WASHINGTON — Treasury Secretary Timothy Geithner announced new restrictions Tuesday for banks requesting bailout funds. Under details released Tuesday, banks will be subject to a "stress test" before receiving funding. The new test is designed to ensure those that need the capital are healthy enough to be able to lend it. Treasury is allocating $100 billion of the remaining $350 billion left in the Troubled Asset Relief Program to capital injections. Those funds would come in addition to the $250 billion already allocated to date to assist banks. At a news conference on Tuesday, Mr. Geithner said the actions taken last fall were necessary but insufficient.
"The force of government support was not comprehensive or quick enough to withstand the deepening pressure brought on by the financial crisis," Mr. Geithner said, according to a text of his prepared remarks. "The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust. 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."
Mr. Geithner said Treasury and the Federal Reserve Board are creating a new lending facility that will leverage up to $1 trillion to assist in bringing down borrower costs. Treasury also plans to use some of the rescue funds to expand the Feds soon-to-be launched Term Asset Backed Securities Loan Facility up to possibly $1 trillion. Mr. Geithner said Treasury would create a "bad bank" to buy toxic assets. To avoid putting taxpayers on the hook for the large cost, Treasury plans to leverage private capital to buy the assets. The plan does not appear to answer the critical question of how to price illiquid assets. This hurdle was a major stumbling block that led to the Bush administration to drop its original asset purchase plan. Treasury also said it would allocate $50 billion to a foreclosure mitigation program, to be announced in the next two weeks. To increase transparency and accountability, Treasury said banks will be required to show how they are using government assistance. The administration also is toughening restrictions on dividends, stock purchases, acquisitions, lobbying, and executive compensation.
The Tarp program has been criticized for a lack of transparency, accountability and inability to show if banks are using the funds for lending. Mr. Geithner warned that the latest changes may encounter problems of their own.
"This comprehensive strategy will cost money, involve risk, and take time," Mr. Geithner said. "We will have to adapt it as conditions change. We will have to try things we've never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."
