Tim Geithner unveils new plan to rescue US banking system

US Treasury Secretary Tim Geithner has admitted America’s original bank bail-out was “inadequate”, as he set out a revamped plan to provide more than $2 trillion to stabilise ailing financial institutions and revive lending.

• Mr Geithner, who as the former president of the Federal Reserve Bank of New York was instrumental in devising the previous $700bn bail-out, admitted that the “force of government support” in the Autumn failed to prevent the “deepening pressure brought on by the financial crisis.”
• Admitting public distrust in the first bail-out, led by his predecessor as Treasury Secretary, Hank Paulson, Mr Geithner admitted that today’s “comprehensive strategy will cost money, involve risk, and take time.”
• Today’s plan comes a day after President Barack Obama used his first White House press conference to tell Americans that passing his massive economic stimulus bill would mean the difference between “catastrophe” and saving or creating “up to four million jobs.”
• US stock markets markets responded badly to the plan, with the Dow Jones Industrial Average extending losses to more than 3pc in early trading.
• In place of October’s plan, which simply injected capital into major US banks and hoped for the best, Mr Geithner unveiled a three-prong programme which he hopes will “use taxpayers’ money in ways that will benefit them.”
• The programme will be known as the “Financial Stability Plan” – ditching the TARP (Troubled Assets Relief Programme) moniker – and Mr Geithner said that it would be monitored closely and reviewed regularly to ensure it is working.
• The three planks of the FSP are to increase consumer lending; to inject more capital into banks – but only after each undergoes a “carefully designed comprehensive stress test; and to launch a public-private “bad bank” to remove assets from the balance sheets of ailing banks.
• To spark bank lending to consumers, the Federal Reserve is to expand its existing $200bn Term Asset-Backed Securities Loan facility (TALF) up to a total of $1,000bn. The TALF allows banks to use existing assets as collateral to access new funds from the Fed. The central bank said it may widen the collateral eligible in order to increase the fund’s potential.
• The size of the bad bank’s pool to buy assets will initially be $500bn, but Mr Geithner said it could grow to $1,000bn in financing capacity.
• ‘By providing the financing that private markets cannot now provide, this well help start a process of providing a market for the real estate-related assets that are at the centre of this crisis,” he said of what is being billed as a public-private investment fund.
• In terms of new capital injections into the banking system, the Treasury Secretary said he wanted bank’s balance sheets to be “cleaner and stronger.”
• Banks with assets of more than $100bn will be subjected to a detailed financial stress test – something that was not the case under the first stage of the bail-out back in October – and if they do need further funding, they will be allocated funds in return for preferred shares will be convertible into ordinary shares over time. The original Treasury injections were in non-convertible preferred shares.
• Although his much-awaited speech was somewhat limited in details of his plans to tackle the problems in the housing market, Mr Geithner did say that $50bn of the original $700bn bail-out fund would be spent on home foreclosure relief.
• In addition, he stressed the US was committed to reform of its own financial regulation system and that of the global financial system, something which President Barack Obama also supports.