Wednesday, January 21, 2009

Geithner calls for tougher bailout terms

Treasury Secretary-designate Tim Geithner called for bold action to blunt the economic downturn and promised to tighten the terms for companies getting federal financial help.

In prepared remarks to be delivered Wednesday morning before the Senate Finance Committee, Geithner called on senators to support the Obama administration's $825 billion stimulus plan. The comments come as the Senate panel prepares to consider whether to confirm Geithner as the nation's top financial officer.

"Senators, the ultimate costs of this crisis will be greater, if we do not act with sufficient strength now," Geithner's testimony read. "In a crisis of this magnitude, the most prudent course is the most forceful course."

In his testimony, Geithner -- who is currently the president of the Federal Reserve Bank of New York -- also advocated "aggressive action to address the housing crisis and to get credit flowing again," though he offered no specifics.

The comments come a day after President Obama took office, only to confront the worst-ever Inauguration Day selloff in the stock market.

The Dow Jones industrial average dropped 4% Tuesday, led by another free fall in bank stocks. The KBW Bank index plunged 20% to its lowest level since 1994, amid worries that big financial institutions such as Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) will require additional federal aid that could wipe out shareholders.

Geithner said that if confirmed as Treasury secretary, he would work to reform the government's most visible response to the financial sector crisis -- the $700 billion financial bailout plan enacted by Congress last fall after September brought the collapse or takeover of six major financial institutions.

The Bush administration's approach to the Troubled Asset Relief Program, or TARP, has become deeply unpopular with legislators and the public.

Many skeptics complain that there was no plan in place to make sure the first $350 billion in government funds were used to boost lending to consumers and businesses.

Geithner said a revised TARP plan will contain "tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering."

The comments echo those made recently by another top Obama economic aide, National Economic Council chief-designate Larry Summers.

Addressing another prominent concern, Geithner promised to develop a plan to unwind the government support for financial markets and institutions as soon as possible, and to develop a plan to put the nation on sounder footing fiscally.

The budget deficit is expected to exceed $1 trillion in coming years as tax receipts plunge and federal spending expands to fill the shrinking private sector.

"We need to demonstrate with clear and compelling commitments now, that when we have effectively resolved the crisis and recovery is firmly established, that as a nation, we will return to living within our means," Geithner said.

The hearing -- starting with testimony by Geithner and statements by the leaders of the Senate Finance Committee, Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- is expected to focus on these points as well as a discussion of Geithner's tax status.

The hearing was originally set for last week, but it was pushed back after it came to light that Geithner -- who as Treasury secretary would oversee the IRS -- had failed to pay in timely fashion some $34,023 in self-employment taxes between 2001 and 2004.

Obama's team dismissed the tax problems as a "common mistake," and Geithner has since paid the required taxes and interest. Obama's chief of staff said Sunday the president "absolutely" supports the nominee.

Though as head of the Treasury Geithner would oversee the IRS, many observers have dismissed the tax questions as paling in comparison to the need to address the crisis in the economy and financial markets.

"I'm interested in hearing his explanation for the tax stuff, but that's minor next to the other issues," said New York University finance professor Roy Smith. "What I want to know is what he's learned from the first half of the TARP."

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