The Obama administration is scrapping the Bush administration’s economic recovery plan and has unveiled a financial stability plan that includes further stabilization of the banking sector, expanded modifications and a revival of the secondary market. Execution of the plan will involve trillions of dollars.
U.S. Treasury Secretary Timothy Geithner discussed today details about the new plan, according to a transcript of his prepared statement released by the Department of the Treasury.
He said that the financial system is working against an economic recovery — forcing millions of layoffs, pushing foreclosures higher and making it harder for credit-worthy borrowers to obtain home financing as banks are pressured by the recession.
“We must get credit flowing again to businesses and families,” Geithner said. “Our plan will help restart the flow of credit, clean up and strengthen our banks and provide critical aid for homeowners.”
He noted that the government’s program to repair the financial system is being fundamentally reshaped. He also said that the United States must “send a clear and consistent signal that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy.”
Geithner described a three-step plan that includes new capital for banks that can pass a stress test. The funds will be funneled through the Treasury “as a bridge to private capital.” He said all government agencies that regulate U.S. banks will be involved in a more intense assessment of individual institutions to determine which are healthy enough to be given new capital.
The fund will be initiated with $500 billion but is expected to ultimately provide up to one trillion in financing capacity.
The third step in the Treasury’s plan involves a $1 trillion commitment by both the Treasury and the Federal Reserve for a consumer and business lending initiative that is expected to kick start the secondary lending markets and reduce borrowing costs. By restarting the securitization markets, the government hopes to get credit flowing again for commercial mortgages and non-mortgage credit such as small business lending, student loans and auto finance.
“Today’s announcement represents a significant step forward in the effort to restore confidence in our financial institutions, stabilize the credit and housing markets and address some of the systemic problems currently plaguing our national economy,” Mortgage Bankers Association President and Chief Executive Officer John A. Courson said in a press release.
In addition to the three steps, Geithner discussed plans to end the real estate market spiral where foreclosures lead to lower home prices which, in turn, lead to more difficulty in home financing.
“Our focus will be on using the full resources of the government to help bring down mortgage payments and to reduce mortgage interest rates,” Geithner stated. “We will do this with a substantial commitment of resources already authorized by the Congress under the Emergency Economic Stabilization Act.”
This aspect involves committing $50 billion to help reduce monthly payments, requiring the participation of recipients of government capital and establishing loan modification guidelines and standards for government and private programs.
Geithner said the Federal Reserve will continue to buy up to $600 billion in the mortgage-backed securities of Fannie Mae and Freddie Mac.
Mortgage bankers also rallied around Obama’s plan.
“MBA supports Treasury’s goal of bringing all stakeholders together around a uniform and workable standard for modifying loans to help troubled homeowners achieve an affordable monthly payment,” MBA’s Courson said.
In a statement released by the White House, President Barack Obama explained that foreclosures are at the heart of the financial crisis and must be addressed.
“This program will require a substantial and sustained commitment of public resources,” Geithner said. “Congress has already authorized substantial resources for this effort, and we will use those resources as carefully and effectively as possible.”
Banks receiving aid will now be required to use all of the capital to generate new lending that would not have occurred without the government support. Treasury investments will be placed in a new Financial Stability Trust.
The American Bankers Association issued a statement in support of distinguishing aid for troubled corporations from capital injections at healthy banks.
“The vast majority of banks never made the type of toxic subprime loans that led to the current financial crisis and more than 90 percent remain well capitalized,” ABA said.
Geithner said Obama is committed to a complete overhaul of the U.S. financial regulation system — which the Government Accounting Office recently described as a 150-year-old U.S. financial regulatory system that is “a fragmented and complex arrangement of federal and state regulators.”
The Treasury secretary said the second step is the establishment of a public-private investment fund. Government funds will be used to leverage private funds for legacy loans and assets that are now burdening many financial institutions. The government hopes this step will revive the market for toxic real estate assets.
The stock market reacted violently to the Treasury’s plan — with the Dow Jones Industrial average plunging 382 point for the day.
