Scroll down for video excerpt and full transcript
In an interview on Wednesday night with Charlie Rose, Treasury Secretary Tim Geithner struck an optimistic tone, saying that none of the 19 banks that experienced government stress tests are insolvent, but he was cautious about upcoming regulatory reform of the financial system, saying that it could take up to three years.
He added that the stress test results, which will be released on Thursday, "will be, on balance, reassuring."
Geithner also acknowledged that the banks were tough negotiators when it came to the results of the stress tests:
Charlie Rose:
We hear these kinds of stories coming out already from some of the banks, saying that there was intense negotiation because what the world was going to see was their balance sheet.Tim Geithner:
That's right.Charlie Rose:
Give us a sense of that.Tim Geithner:
Well, again, this is a -- this is a normal thing. You know, banks normally in some -- need to raise capital. Supervisors tell banks they need to raise capital. That's a normal part of the business. What we did here in this context was to take a more conservative look and look ahead to what may happen in the future and in the case we face a deeper recession as a way to lift more definitively this cloud of uncertainty over the financial system, and that disclosures will be enormously important. But this is a normal part of the way crises get resolved, and again, there will be some institutions that don't need additional capital. They'll be able to begin to repay the government. That's very helpful, enormously helpful to confidence. That will give us more resources to devote to small banks and make sure there's credit markets opening up. And some banks are going to have to raise additional capital, and they'll have a bunch of different ways that they can do that.
Geithner, who didn't name the banks which would need additional capital, emphasized that most of those banks will be able to raise capital through private sources rather than government financing.
And he stated that the government would be reluctant to take larger stakes in banks, such as by converting preferred capital: "we'll be reluctant to do that... we'll get out as quickly as possible."
Geithner also issued a not-so-subtle warning to Wall Street executives by indicating that the government could force management changes at banks in which it has made a significant investment:
If we face those situations, we'll have to make judgments about whether the quality of leadership of those boards is strong enough so that, again, our interests are met best. Our interests are not just as a shareholder, as an investor.
Geithner also explained that regulatory reforms could take up to three years and that the government will get back at least $25 billion over the next six to 12 months from banks that received TARP funds.
Watch an excerpt of the interview:
Read the full transcript:
Charlie Rose:I want to talk about the stress tests, which will be relieved, the purpose of them and what you hope to accomplish, and what we learn from them, but let's begin with the overall economy. The chairmen of the Fed, Ben Bernanke, was at a Congressional committee yesterday, suggesting that he sees the beginning of recovery in 2009. How do you see it?
Tim Geithner:
I think things feel better. I think your -- people sense a bit more stability. You can see it in behavior. People are spending a bit more. Investors -- companies are starting to borrow again so they can start to make investments again. It does feel better, but I think we emphasize that there is a lot of pain across this country, still. Enormous uncertainty, people going through what is probably the most challenging period, still, in a generation. It took us a long time to get into this, and it's going to take us a lot to get out of this still. So these were important signs of some stability. They're the necessary steps for recovery to begin, but, you know, this is going to take a while.
Charlie Rose:
And what is happening, you think? I mean confidence is one thing.
Tim Geithner:
Confidence is better. It's been sort of sustained day-by-day, week-by-week improvement in consumer and business confidence now for several weeks. Part of it was really because, you know, confidence just fell off a cliff in the second half of last year. Particularly the period after September/October, just fell off the cliff. And people just stopped. They stopped spending. They stopped investing. You saw trade fall off a cliff. There was just enormously damaging shock to confidence everywhere. People were just scared and uncertain. And that went very, very far. Went very far, and it just -- it stopped, and it's come back a little bit and that itself helps, just that sense of the end of the fall helps a little bit.
Charlie Rose:
And you're beginning, though, to see the recovery in 2009. We're now in May 2009.
Tim Geithner:
The pace of decline is slowing, here and around the world. And there are some places where we're seeing things starting to improve, but the main thing is a sense of stability, yet. Now for the first time, really I would say in several quarters, you're starting to see people start to raise their forecasts a little bit for the later this year and '10. And again, as the chairman suggested yesterday, and I'll just refer to his forecast, the Fed's forecast, is the Fed's forecast is that you'll start to see growth slightly positive second half of this year, and growth will strengthen into next year.
Charlie Rose:
There's a consensus in the administration of agreement with Chairman Bernanke?
Tim Geithner:
Well, as I said, use this forecast -- it's a good independent, credible forecast, and it's not very different from the consensus of private forecasts, now. So I would say there's broader consensus now that that's a reasonable expectation for the economy, but, you know, a lot of risk ahead, still. Really important that the governments here and around the world will keep at this. We have a lot to do to get Americans back to work, kind of reinforce this improvement in confidence, get credit markets flowing again. We're going to keep doing that, again, because we want to make sure we're building the strongest foundation for recovery possible.
Charlie Rose:
What indicia are you looking at?
Tim Geithner:
Confidence is a good measure, but you really want to look at how people are behaving. How much are they spending, how much are they saving, where are they investing, are they borrowing again? And again, all those indicators suggest a broader-based improvement in tone.
Charlie Rose:
There is a question of jobs and unemployment.
Tim Geithner:
There's still enormous pain, uncertainty, sense of challenge across the economy as a whole, and unemployment is going to keep rising for awhile, even as growth starts to recover. The way recoveries work is unemployment will rise for a while.
Charlie Rose:
It goes beyond eight.
Tim Geithner:
Right -- well, it'll go where it's going to go, but the important thing is that people have to prepare for the likelihood that unemployment will still rise as the economy recovers. What will start to happen is that the pace of job loss will start to slow significantly, and that's a really important thing. As people start to see that, and that should happen too, over the next several quarters -- people will start to see that improvement, fewer people will be losing their jobs, people will be less concerned about losing their jobs, that will help confidence too; that will help reinforce the basis for recovery.
Charlie Rose:
Do you think we'll need another stimulus?
Tim Geithner:
Not at this stage, but that's something we've got to keep an eye on, carefully. Again, I think that a big mistake governments make in coming out of these things is they tend to put the brakes on too early, draw back too quickly, prematurely try to exit, undo all these exceptional things you do to address a crisis, and we want to be very confident, we want to be very sure, both here and around the world, that there is, you know, strong, sustained support for recovery, and that recovery is firmly established before you start to dial that back. Now, we have to be prepared to do what's necessary to get through this, and so we'll keep watching closely, working with countries around the world so that, you know, if we see signs of risk emerging again, things get frazzled again, we have to be prepared to take -- to do what's necessary.
Charlie Rose:
Yeah. What about within the business -- business community in terms of spending, in terms of inventory, in terms of expansion?
Tim Geithner:
I think it varies tremendously across the country. You know, you have huge divergence in unemployment rates across the country. Parts of the country have enormously high unemployment rates and they're still getting dramatically worse; parts of the country have much greater, sort of, stability and confidence, so it varies a lot. I would say, in general, businesses still feel that credit is tight, they're still worried they're going to not be able to borrow enough to meet payroll and expand businesses, and that concern about the credit markets, financial system, being still as a headwind, acting as a headwind on growth, is still significant out there, even though we've seen signs of improvement.
Charlie Rose:
That brings us to the financial sector. What is the purpose of the stress test, and what do you hope to gain from them?
Tim Geithner:
Excellent question. This financial system, at the beginning of this year, was operating under a deep cloud of uncertainty, great loss of confidence. People were very worried about whether the scale of losses that might come in a deeper recession would be sustainable for this system. And banks were unable to raise equity, could not borrow without guarantees from the government, and they were being defensive; they were pulling back on lending, and that was sucking oxygen out of recovery, deepening the recession. And that's -- fundamentally underpinning that was the sense of concern, lack of confidence, again, about how strong banks were. So what we did with the Fed is, for the first time ever, we brought the nation's financial supervisors together, and in an unprecedented step, asked them to do a careful look under the hood, to take a careful look at how much -- how strong these institutions were in the event things got worse. And what these results will do is they will bring in a level of transparency to bank balance sheets that will allow investors to judge, make it easier for them to raise capital, improve confidence that this system is going to be strong enough to get through this, and that will be enormously helpful. It will be an important next step forward. Again, because of the virtues of bringing disclosure and transparency, it will help lift this fog of uncertainty over the financial system, and I think the results will be, on balance, reassuring.
Charlie Rose:
Two things: one, transparency was necessary so that people would have confidence in the numbers that you release.
Tim Geithner:
That's right, they get to judge. They'll get to see them. They'll make their own judgments. But you're going to hear criticism from both sides in this, Charlie. A lot of people will say these were unfairly tough.
Charlie Rose:
And the other side, they were not tough enough.
Tim Geithner:
And there will be other people to say that, you know, that losses could be worse. And they may be right. But this was designed -- again, designed by the Fed -- to get the balance right and to strike the right balance. And it is a very exacting set of standards. Again, because what we want to do is to make sure that people have confidence that our financial system is going to be able to get through this and going to be able to lend. And to be able to lend, they need to be able to raise equity and have a stronger cushion against future loss.
Charlie Rose:
We hear these kinds of stories coming out already from some of the banks, saying that there was intense negotiation because what the world was going to see was their balance sheet.
Tim Geithner:
That's right.
Charlie Rose:
Give us a sense of that.
Tim Geithner:
Well, again, this is a -- this is a normal thing. You know, banks normally in some -- need to raise capital. Supervisors tell banks they need to raise capital. That's a normal part of the business. What we did here in this context was to take a more conservative look and look ahead to what may happen in the future and in the case we face a deeper recession as a way to lift more definitively this cloud of uncertainty over the financial system, and that disclosures will be enormously important. But this is a normal part of the way crises get resolved, and again, there will be some institutions that don't need additional capital. They'll be able to begin to repay the government. That's very helpful, enormously helpful to confidence. That will give us more resources to devote to small banks and make sure there's credit markets opening up. And some banks are going to have to raise additional capital, and they'll have a bunch of different ways that they can do that.
Charlie Rose:
The argument would be how much capital that they should have to raise.
Tim Geithner:
That's right.
Charlie Rose:
Because they've got to raise it within a six month period, and they've got to have a plan within a one month period.
Tim Geithner:
They have to work out a plan, get that plan agreed to by their supervisors, and they have to go execute that plan. And they're going to have a period of time to do that. And the government will stand behind that process, so that we want the world to know that we will make sure there is enough capital there in the system. And so, we'll provide a backstop to these institutions as they go out and raise private capital. But, you know, banks don't get to decide how much capital they need. That's the judgment supervisors have to make. In any system, any credible financial system, the supervisors get to make that judgment. And they have to make that judgment with extraordinary care, with integrity, but that's their judgment to make. And you know, banks will fight these. They will disagree. They'll want the numbers to be lower, but the supervisors get to decide.
Charlie Rose:
Because they'll want to raise less capital, be demanded they raise less capital.
Tim Geithner:
They might want to dilute their current shareholders less because they might believe that they're going to be able to earn their way out of this. And so that's why they might resist us, but that's a natural part of the process.
Charlie Rose:
There are 19 banks at issue. Some of the results will say you do not have enough capital, and you have within six months to raise more capital. How do you expect these banks to get their balance sheets to meet these standards?
Tim Geithner:
Well, let me step back for one second. In general, there is quite a lot of capital in the U.S. financial system, and all these banks operate today with substantial capital as measured by their regulators. What this is designed to do is to make sure there's this additional cushion of extra resources to deal with the uncertainty we face going forward because that will help make sure there's a stronger capacity for lending as we come out of this recovery. And it is very important that again, banks are able to provide the credit recovery requires. So that's what this is designed to do. Now, banks will have lots of different ways to raise additional capital. They could go raise new common equity from existing shareholders or from new investors. They can seek to convert or exchange some of their existing securities, capital securities, into common equity. They can come take capital from the government, apply to take capital from us. And we will, again, we'll backstop and reinforce that process. And I am reasonably confident that the vast bulk of these additional needs, these guys will be able to meet through private means. And they'll have a big incentive to meet through private means, and that's good for us, too, because we don't want to create a situation where the government has to come in, except where that's necessary.
Charlie Rose:
Are we beyond essentially the question of solvency of banks in America?
Tim Geithner:
For the system as a whole, I think people can be confident that this system is a stable system. It will be a resilient system, and we'll make sure it is a stable, resilient system. And these largest institutions, they account for roughly three-quarters of assets on bank balance sheets, so they're very -- their health and their stability is very important to the financial system. And this process will help reinforce confidence in that --
Charlie Rose:
But do you believe all 19 banks are not at a risk of insolvency?
Tim Geithner:
I believe that, yes.
Charlie Rose:
They are, so they --
Tim Geithner:
None of those 19 banks are at risk for insolvency. Now, again, these banks, they bear the biggest responsibility for making sure that they can reassure investors that they're going to be strong and viable in the future. We'll indeed help them do that if that's necessary, but they bear the responsibility for making sure they can convince their investors and their creditors that they can get through this with a strong, viable franchise, and I think they're going to be able to do that.
Charlie Rose:
All right, so you're confident that these banks will be able to go raise this capital over a six month period.
Tim Geithner:
Reasonable confident, and --
Charlie Rose:
And if they don't?
Tim Geithner:
If they don't, they can come to us and we'll provide it.
Charlie Rose:
The government will provide. And this is additional TARP money?
Tim Geithner:
That's right.
Charlie Rose:
How much TARP money is left for that?
Tim Geithner:
At the moment, we estimate that there's roughly $110 billion uncommitted. We expect, though, to get a significant amount of money back from the banks that don't need additional capital. And we estimated a few weeks ago, Charlie, that we'll get back $25 billion over the next six to 12 months. I think we'll get significantly more than that back, so we have a substantial amount of resources to backstop the system in this process, and that's a good thing. Because then we have more flexibility, as I said, to make sure we're providing support to small community banks and to help get these credit markets working again.
Charlie Rose:
Suppose they go out into the capital market. What will the government do to help them raise private capital?
Tim Geithner:
Well, the government is doing a lot now to help hold the system together. The Federal Reserve and the FDIC are providing a lot of support in terms of liquidity. These are temporary guarantees that are necessary to help keep the system together, and that's a very important thing. We're going to keep doing that, but it's up to the banks themselves to figure out how they're going to raise this money. And it's in our interests that they're able to do this from private sources. We're going to help reinforce and backstop it, but the important thing is that they go do it?
Charlie Rose:
What kind of guarantees are there for private capital that comes to these banks?
Tim Geithner:
Well, they're -- again, they'll have to make the judgment about where they think they'll get the best return on their capital. But for a temporary period, to help protect the overall economy, the Fed and the FDIC are providing important temporary guarantees. Because again, banks require the ability to fund themselves. That's central to banking, and we want to make sure the markets have confidence in their ability to meet their commitments, get access to liquidity and those things. And so for a temporary basis, the government has to do that.
Charlie Rose:
Okay, some banks sell assets in order to array and increase capital so they can meet the future economic demands. Some banks will be able to convert preferred stock into common stock.
Tim Geithner:
That's right.
Charlie Rose:
Why is that a good idea?
Tim Geithner:
Why is that a good idea? Well, for some investors --
Charlie Rose:
So that the government ends up with a significant amount of the common stock of the bank.
Tim Geithner:
It's not clear how many banks are going to want to convert the government's preferred stock into common equity for the government. I think, again, most banks are going to want to avoid doing that. They may be able to convince their private holders of preferred stock to convert to common. That's a judgment investors make all the time.
Charlie Rose:
Well, they want to do it also because it dilutes common stock, doesn't it?
Tim Geithner:
They may choose to do that, but again, the investors would be making a choice. They would be trading a security that has the possibility of an interest payment over time for a greater share in the future upside of that business, and that is a choice investors will make. And banks will try to figure out the optimum mix of these strategies. But you're right. They can go raise new common equity. They can sell businesses that they don't think are essential to their franchise in the future, use that to raise equity. Or they can seek to convert some of the existing capital they have into common equity, a range of things. They all make different choices, but I think the important thing we're trying to do is make sure that common equity comes into the system so there's a better cushion there for future --
Charlie Rose:
What you're trying to do is strengthen the financial sector so that they can perform the function they can in this economic crisis.
Tim Geithner:
Exactly, and if we left this unaddressed -- this cloud of uncertainty over the system -- then what would have happened is banks would have lent less because they wouldn't have been able to raise equity, and they would have become more defensive, more protective, deepening the recession. That's what we had to protect.
Charlie Rose:
Let me just understand you. You hope that they will not want to -- you don't want the government to end up owning any more of these banks than they already own. You'd prefer they not take the preferred stock and convert it into common stock.
Tim Geithner:
We'll do if it it's necessary, if it's on terms that are acceptable to the taxpayer. We will be reluctant to do that, because we don't want the government to be in the situation of owning material stakes in our financial system. Where we have to do that temporarily, we'll do it, but we want to get out --
Charlie Rose:
Temporarily?
Tim Geithner:
We'll get out as quickly as possible, and we don't want to be in the position of making day-to-day management decisions about these institutions.
Charlie Rose:
If you own a significant percent, say over 30 percent, are you going to be involved in the management of the bank?
Tim Geithner:
If we face those situations, we'll have to make judgments about whether the quality of leadership of those boards is strong enough so that, again, our interests are met best. Our interests are not just as a shareholder, as an investor. We want to make sure the institutions will be strong enough so that we can get out, that the private capital will cover more places over time. But again, I think for the vast bulk of these institutions, they're going to able to -- at least they're going to have the chance, a reasonable shot, to meet these needs through private sources. Because they don't what to be in the position, too, where they are dependent on the government.
Charlie Rose:
What surprised you about these banks?
Tim Geithner:
You know, I don't think that -- I don't think I was very surprised by any of it. You know, we have a system that's very diverse. A lot of strength, some parts of the system that were, in the eyes of the market, didn't have that much common equity. And this will fix that. It will allow markets to differentiate, and it's important to differentiate, again, because the -- our system needs to go through a process of restructuring. Some parts are going to get larger. Some will get smaller. That's a necessary process of adjustment. A lot of that's happened already. Some of that more will be ahead. So I'm not very surprised by this -- by the numbers we've seen.
Charlie Rose:
You will set the standard as to how much capital they need, and they will tell you how much capital or you'll help them define how much capital they have.
Tim Geithner:
That's right.
Charlie Rose:
And therefore there's a shortfall in some cases.
Tim Geithner:
There will be a shortfall. Again, this is not a solvency thing. There is very significant cushions in these institutions today, and all Americans should be confident. These institutions are going to be viable institutions going forward. This is designed to make sure that the economy will be able to benefit from larger lending capacity going forward in the event we were to face greater uncertainty again around a deeper recession. So it's like insurance against -- it's like insurance -- like precautionary insurance against the risk of a deeper recession, that will help make recovery more likely, because then banks won't have to keep behaving against the possibility that they have protect themselves against things getting worse. So that's the dynamic this will help the recession.
Charlie Rose:
All right, let's talk about those banks that say, "I got a clean bill of health from the federal -- from the stress test. And therefore I want to repay my TARP money." What are you going to demand of those institutions?
Tim Geithner:
The really important thing is -- I want to say two things, Charlie. A very important thing is they have to demonstrate that they can borrow in the markets without government guarantees. And if they can --
Charlie Rose:
No FDIC guarantee of your seeking of private capital.
Tim Geithner:
They can demonstrate now that they can go in there and convince people that they are willing to lend money to these institutions without an FDIC guarantee, and where they can do that, we will welcome that money coming back. When they have plenty of capital, above the requirements of the test the Fed designed, and they can demonstrate they can raise money without an FDIC guarantee, then we will welcome that capital coming back. But I want to say one thing that's very important: I know that many institutions are eager to repay the government as a sign of strength. And again, that's a sign of health in our system and we should welcome that.
Charlie Rose:
Also because they don't like the restrictions from the TARP money, too, on compensation and other packages.
Tim Geithner:
Yeah, that's what I'm coming to, and I want to, and I really want to underscore this. This crisis was deeply damaging in part because of this great loss of confidence in the quality of leadership at America's financial institutions across the board. And these institutions, all of them, have a long way to go to rebuild that sense of confidence and trust that's necessary for any financial system to run well. And that's going to require a lot more work by them, all of them. To earn that confidence in the American people they are going to make sensible judgments about the incentives they create for risk taking in their firms, how they are using those resources, and that they are going to be in their communities they operate, in the markets they operate. Where they lend, that they are going to be part of the solution and they are going to be an important part of recovery, and they need to work very hard to earn that confidence again. All these institutions, and not just those that as a result of the Fed's test emerge with relatively strong capital so they can repay. And I say that because we can't go back to the situation we had over the last ten years, and we're not going to go back --
Charlie Rose:
Categorize the situation over the last ten years as you see it, that you can't go back to.
Tim Geithner:
Okay, we had a period where compensation practices just became completely un-moored from reality, defied gravity, and they created incentives for risk taking that overwhelmed all the basic checks and balances in the system. Overwhelmed the discipline shareholders are supposed to bring to management of firms. Overwhelmed the checks and balances of risk management, and of supervision. And we're not going to go back to that situation. We're going to make sure that, as part of our broader regulatory reform effort, that we are putting in place standards that help change those incentives. That's a critical thing. That's going to apply -- has to apply across the financial system.
Charlie Rose:
Those firms that want to repay their money -- and some already have -- smaller banks --
Tim Geithner:
Smaller banks have, that's right.
Charlie Rose:
Smaller banks have. Some banks have already proven they can raise private capital without FDIC approval --
Tim Geithner:
Right, that's right.
Charlie Rose:
-- so you've already got that.
Tim Geithner:
That's a good thing.
Charlie Rose:
But if in fact they pay it all back, you know, what restrictions will exist on their compensation policy at their individual institutions?
Tim Geithner:
Well, let me -- let me just step back for one second. And we're -- the president is committed, and is working with the leaders of Congress, on very comprehensive, broad-based financial reform, to put in place new rules of the game, more constraints on risk-taking, to prevent a crisis like this from happening again. Much stronger protection for consumers; we're going to have to get a much better balance in terms of the oversight structure. As part of that, it is very important that both the SEC and bank supervisors set out broad standards and principles for compensation practice. Now, you don't want the government setting limits on overall compensation, or deciding what's appropriate in terms of the level of compensation. That's not something we should do as a country. But what government has to do is to make sure that the incentives compensation set by those things don't create too much risk of excessive risk-taking in the future, where people get to benefit from the possibility of future public support and reap all the gains of that support today, and that's not something we can have. So broad standards and principles that will make sure that money is at risk, incentives are -- the company is at risk -- until you really realize the game that you're not incenting short-term risk-taking at the expense of long-term stability; those are the kind of changes that all institutions today are trying to get right and put in place.
Charlie Rose:
And new restraints on leverage?
Tim Geithner:
Absolutely. I think that, again, as part of any credible effort -- this will happen here and around the world -- there's going to have to be greater constraints on leverage and risk-taking, more broadly applied across the financial system.
Charlie Rose:
When will we see that start to happen?
Tim Geithner:
Well, we need to get through this crisis. It is very important we get through this crisis, and be definitively through it. But we're hoping to legislate this year. One of the president's principal priorities is to work with Congress to put in place a new framework for constraints on risk-taking, for better consumer investor protection, better protection against the kind of fraud we saw in these markets, and a much more powerful, cleaner oversight structure with better enforcement, frankly.
Charlie Rose:
Whatever you can do in terms of regulation and legislation, will take place during the next three years.
Tim Geithner:
Yes, within that period of time.
Charlie Rose:
Not earlier.
Tim Geithner:
Within that period of time. But again, these things are about preventing the next boom.
Charlie Rose:
How will you know when we are, sort of, at a place where we have gotten through this crisis? What is the indicia, what is the data, to tell us that?
Tim Geithner:
The most important thing is you see unemployment coming down definitively; very substantial sustained reductions in unemployment. So you see Americans back working again, and the productive capacity of America is being fully used. That's the most important test.
Charlie Rose:
What else?
Tim Geithner:
Well, you want to see markets start to work again, you want to see confidence come back, you want to see people be able to borrow more freely if they want to finance a kid's education or they have to finance an extraordinary medical expense; you want to see that easier for them to do. I think those are the things that matter; you want to look at the things that matter to the lives of average Americans, you want to see businesses more confident to make investments in some new idea, to help expand their business, so those are the things that are measures of health.
Charlie Rose:
Which is not happening at this point.
Tim Geithner:
No, not yet.
Charlie Rose:
Especially in the business.
Tim Geithner:
Again, this is -- this is really, Charlie, about some tentative signs of stabilization and stability, some early indications of improvement, but you know, we're going to have to work through, still, a very challenging process of adjustment. That's going to take some time.
Charlie Rose:
Where are we in housing?
Tim Geithner:
Housing; pace of decline in housing prices is slowing, and that's very important. Parts of the country where house prices have fallen a lot, demand for new housing is picking up.
Charlie Rose:
But there's a huge, existing stock out there.
Tim Geithner:
There is a huge existing stock, right --
Charlie Rose:
Available and not being purchased.
Tim Geithner:
And that's going to take some time to work through, still, but interest rates have come down a lot. Millions of Americans now, partly as a result of the Fed's actions, partly as a result of the president's programs -- you're going to be able to refinance to take advantage of those interest rate -- that's what's helped stem the decline in house prices. That means that there will be much more money in the hands of the average Americans if they can refinance to take advantage of lower interest rates. Those things help, those things help. Now, again, you see some signs of stability in parts of the country where prices fell the furthest, and that helps. But you know, this housing thing still has a ways to go. Most of the resets -- you know, a lot of people went into mortgages which had a low interest rate for the first couple years, and then reset to much higher rates; most of that reset bulge is behind us now, and that's also helpful too. So you're going to see the start, the beginnings of the process of repair in housing too, even though it is a little ways to go.
Charlie Rose:
Looking back, what are the mistakes, and what should you have done more of? Where were your instincts right but you didn't go far enough?
Tim Geithner:
I think, again, this is with the benefit of hindsight --
Charlie Rose:
Exactly, 20/20.
Tim Geithner:
-- to everyone in this case. And we'll need a little more time to get full perspective. I would say there were three types of broad errors of policy, in policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk, people trying to get a higher return. That was just overwhelmingly powerful.
Charlie Rose:
Money was too easy.
Tim Geithner:
It was too easy, yeah. In some ways less so here in the United States, but it's true globally. Real interest rates were very low for a long period of time.
Charlie Rose:
Now that's an observation. The mistake was that monetary policy was not by the Fed, was not --
Tim Geithner:
Globally , what matters --
Charlie Rose:
By central bankers around the world.
Tim Geithner:
Remember, as the Fed started to tighten earlier, but our long rates in the United States started to come down even as the Fed was tightening over that period of time and partly because monetary policy around the world was too loose. And that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know we all bear responsibility for that. I'm not trying to put it on the world. The second thing was in supervision and constraints, for a lot of reasons, partly for the first reason. The supervisory system was just way behind the curve. You had huge pockets of risk build up outside the regulatory framework and not enough effort to try to contain that, but even in the core of the system banks got to be too big and over-leveraged. Now, again, here's an important contrast. Banks in the United States -- even with investment banks, now banks -- bank assets are about one times GDP in the United States. In many other mature countries, in Europe for example, they're a multiple of that. So again, around the world, banks got to just be too big, took on too much risk relative to the size of their economies. And the third thing I would say is even as the crisis started, and it was obvious that this was going to be high risk of a very damaging recession with enormous damage to average people around the world. I think governments were late to move. I mean, they were late to put in place the kind of forceful stimulus we now have in place, and they were late to escalate to try to contain the damage in the --
Charlie Rose:
Nobody seemed to understand the gathering storm, or few.
Tim Geithner:
I think central banks generally moved earlier. They escalated more aggressively before governments started to use fiscal policy for that. This government did put in place a fiscal package as you know earlier last year, not a very powerful large package. It didn't move, but it just wasn't that much. And this country, it's a tragic mistake for this country. We came into this crisis without the broad tools we needed to address that, so it took awhile for people to recognize the urgency of the situation and be willing to legislate the kind of broader authority any government needs to get through a financial crisis.
Charlie Rose:
Are these the kinds of tools that Secretary Paulson went and asked for from the Congress.
Tim Geithner:
Exactly. It was those tools.
Charlie Rose:
You know, there's this issue as a broad issue of where we are: exit strategies. Some people worry that something is taking place now that will somehow become part of the structure, and they worry about that.
Tim Geithner:
No, we're not going to let that happen. Let me give you two indications of where we're trying to be very careful to design into these programs a credible capacity to dialing back an exit. Now you saw in the president's budget him lay out detailed set of commitments to bring our deficits down over time to a level that is sustainable, so even as we're doing these extraordinary actions to fix the inherited problems in this recession and financial crisis, he laid out a very ambitious, very tough, with clear choices for how to bring those deficits down, and that is vitally important. But in the financial system, it's even more important. So all these actions the Fed has taken and central banks have taken, that we're taking in the financial system, we're trying to make sure that we create incentives for them to be unwound as quickly as possible. So one example, we want to make sure that these programs are priced so that when conditions normalize, it's not economic for people to use them, so they're going to want to replace those monies, that money they're borrowing with private investment. So that's one way to help build in a mechanism for exit as conditions stabilize, but that won't be -- if that's not enough, we'll make sure we do more again because we don't think it will be healthy for the economy as a whole for us to have in place over a long period of time, these kinds of extraordinary interventions. We're going to have to dial them back, but only when we're very confident that you have the foundations of recovery firmly established. Because again, classic mistake of financial crises, the government steps on the brake too quickly and they arrest a tenuous sign of recovery, pushing the economy to a more vulnerable point again, prolonging the recession, doing more damage --
Charlie Rose:
Where is the historical precedent for that?
Tim Geithner:
Well, you can see it in -- it happened in the United States to a certain extent, but it also happened in Japan in the 90s. That's a good example.
Charlie Rose:
They stepped on the brake too early?
Tim Geithner:
Too early. So they -- Japan for example, they tightened fiscal policy, but still in the middle was a damaging recession, a financial crisis, and that did take some of the air out of recovery. I'm not trying to blame Japan --
Charlie Rose:
But as you know, Japan went through a ten-year period
Tim Geithner:
Yeah, you need to be -- I think the classic response that's shaped everything we're going to do is to be aggressive early -- carefully, but aggressive early, both with support to get people back to work, help support private investment through the recovery act the president passed, through efforts to get credit flowing again more forcefully and decisively, and to get the world working with us. So we are doing extraordinary things to make sure it's coordinated policy stimulus around the world at an early stage and a lot of financial support to those emerging markets that are so critical to U.S. businesses. So those three things together you're seeing on a scale I don't think you have ever seen in a global financial crisis before. And that has been helpful, Charlie, in bringing confidence back a little bit. I think it's the -- the world has sat there and seen this government -- governments around the world -- doing things on a very aggressive scale, and that sense of governments acting has been helpful in reducing some of the acute uncertainty about the risk of a deeper recession.
Charlie Rose:
Do you think the government in China, governments in Latin America, governments in Europe, have sufficient confidence in the American economy today and its future?
Tim Geithner:
I do, and I think if you look at how markets are behaving today, I think you see evidence of that. So here's -- I'll give you one example, Charlie. If you look at the last six months, last three months, the last year, at times when there was the greatest fear about the health and stability of the global financial system -- and this is still happening today -- money is generally flowing to the United States. So --
Charlie Rose:
Even though the Chinese, in several instances, have said, "We have some questions about all this debt that we own and whether we should continue this policy of buying American debt."
Tim Geithner:
Exactly, but if you look at how they're acting and how they're behaving, generally when people are concerned about risk, the dollar is stronger and there's been money flowing into the Treasury and U.S. financial assets. And that's a sign of relative strength and confidence in this financial system, justifiably so. But we are going to work very hard. This president, his economic team, we are going to have to work very hard, and we'll continue to do it to make sure that we are earning hat confidence every day, confidence of Americans, confidence of investors around the world. And that's why we're trying to do so much to restore a basic fiscal frame of discipline over the medium term, to try to make sure we're paring this financial system as aggressively as possible. We're not going to drift through this. That would be damaging to confidence. And we want to lay a foundation for a stronger, more sustainable, more balanced recovery.
Charlie Rose:
This began -- this is -- this sub-prime crisis began in the financial sector. Is that where it has to be -- is that the biggest challenge? Getting the financial sector right?
Tim Geithner:
No, I think that that's an important challenge, but I don't think it's the dominant challenge.
Charlie Rose:
The dominant challenge is...
Tim Geithner:
The dominant challenge is this complex interaction. People around the world, and the United States too, they borrowed too much.
Charlie Rose:
Right.
Tim Geithner:
They're going to have to work down their balance sheets, work down that debt. They're going to have to save more. The financial system's going to have to get stronger where it's been weaker. That process of repair is critical to that. And we have to, as the government, make sure that we are making investments in things that are going to make us more productive in the future. So --
Charlie Rose:
We have an interesting point here. Historically, we've gotten in trouble with a current account deficit and trade deficit because we spent more than we saved. We now want to say to our citizens, I think, "We want you to spend. We want you to -- we want to create demand." That's what we need to do. That's the paradox.
Tim Geithner:
That's the paradox. So in the near term, the government has to be prepared to spend to offset the big contraction in demand as people become more cautious and begin to save more. And that's the only way that governments, that economies get through these things. For a temporary period of time, on an exceptional basis, governments be willing to span that gap and spend and provide funding, but only temporarily, because we want to be able to dial that back as quickly as possible. But you're right, it's a paradox, and it only works, again if we're willing to commit to bring those deficits down, to walk back that exceptional funding when recovery is firmly established. Without that confidence, people will save too much. They'll start preparing for the risk that taxes will be too high in the future, so you have to get that balance right. It's a very difficult balance.
Charlie Rose:
I think it was Larry Summers and others who have said there used to be too much greed and not enough fear, and now we need more greed and less fear.
Tim Geithner:
Yes, the markets took too much risk. Now the risk is they take too little risk. So we need to get financial institutions, investors, again, do you want to take a chance on American business, and not over correct to the excess of those --
Charlie Rose:
Do money market accounts and what's happening with the Libor tell you anything?
Tim Geithner:
Libor is improving, so Libor is, you know, the cost of lending to a bank un-secured at very short maturities, so those have come down progressively.
Charlie Rose:
Does that say anything?
Tim Geithner:
Yes, it's a symptom of confidence, but -- no I was going to say but, and again if you look at -- these credit markets are opening up. So interest rates are down. The surveys of lending behavior suggest some improvement. Companies are borrowing a lot more now, able to borrow more at lower rates. Just today, partly because of a Fed-Treasury program, you saw issuance of securities backed by credit cards, by car loans, by student loans on a very substantial scale again, and those rates coming down. So those are encouraging things, but in general those rates are still high, they're still too high, they're unnecessarily high, and that reflects, still, what is a tight credit market for average business -- viable businesses. So that's why we need to make sure that we're continuing trying to work to bring those rates down and we're at the early stage, still, of that process.
Charlie Rose:
Where are we in the process of getting the toxic assets out of the system?
Tim Geithner:
There's been a lot of it -- there's two types of those assets. There's securities.
Charlie Rose:
Right.
Tim Geithner:
Things that trade on the markets, they have a price normally. And there's loans that banks typically hold for a longer period of time. Those are less liquid investments. This -- securities prices have fallen quite a lot. And banks, partly because of the stress test, are being more conservative in estimating the losses on their loans. But we're really at the beginning of that process of cleaning up.
Charlie Rose:
Does it go to the public/private partnership?
Tim Geithner:
It does, exactly.
Charlie Rose:
But how is that doing? Because we hear --
Tim Geithner:
It hasn't started yet.
Charlie Rose:
Nobody agrees on valuation. Banks want to keep it high, people in private/public partnerships want to buy low.
Tim Geithner:
Right now things are frozen because of that, and because people can't borrow to make these investments. The way these markets typically work, people have to be able to borrow to make these investments, it's like the way the housing market works, you know? If you had to sell your house on a market where nobody can get a mortgage, the price would be very low. You would be reluctant to sell, reluctant to move, take a new job. So that's what's frozen now. So what these funds are designed to do is to create a market where none existed today. By bringing in private capital, with some government capital and government financing so that banks now have a choice, the stress test will increase certain incentives to sell, because it will require them to hold more capital against those loans on their balance sheets. That will narrow the gap between what's on their balance -- price on their balance sheets and what they can get on the market with these funds. That will make it easier for them to clean up their balance sheets. And they're going to have a strong incentive to do that, Charlie, because, again, they're going to want to raise private capital so they don't have to depend on the government. Private investors are going to be more willing to put capital into a bank if they think it's a cleaner institution, more confidence --
Charlie Rose:
Better balance sheets.
Tim Geithner:
Yeah. So that's the way this will work. These programs, we expect them to be up and running in the next four to six weeks. And they've had some effect, already, on confidence. They're sort of like -- people are behaving as if they see a bit of a backstop there, so some of those markets are improving a bit, and just over the first quarter, you know, as banks knew the stress test results were coming, and there would be a level of transparency disclosure about their balance sheets, banks have been acting pretty aggressively in their first quarter to take steps already to try to sell assets and show a cleaner, more --
Charlie Rose:
And stock market prices have begun to rise.
Tim Geithner:
And they've reflected that.
Charlie Rose:
What indications would you read in that?
Tim Geithner:
Hard to know. I just would say that at the end of last year/beginning of this year there as just an acute sense of fear and concern about the health of the system, partly because there's a lot of uncertainty over the system. And I think as the economic conditions improved because of the forcefulness of the president's policy response here and around the world, that's helped a little bit. And as that's helped, fear has receded a little bit. And I think one thing that's very -- very important -- what's very important , Charlie, is again, as people saw the fact that there would be disclosure transparency at the end of this stress test process, confidence in banks has started to improve. People are anticipating the benefits of greater transparency.
Charlie Rose:
This has been a real problem for the administration, and you've had to battle it; it is the belief that, on the part of taxpayers, who have seen their money go rescue banks, and say, "Is this system fair?" Because there was a difficulty in convincing, or making the case, that this was necessary in order for the greater good.
Tim Geithner:
Absolutely. It's the most understandable frustration and anger, because people sat back, people who were conservative didn't borrow too much, they were careful, they're suffering enormous damage -- uncertainty, losing their jobs, sometimes losing their homes -- because the financial system took on too much risk. A bunch of their neighbors borrowed too much. And that's why financial crises are so unfair, and so damaging to public confidence, because they are indiscriminate in the damage they cause. It's just unfair. So people are right to say it's unfair --
Charlie Rose:
Yeah, and nobody says to an individual, "You're too big to fail."
Tim Geithner:
Yeah, exactly right, but the only reason we're doing any of this stuff is to protect those people from the consequences of the damage this system would cause if we didn't act. So just as an example, the U.S. economy fell at a 6 percent annual rate in the fourth quarter of last year, and that happened in part because there was a bunch of failures of financial institutions and a huge loss in confidence here and around the world. And the actions we're taking, that we have to do to help stabilize the system and get credit flowing again, are necessary to avoid more damage like that. And it seems unfair, but the most fair thing we can do as a government is to try and make sure that, again, this financial system and these banks are not doing enormous damage to the productive capacity of the American economy. So it's a completely understandable reaction, but the only reason we're giving a penny to a bank is because that is necessary to make sure people who depend banks for their livelihood are able to benefit from future credit flows. And this is an important to say: when this president came in, he fundamentally changed the basic framework we were using to support the financial system. So the first dollar we committed was to help address the housing crisis, make sure people could refinance, modify their mortgages, take advantage of lower interest rates. The second thing we did was to make sure we were going around banks to get these markets for consumer lending, for small business lending, for automobile financing, working again ; going around banks. And we went and did a small business lending program directly targets, so that we're going around banks in this context. But banks are central to our system, and we need to do something more decisive to make sure banks too are strong enough, because they're going to have to -- the economy is going to depend on the credit they provide. So we brought a transforming level of clarity and transparency, we've put the terms in all these contracts on the Web site so American can see, we've put in place tougher conditions on compensation practices, so the money that taxpayers were providing was going for lending, not to reward excessive risk-taking. So we were very careful to making sure we were rearranging the priorities so that people could see we were doing things that were going to be directly beneficial to the people most vulnerable to this crisis. But you're right, the anger is deep, and it's understandable, but our obligation is to make sure, again, we're protecting the economy --
Charlie Rose:
Is it fair to say that it took a moment for that -- it took awhile for that to settle in, an appreciation of the anger, and an appreciation of the rage that existed because people didn't understand --
Tim Geithner:
Didn't take the president time to appreciate that, he lived with it. You know, I spend an enormous amount of time talking to businesses around the country, talking to members of Congress; they felt it very powerfully, I was deeply aware of it, but it is still a hard thing for people to understand, because it seems fundamentally unfair. You are giving support to some institutions that did help get us in this mess, why is that justifiable? And the only reason we do it is because -- and again --
Charlie Rose:
Are they saying, money that is sent to rescue AIG then is being paid to counter-parties and people like that, and they say how -- because it's a complex financial relationship.
Tim Geithner:
Because, again, just to go back -- let's just replay the clock. So, we had an experience as a country, in the five months of last year, about what happens when you don't act to protect a system. So when Lehman failed, when two of the largest banks in the country came to the brink of failure, when AIG was --
Tim Geithner:
I'm talking about Wachovia and WaMu.
Charlie Rose:
Right.
Tim Geithner:
The consequences of that cliff loss of confidence were devastating. So unemployment is dramatically higher today, the value of people's pension savings is dramatically lower today, because of the consequences of those actions. Those failures to protect the economy from a financial system that was deeply fragile, and that is ultimately what is the most fair and just thing to do for the average American because if we don't act, as you saw in that last part of last year, you see people lose their jobs who shouldn't, businesses fail who shouldn't, don't deserve to fail, so this strategy of trying to make sure credit is flowing, you're stabilizing the system is necessary, but it's also just. And to not act like that would be irresponsible.
Charlie Rose:
The big argument is they are having beyond is the system fair, it is how do you make the case -- this is more for the president -- you're trying to do too much at this time? Fix the economic crisis and we can worry about the structure of the economy and what we do on education in terms of what we do for the environment and what we do in other sectors a bit later, because putting people to work immediately is the biggest challenge.
Tim Geithner:
No conflict in these objectives. You have to do them all together for the reasons you said, which is you need to give people a path forward, a path out of this, a capacity and confidence we'll be able to dial back these extraordinary interventions. So you have to do these things together. You have to make sure you're providing a lot of demand for the economy to arrest the risk of a deep recession. You have to get the financial system working again because without that, there won't be recovery. You have to start making investments now in things that will make this economy more productive in the future.
Charlie Rose:
But they -- will they -- go ahead.
Tim Geithner:
Through, as you used -- listed them: education, better infrastructure, reducing growth and health care costs, improving health care outcomes and in leading us to a more energy efficient, cleaner energy economy. Those things will make us more productive. Seeing the government act to do those things which governments have to do is helpful to confidence in that we're going to see a stronger economy in the future. And doing those things that are necessary to help make sure people believe we'll be able to go back to living within our means. Because unless we're making our economy stronger now, there will be less confidence we'll be able to bring those deficits down, that we'll be able to go back to doing what the Fed does, we'll be able to get out of the financial system. I don't think you have a choice, Charlie. If you don't do that, then again, the risk is that you'll see confidence more fragile, and you won't be doing the things that are going to be central to getting out of this.
Charlie Rose:
Critics of the administration, critics of the president, critics of you make one big case. I'm talking about Paul Krugman and Nouriel Roubini and Joe Stiglitz among others. And they make the argument that we really need to take over these banks. That's -- and we need to be very, very aggressive about that until they are back on their feet. That's the way to solve this problem -- and that the people are too wedded to an older system. They're too connected to Wall Street and a Wall Street way of thinking.
Tim Geithner:
I think you -- Charlie, I would say it this way. People will judge me, they'll judge us by what we do, by the quality of the judgments we make, by how ambitious we are in changing things and by how effective we are in fixing this system. That's a reasonable thing. We are being dramatically more aggressive than I believe any serious government has ever been, certainly in generations, in responding to financial crises. So if you look at the scale of action, look at the quality of initiative we've taken, I think it dramatically exceeds even the best managed crises we've seen before. So we're acting earlier and stronger in this case.
Charlie Rose:
Can you argue with new thinking, new -- in other words, rethinking the way things ought to work and what had become built in to a system that, a system that failed.
Tim Geithner:
We are doing dramatically innovative things to go around banks, create competition for banks, get credit markets going, things governments have never done before.
Charlie Rose:
Like what?
Tim Geithner:
Well, the things -- programs to get these securities lending markets going again. That's a good example. These programs to get legacy assets markets opening up again -- never tried before. They are creative, innovative thing. The stress test that you begin with, this exacting assessment of capital needs, never done before, a level of transparency and disclosure. We'll let them judge and the world judge the relative financial strength of U.S. institutions. Those things will put us in a much stronger position than the economies around the world because of the scale and force of initial action, but this is a very important thing: We are going to fundamentally change the regulatory framework over the financial system because as I say, we're not going to go back to -- allow the economy to go back to the system we had to produce this crisis. And if you watch what the president proposes here, you watch while we help get through the Congress, you're going to see these most sweeping changes in financial regulation than, again, we've seen in decades. And we will bring a much more conservative, much more careful balance, much more strictly enforced set of constraints, again, because we've seen the consequences of letting the system grow outdated. But people will -- they'll judge us by what we do. They can judge us by the quality of initiative we bring, and that 's a fair thing, but I -- this president is committed to being aggressive on these things, to doing the hard thing, and to make sure we don't go back and allow to reemerge again the kind of vulnerabilities that created this --
Charlie Rose:
As you well know, though, an army full of lobbyists with huge amounts of money are determined not to see that happen.
Tim Geithner:
It's going to be hard for them, because again the people are watching. There's been enormous damage. People understand the source of that damage. I think you're going to find very broad support in the Congress for fundamental change and that is a huge obligation we face, is making that case and making that happen. I want to say one more thing, Charlie. The president of the United States, this president, he demands of all of us that we look everywhere for ideas, without regard to their source, withour regard to ideology, no matter how uncomfortable it is. And we spend a lot of time talking to people who disagree with us, people who will -- who think they've got a better idea, a better plan. We look very carefully at that. Now we ultimately have to make a judgment about what the best plan is, but we're very careful to do that --
Charlie Rose:
The buck stops with you.
Tim Geithner:
I've always run -- I've been in public life all -- you know, public service all my life. I've always felt that was a necessary way to get better decisions, to make sure we're as open, looking as broadly as we can, and we work hard at that and if we weren't doing it the president would force us to do it.
Charlie Rose:
Well I understand from Newsweek this week that Professor Krugman and Professor Stiglitz, two Nobel laureates who have had some criticism were invited in for a conversation with the president.
Tim Geithner:
And that's a pattern with this president. Again, he does that across the board and he wants all of us doing that and we spend a lot of time sharing with him all the alternatives, their relative merits, so that he has a better basis for making judgments, giving his guidance on these things.
Charlie Rose:
One last kind of closer. A, you're optimistic because you've done all the things that you've just said. You are cautious because you know it's a difficult road. You worry because, what?
Tim Geithner:
I worry because this is still an enormously challenging --
Charlie Rose:
That we have never seen before.
Tim Geithner:
And for the world, not just for us. And that's why we need to make sure people understand that this is going to require more work. It's going to take time. It's not going to feel