1. Bank Lending. Last year at this time, banks had $1.8 billion on deposit with the Federal Reserve. Last week, the Federal Reserve reported that banks now have on deposit with the Federal Reserve $771.2 billion. I would like to know what assurances do we have that the banks taking the TARP funds will start (and when) using this money for Main Street? - David from New Hampshire. In regards to recent reports that banks have actually cut lending rather than expanding available credit, do you feel as though we’re seeing the re-characterization of responsible lending in the U.S.? - Jordan from Pennsylvania After the TARP funds were authorized, why weren't financial institutions required to make a fixed percentage of those funds available in the form of credit? - Timothy from Rhode Island. We require all banks receiving TARP funds to report to us monthly about their lending activities. The reports show that between last October, when Treasury launched the TARP, and April, the latest month for which data is available, the total volume of consumer loans at our biggest banks actually rose slightly. This, despite the fact that the economy as a whole shrank in real terms at a 6.3 percent annual pace last fall and a 5.7 percent rate last winter. While it is true that overall loan volume has declined, that is what typically happens during a recession as families and businesses borrow less and lenders grow more cautious. We believe that, absent government assistance, the decline would have been much sharper and more damaging to the economy. You can look at the bank lending numbers on Treasury’s website, FinancialStability.gov. The increase in consumer loan volume is for 19 of the 21 biggest banks receiving TARP funds. The remaining two banks—PNC and Wells Fargo—had to be removed for purposes of the analysis because they merged with other banks. Including them would have distorted the trend by making it appear that consumer loan volume jumped dramatically when, in fact, there has only been a small increase. 2. Return on Taxpayers’ Investment What is the likelihood American taxpayers will see a return on their (at least) $700 billion investment? If there will be a return, what amount of the funds can we expect to recoup in order to help control long-term deficits? - Chase from Tennessee Is it a good strategy to maximize taxpayer return by having the United States become a common shareholder in all 19 TARP participants? - “Sonofsamphm1c” Taxpayers already have seen a return on part of their investment. To date, Treasury has received $5.2 billion in dividend payments on Treasury’s investment in more than 600 banks participating in the CPP. In addition, banks are already repaying the government investment. 32 banks have repaid for a total of $70.1 billion.
In the end, it’s unlikely that we will be able to escape from the worst financial crisis since the Great Depression without some losses to taxpayers. But those losses would have been much greater had we not acted. The proper measure of TARP’s success is not profit or loss, but whether we stabilize our financial system and revive strong and broadly shared economic growth. 3. Success of PPIP How does the Secretary expect that banks and prospective bidders on their "legacy" assets will be able to reach agreement on a price for those assets? I could not see how the two parties would be likely to get together with the banks trying to avoid too big of a writedown. - Jeff from California To help banks replenish capital and restore confidence, we have taken several important steps. First, we have set up the Capital Purchase Program to provide healthy banks across the country with an investment of government funds on which the banks pay interest. The banks use these investments to increase their reserves and facilitate lending. Second, at our request, regulators conducted the stress tests on the 19 largest financial institutions to clarify these institutions’ financial condition so that they are better able to sell new stock to private investors and bolster their capital in this way. An increased capital buffer also provides protection against losses that could be associated with so-called legacy loans and securities that have remained on bank balance sheets since before the crisis. Third, the Public Private Investment Program (PPIP) is a direct effort to improve markets for these assets and Treasury plans to announce Fund Managers for the securities program in the very near future. Since we are in a period of declining real estate prices, loans and securities connected with real estate are hard to value and markets for these assets have dried up. That’s depressed the price of these assets to levels below where they would be trading in a more liquid market. Banks that own a lot of these loans and securities are in a bind. On the one hand, they don’t want to sell at such low prices. On the other hand, since they don’t know what price these assets would demand in the open market, they don’t want to count them as reserves or capital against which they can make new loans. By joining with private sector partners to bid for these troubled loans and securities, the PPIP is intended to re-start the private markets for these assets so that their price is not stuck at abnormally low levels. The PPIP will compliment the Term Asset-Backed Securities Loan Facility (TALF) program, which was launched as a joint initiative between the Federal Reserve and Treasury to allow for increased liquidity and price discovery in markets for very highly rated (AAA) asset-backed securities. Since this program began a few short months ago, we have seen demand improve substantively for securities that are eligible under the program. We believe that the PPIP will help alleviate stress in markets for securities that are rated below AAA and are not eligible for TALF. One of the big challenges in making PPIP work is getting the banks that hold these loans and securities and the investment funds that will be created under the program, to agree on a price. Some banks may decide to hang onto the assets and wait for them to recover their long-term
value. But we believe that others will want to get these troubled assets off their books so they can get back to the business of lending. We think that it is important to help re-start the market for real estate loans and real estate-backed securities so willing banks have a place to sell. 4. Bank Nationalization How do you respond to critics, such as Krugman and Stiglitz, who say that the troubled banks can and should be taken into temporary receivership? - “Horatio2” Does the Secretary see any circumstances that would create the need to develop a strategy to nationalize the banks? -Hill from Louisiana Please spell out the facts that prevent nationalizing the banks? - Jean from New York Receivership or nationalization may seem like a simple, direct solution to the problem of troubled banks. In fact, there are many complexities associated with this idea. This approach ignores how our financial system has evolved in recent decades. Our largest institutions are substantially larger and more complex than the banks that have been nationalized in the past. A government takeover of one or more of our largest institutions would bring with it huge risks. Nationalization of one or more of these large institutions would raise questions about the status of others. Unless regulators could simultaneously and credibly commit that no other institution was going to be nationalized, it would be difficult to contain contagion to other financial, and non-financial, institutions. There is also the problem of the exit strategy. In the current environment it is hard to imagine that private investors would have the resources, and the inclination, to buy one of these institutions in more or less their current form. That means that nationalized institutions would likely have to shrink substantially before they could be privatized. But dismantling one or more of our large financial institutions in the current economic and financial environment would likely have large negative spillover effects on the rest of the economy. 5. Mortgages Why not make financing for primary residences available at 3%? That would stem the tide of mortgage foreclosures and provide a boost to the economy. - “Jannsmoor” The Obama Administration is actively working to make home ownership affordable and stabilize the housing market. Working alongside the Federal Reserve, Treasury has helped push down mortgage interest rates for all Americans. The expanded First-Time Homebuyer Tax Credit provided in the Recovery Act allows eligible taxpayers to receive a tax credit of up to $8,000 on either their 2008 or 2009 tax returns. We are providing over $6.5 billion in tax credits to encourage first-time buyers to purchase homes before December. We are helping responsible homeowners refinance into more affordable mortgages and are targeting $75 billion to help borrowers and lenders modify at-risk loans in order to lower monthly mortgage payments and thus reduce foreclosures. For details, please see our website makinghomeaffordable.gov.
With more than 50% of homeowners in several cities around the country now upside down on their mortgages and the problem getting worse, why would homeowners continue to make mortgage payments even if they can? - “Tellurider” from Colorado. The vast majority of Americans are responsible homeowners. Their mortgages are financial obligations that they accepted, and they want to pay them whether or not their mortgage balances are greater than the market value of their home at the moment. People also want to emerge from this period with both their homes and their good credit; the only way to do that is to continue to make their monthly payments. While some balk at the idea of continuing to pay on upside down mortgages, the fact is that those who default face significant challenges finding replacement housing or will face significant challenges in the future obtaining credit because of the negative effect that defaulting will have on their credit scores. I would ask to give consideration to some type of a mortgage moratorium for us homeowners who are not yet in trouble but could be very shortly. As job losses continue or our unemployment insurance runs out, many of us stand to fall into trouble. - “Sueinmn” We appreciate the importance of reaching borrowers early before mortgage problems develop and people are in danger of losing their homes. That’s why one part of the Make Home Affordable Program is designed to help responsible homeowners who are current with their monthly payments, but are having trouble refinancing into more affordable mortgages because the value of their home has dropped below the value of their mortgage balance. It’s why another part of our program is designed to help responsible homeowners who are still current with their payments, but are in imminent danger of default by encouraging lenders to offer modifications to make their mortgages more affordable. In the case of this latter program, we recognize the unfortunate reality that we won’t be able to help every homeowner because many purchased more house than they could afford; these people would not be able to keep up with their payments even if their mortgages were modified. For details on our program, see our website www.makinghomeaffordable.com. 6. Credit Cards Rates Why are the banks who have taken billions in taxpayer money being allowed to raise their fee structure and interest rates to pay back those same taxpayer loans? -Sidney from Oregon Why are the banks being allowed to double the interest rates on long-term customers with credit cards who have never missed a payment? Wasn't the bailout to stabilize the banks? Ronald from New Mexico Why are we not hearing about comprehensive roll-backs on the exorbitant amounts that credit cards are charging? I have recently had many of my credit cards spike their rates to
29.9% which makes it nearly impossible to manage my finances. - Marian from New Mexico. Just before Memorial Day, President Obama signed into a law the CARD Act that, among other things, prohibits credit card companies from raising interest rates on debt that you have already incurred; gives you 45 days before any rate hikes take effect so you have time to cancel your card and look for a better deal; and restricts the kinds of payment deadlines that card companies can impose and charge you late fees for missing. In addition, the Act requires companies to disclose in your monthly statement how long it would take you to pay off your balance if you paid only the required minimum, and how much you would have to pay in order to pay off your balance in three years. Last week, the President unveiled his financial regulatory reform plan that calls for the creation of a Consumer Financial Protection Agency to look out for the interests of consumers of credit, savings, payment and other financial products, and that would enforce the CARD Act. 7. Deterring Irresponsible Behavior The world's economy and our role in it have been seriously damaged. Please explain how future bank executives will be deterred from engaging in the same careless acts if the government will protect their institutions and allow them to keep their jobs when they take unreasonable risks. What disincentives will be imposed? - Ralph from New Jersey Excessive risk taking was a major cause of the current crisis. And the fact that executives were actually incentivized to take the risks they did, makes the need for reform urgent. There are two ways we are addressing this issue. First, we want to make sure that no one assumes the government will step in to bail them out if their firm fails. As part of our plan for comprehensive regulatory reform we want to make sure financial firms follow the example of families across the country that are already saving more money as a precaution against bad times. We want to require all firms to keep more capital and liquid assets on hand as a greater shock absorber against potential future losses and that the biggest, most interconnected firms, keep even larger amounts on hand. Second, our plan seeks to better align the executive compensation practices of financial firms with the long-term interest of shareholders, the financial system, and the economy as a whole. In the short-term we are working with Congress to pass legislation in two specific areas. First, we will support “say on pay” legislation, which requires companies to give shareholders a nonbinding vote on executive compensation packages. We are also pursuing legislation to help ensure that compensation committees, the people who help draft the pay packages for executives, are more independent. 8. Banks Paying Back Money My question for Mr. Geithner is whether Goldman and all banks will be asked to retire the FDIC-backed debt they have issued before they are given the freedom to do as they please. - Janice from New York
The Temporary Liquidity Guarantee Program is a program established and run by the FDIC and is independent from Treasury’s efforts to stabilize the financial sector. Treasury will not require banks to retire this debt as a condition of repayment. Why are AIG counterparties able to retain 100% of the funds they received from the AIG bailout, and then at the same time be TARP recipients that wish to quickly pay off their debt to the US government so as to avoid any executive compensation regulations? Claudia from New York The recent repayments of the TARP funds invested in financial institutions through the Capital Purchase Program (CPP) are a positive sign. The objective of the CPP program was to temporarily strengthen the buffer of capital in the banking system. An increased buffer gives banks greater confidence to lend, an essential element of any sustainable economic recovery. Each of the institutions that repaid had been certified by their regulator as being able to play their role in lending even after repaying the government investment. Treasury has always envisioned the CPP program as a bridge to private capital and this is an example of that bridge. We have applied our executive compensation restrictions to entities that directly receive financial assistance under TARP and remove these restrictions when these institutions repay government funding. Not only does AIG remain under the regular TARP executive compensation rules, it is under even more stringent restrictions reserved for companies, like AIG, receiving “exceptional” assistance from the government Regarding the payment of AIG counterparties, one must recognize that derivative contracts, such as credit default swaps, are different than typical obligations. When a party owes its counterparty collateral, paying out even a penny less than 100 percent of the amount owed constitutes a default, which means the derivative trades suddenly vanish. Even worse, a default on one contract can set off a chain reaction of defaults across all counterparties. Had this happened at AIG last fall, about 1000 counterparties would have woken up and found that their nearly 50,000 trades with AIG had vanished. In combination, these defaults could have further destabilized market conditions when they were already very fragile. Moreover, a default of AIG at that time would have had serious repercussions on its insurance operations, causing market uncertainty to spread beyond just the banking sector. Since that time, employees at AIG have been working to defuse this situation and they have made progress. Since the end of the 2008, AIG has reduced the number of derivatives trades on its books from almost 50,000 to well under 30,000, reflecting significant progress in “winding down the book.” 9. Regulatory Reform & Too Big To Fail What regulatory tools does the Secretary feel he will need to adequately regulate the new financial institutions such as Citigroup, AIG, and Bank of America? - “Olddog65” Here are the key tools that the government needs:
It needs to be able to require financial firms of all sorts to have more capital and more ready access to cash so that they can absorb losses and continue to operate. It needs to have the power to resolve large and inter-connected firms that grow weak or insolvent before they fall apart and damage the system. Currently, we have this power for banks, but we need to be able to apply this process to other types of financial firms. It needs to bring much greater transparency and market discipline to critical markets. For instance by imposing record keeping and reporting requirements on all over-the-counter derivatives transactions, and giving full enforcement authority to regulators for abuse in these markets. Or by requiring sponsors or originators to maintain an interest in asset backed securities – so their incentives are better aligned with investors. Finally, it needs to be able to ensure that the new, higher standards that we will hold financial firms to here in the U.S. are matched by similarly high standards around the world. The President is seeking all of these in the financial regulatory reform package he unveiled last week. Is it absolutely necessary to have financial institutions that are too big to fail? There are lots of small banks and CUs with just a few hundred million, or a billion or two, in assets. – Anonymous Over the past two years, the financial system has been threatened by the failure or near failure of some of the largest and most interconnected financial firms. The federal government’s ability to respond was severely complicated by the lack of a statutory framework for avoiding the disorderly failure of a nonbank financial firm. The Obama Administration’s plan will change that. The plan not only puts in place safeguards to prevent the failure of these firms, but also a set of orderly procedures that will allow us to protect the economy if such a firm fails. While size may be an indicator of the risk that a firm might pose to the financial system, that is not the only issue. Other important issues are: How interconnected is the firm? Does the firm play some unique role in the financial system? How much money the firm has borrowed to finance its activities? Under our plan, we look at all of these factors – and firms that present unusual risks will be subject to much higher standards, so that the risk of failure is lower. The Administration’s plan also gives the federal government the authority necessary to avoid the disorderly resolution of large, interconnected firms when the stability of the financial system is threatened. This will be modeled on the existing FDIC regime for banks and will help ensure that the federal government does not, in the future, have to choose between bailouts and financial collapse. 10. Credit Default Swaps
During questioning before Congress you were asked why exotic investment instruments like credit default swaps shouldn’t just be done away with. You responded that you did not want to stifle “creativity” in the financial markets. Why do we want a “creative” financial market? – Anonymous We want a creative financial market because a creative economy requires it—the innovations generated by our markets and institutions help to make our economy the most vibrant and flexible in the world. The new products, services and capital, they produce are exactly what help turn a new idea into the next big company. Overall, we do not believe that you can build a system based on banning individual products— our core challenge is ensuring we have a system that has a proper balance between innovation on the one hand and consumer protection on the other. We propose keeping the system safe for innovation by having stronger protections against risk in CDS and other derivative markets with stronger capital buffers, greater disclosure so investors and consumers can make more informed financial decisions, and a system that is better able to evolve as innovation advances and the structure of the financial system changes. 11. Restoring Stability from the Bottom Up
Since the TARP has focused on the banks, and Wall Street and the Stimulus is slated for states to use to get shovel ready projects going, what is the reason the administration doesn’t put money directly into the accounts of tax payers in a trickle up economic plan? I know that is the intent of the tax break, but I’m asking about a serious multibillion dollar infusion directly allocated to the citizenry. - Paul from California The intent of the tax cut was to put money directly into the hands of working Americans. In fact, the $237 billion tax cut in the American Recovery and Reinvestment Act (ARRA) was the quickest and broadest tax cut in our nation’s history. The centerpiece is the Making Work Pay Credit which gives an immediate tax cut to more than 95 percent of working American families. Over the next two years, the Making Work Pay Credit is expected to put more than $100 billion in the pockets of hard-working Americans. Other measures include an increase in the refundability of the Child Tax Credit that will put almost $18 billion into the pocketbooks of approximately 11 million families. An increase in the Earned Income Tax Credit (EITC) will help 6.3 million low-income families with 12.7 million children. An expanded First-Time Homebuyer Tax Credit allows eligible taxpayers to receive a tax credit of up to $8,000 if they purchase their first house before December. The credit will help an estimated 1.4 million Americans by providing over $6.5 billion in tax relief. Over $3 billion of credits have already been paid out to first-time homebuyers. In addition to tax cuts, ARRA included economic recovery payments to people receiving Social Security and Supplemental Security Income benefits. These one-time payments of $250 were distributed in May and have already put $16 billion in the pockets of over 64 million Americans.
I have read that smaller banks are being allowed to fail. Although logistically difficult, would dealing from the bottom as well as the top of the banking pyramid have far greater effects on local economies? - Joe from New York The Obama Administration is committed to helping small and community banks during this crisis. In May, Treasury re-opened the Capital Purchase Program (CPP) to small banks with assets under $500 million. Through the CPP, Treasury has invested in over 600 banks across the country in 48 states, including small, community, regional and national banks, as well as Community Development Financial Institutions (CDFIs). 12. Performance Measurement & Oversight I feel that there is little in the media that helps average Americans get any real sense of whether the government’s strategies are working. Putting aside the stock market, what should Americans look to in order to tell if the market meltdown is stopping and we are coming out of the credit markets freeze? - Sally from Washington, DC A good starting point is looking at broad measures of economic performance, like jobs. For example, problems in the credit markets have had a very real and measurable impact on unemployment, which has now risen to its highest level in 26 years. Job losses in the month of May were at their lowest level since September 2008, and they were about one half of the average monthly job losses for the first quarter of the year. Although somewhat indirect, overall performance measures such as employment can provide important information about the health of the credit markets. There are also a number of direct measures that shed light on how credit markets are working. The one data point that has probably been most indicative of the pressures in credit markets has been the LIBOR/OIS spread, which measures the pressure on overnight liquidity in the financial system as well as the fears that institutions have in doing business with other firms. You can see LIBOR/OIS Spread displayed on our website, along with a few other measures of credit market pressure: http://www.financialstability.gov/impact/data.htm Please explain the oversight process so we know when these banks are going to use this money for the common good. - “Dye2000” Treasury has invested capital in viable banks so that our financial system has the needed confidence to continue playing their vital roles as providers of credit to businesses and consumers. In exchange for this investment, banks pay interest of 5 percent per year back to the taxpayers for as long as they retain the investment. To help measure the lending activities of banks participating in the CPP, Treasury has launched the Monthly Lending and Intermediation Snapshot, a very important initiative to help the public easily assess the lending and intermediation activities of banks participating in the CPP. This snapshot is available monthly at www.financialstability.gov.
Also, Treasury recently published an expanded Monthly Lending Report, which reports on the monthly average outstanding balances of consumer loans, commercial loans, and total loans from all CPP participants. The new Capital Assistance Program will require institutions to indicate their expected use of funds and track lending against a baseline. On top of these reports, Treasury’s programs are monitored by three separate oversight bodies in addition to Congress. Treasury has a productive relationship with each of these bodies, including the Special Inspector General for the TARP, the General Accountability Office, and the Congressional Oversight Panel.