Updated from 2:25 p.m. EST
Treasury Secretary Timothy Geithner on Tuesday unveiled a new $1.5 trillion plan aimed at combating the financial crisis through a collaboration of public and private investments and a consumer and business lending initiative.
In prepared remarks released ahead of his press conference, Geithner offered his plans for deploying the second half of the $700 billion Troubled Asset Relief Program, or TARP, to banks that can prove their worthiness. Geithner referred to the Financial Stability Plan as a "comprehensive strategy" that "will cost money, involve risk, and take time."
"This is a challenge more complex than any our financial system has ever faced, requiring new systems and persistent attention to solve," Geithner said in his remarks. "But the president, the Treasury and the entire administration are committed to see it through because we know how directly the future of our economy depends on it."
As part of the new package, Geithner said banks will be required to go through a carefully designed comprehensive stress test. "We want their balance sheets cleaner, and stronger," he said. "And we are going to help this process by providing a new program of capital support for those institutions which need it."
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The capital provided to troubled banks will come with conditions to help ensure that the assistance preserves or generates lending capital above the level that would have been possible in the absence of government support, Geithner said.
In order to ensure more transparency and accountability, the plan requires firms to show how assistance from the Financial Stability Plan will expand lending and will push to mitigate mortgage foreclosures. Additionally, banks will be required to restrict dividend payments, stock repurchases and acquisitions and
will be limited.
In conjunction with the
, the Federal Deposit Insurance Corp., and the private sector, Geithner said the Treasury Department will establish a Public-Private Investment Fund, although that plan seems to fall short of the so-called "
" entity many market observers had been calling for.
The fund will provide government capital and government financing to help leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion, according to the Treasury Department. It is intended to get private markets working again for the legacy loans and assets that are now burdening the entire financial system.
"By providing the financing the private markets cannot now provide, this will help start a process of providing a market for the real estate related assets that are at the center of the this crisis," Geithner said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets."
In addition, Geithner stressed the importance of opening up new lending.
"In our financial system, 40% of consumer lending has historically been available because people buy loans, put them together and sell them," he said. "Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses -- large and small."
As part of the consumer and business lending initiative, Geithner will attempt to broaden and expand the resources of the previously announced but not yet implemented Term Asset-Backed Securities Loan Facility, or TALF. Previously, Treasury was to use $20 billion to leverage $200 billion of lending from the Federal Reserve. Geithner's plan will dramatically increase the size by using $100 billion to leverage up to $1 trillion and kick start lending by focusing on new loans.
Geithner called the first dispersion of TARP funds as "absolutely essential, but they were inadequate." He added that instead of catalyzing recovery, "the financial system is working against recovery, and that's the dangerous dynamic we need to change."
The new Treasury secretary also acknowledged the growing concern over wasteful tax dollar spending. "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," he said.
Geithner also stressed that the administration will make mistakes as it tries things never attempted before.
"We will go through periods in which things get worse and progress is uneven or interrupted," he said. "But we will be guided by the principles of transparency and accountability -- dedicated to the goals of restoring credit to families and businesses -- and committed to moving our nation towards an economic recovery that is as swift and widespread as humanly possible."
In his statement during a hearing before the Senate Banking Committee, Geithner repeated many of the remarks he delivered earlier Tuesday and added that President Obama and his economic team will come up with a "comprehensive plan to address the housing crisis. We will announce the details of this plan in the next few weeks."
House Financial Services Chairman Barney Frank (D., Mass.) weighed in with his thoughts on Geithner's plan, commending the Treasury secretary for making a number of improvements to the original TARP program that "will increase accountability and transparency of this taxpayer-funded rescue of America's financial institutions."
However, Frank offered two criticisms. "First, I'm concerned that $50 billion to reduce foreclosures understates the amount that we will need, and we need some assurance that, assuming this works as we hope it will, there will be more money available. Secondly, the secretary said the administration would present details of their foreclosure reduction plan in a few weeks, which is too much time," Frank said in a statement.
The stock market didn't appear to welcome Geithner's remarks with open arms, as the three major U.S. stock averages fell between 3% and 4%. The plan made no mention of temporarily suspending or changing fair value, or
, accounting rules, something that many on Wall Street had been hoping for.
The financial sector was among the hardest hit following the news.
Bank of America
was down 11.9%,
lost 9.8% and
gave back 7.7%.
Robert Pavlik, chief market strategist with Banyan Partners, said that even though Geithner touts the plan as comprehensive, it does not go far enough.
"Let's face facts. It's not a blow-away plan," he said. "It seems as though it's going to be a tremendous disappointment. People were hoping for so much more."
"Bottom line, I think the market would've been happier if the government stepped up and created a true 'bad bank' to buy the failing assets of the financial companies and then force them to increase their lending through monitoring," Pavlik said.
Pavlik added that he's curious to see how much traction the government will see with a public-private company.
"You start to wonder why anyone would invest as a private investor in something like that when you can buy the assets yourself," he said. "Why would you want to partner up with the government?"