home securitization markets, providing banks a form of capital insurance, they can get through a deeper recession. These are very powerful programs put together in a very short period of time, and you can see them start to have traction in opening up these federal markets and getting interest rates down.

BURNETT: Do you need to hire some people who understand the capital market, people on Wall Street that are the very people that right now are being pilloried, whether rightly or wrongly, there is a perception; everyone on Wall Street says it to me: There's not enough people to answer the phone at Treasury.

Sec. GEITHNER: Again, we have a terrifically strong group of people here who are working very hard, people with a lot of experience in the markets, a lot of experience in policy and regulation, and we're getting more people every day. And we're going to have a strong, powerful, experienced team that understand both the markets and the politics of this stuff.

BURNETT: Mm-hmm.

Sec. GEITHNER: And the policy. Because again, what we need to do is make sure the American people are confident that we're providing--we're doing the best programs that protect the taxpayers' interests, don't reward past failure, make our system stronger.

BURNETT: Final question, your house, it's up for sale. We know that. That's part of the public record. We're in a housing crisis. You haven't been able to sell it, so you've got to do this commute. Is that--is that an indicator we can all look at, when Tim Geithner can sell his house, things are going to be OK?

Sec. GEITHNER: We're planning to move my family down in the fall. Can't wait to see them, can't wait to get them here. Don't like commuting very much. And I look forward to having them live in the same city with me as quickly as possible. But it's not going to happen till the summer because of the school year.

BURNETT: Because of the school year. OK. Secretary Geithner, thanks very much.

Sec. GEITHNER: Nice to see you. Thank you.