Geithner Pledges Prolonged Effort to Stabilize Banking System

By Robert Schmidt and Rebecca Christie

Jan. 22 (Bloomberg) -- Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, pledged an expanded and prolonged government role in everything from stabilizing banks to ensuring credit for small businesses.

Geithner, who today may take a step toward confirmation with a Senate Finance Committee vote, told lawmakers yesterday “we’re at the beginning of this process of repairing the system, not close to the end.” He committed to “much more substantial action” on a “very dramatic scale.”

The testimony showed the Obama administration is determined to avoid the strategy followed by former President George W. Bush, whose gradualism sowed confusion among investors and lenders. Geithner also warned that policy makers must not stop until a recovery is entrenched, invoking lessons from the Great Depression and Japan’s economic malaise.

“What is needed” is an all-out effort “addressing every facet of the problem,” said Ethan Harris, a former New York Fed economist who is now co-head of economic research at Barclays Capital in New York. “If this fails, it won’t be for lack of trying.”

Financial shares rallied, a day after hitting the lowest level since March 1995, on confidence Obama will take steps necessary to shore up banks. Stocks were also lifted by news that Bank of America Corp. directors bought shares.

The Standard & Poor’s 500 Financials Index gained 15 percent to 124.16 yesterday, recouping most of the previous day’s loss, which was spurred in part by concern some firms are in such bad shape they may have to be nationalized.

Long Haul

Geithner provided the outline of steps that are likely to include addressing the toxic assets curbing banks’ ability to make new loans. He gave no indication he’s planning outright government takeovers, while warning senators at the committee’s nomination hearing that Obama’s team is preparing for a long haul as it works to thaw credit markets.

The nominee indicated the administration is closely studying using some type of a “bad,” or “aggregator,” bank to remove illiquid assets off banks’ books. Such a model has “been present at the solution to most financial crises around the world” and may be part of the U.S. effort, he said. Geithner, 47, has headed the Federal Reserve Bank of New York since 2003 and consults regularly with overseas counterparts.

House Financial Services Committee Chairman Barney Frank warned yesterday that further interventions in the banking system must be coupled with efforts to aid individuals, such as providing better heath care. “We’re going to look into” the bad-bank idea, Frank told reporters.

Overhaul of TARP

Geithner took pains to say the $700 billion financial- rescue fund will be overhauled to help average Americans suffering from the financial downturn. Former Treasury Secretary Henry Paulson used the first half of the Troubled Asset Relief Program mostly for buying stakes in banks.

“We’re also going to have to provide much more substantial direct support to the credit markets, so that the complicated mechanism that small businesses depend on, that student-loan markets depend on, that the automobile-finance market depends on, that the commercial and residential real estate markets depend on, that those markets start to come back,” Geithner said.

In 3 1/2 hours of testimony, some senators grilled Geithner about his late payment of almost $50,000 in taxes. He accepted responsibility, saying his errors were “careless” and unintentional.

Tax Issue

He also apologized to the committee for the toll the issue has taken on his confirmation, which has left the administration without its top economic official since taking office Jan. 20. The full Senate would still need to vote on his nomination after an approval by the finance panel today.

The most intense grilling came from Senator Jon Kyl of Arizona, who warned Geithner to stop “dancing around” direct answers. After the hearing Kyl, the No. 2 Republican in the Senate, suggested to reporters he may not vote for Geithner’s confirmation.

“I very much wanted to support his nomination for a variety of reasons, but I must tell you that I was troubled by his testimony,” Kyl said.

Still, others on the committee said Geithner will ultimately be approved. Republican Senator Pat Roberts of Kansas predicted to the nominee that “you will be confirmed.”

Valuing Assets

One issue that the Obama advisers are struggling with is how to value the mortgage-related securities and other distressed holdings financial firms would like to unload.

“It’s an incredibly difficult thing to do and to get right,” Geithner said. “And getting it right will be central to the basic credibility of the program.”

Most experts think that using a mix of market prices, model-based estimates and analysis by bank supervisors is the best option, Geithner said.

While Geithner wasn’t asked whether the administration will seek to increase the size of the TARP, House Majority Leader Steny Hoyer, a Maryland Democrat, said yesterday he “would not be surprised” by a request for an increase. The Obama administration has about $350 billion left.

Geithner also told the committee that confidence in the dollar is “critical” to the U.S. economy, while omitting any mention of a commitment to the “strong dollar” policy of his predecessors. He said it’s important for America’s biggest trading partners to refrain from setting or manipulating their exchange rates.

Exchange Rates

The comments continue recent U.S. tradition of signaling that exchange rates won’t be used as a “weapon,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York.

In one exchange yesterday, Geithner noted the historical failures of past attempts to arrest economic declines.

“Part of the problem was a bit of early shift towards restraint, before growth was strong enough,” Geithner said, referring to the U.S. in the late 1930s and Japan in the 1990s. Both cases underscore “the importance of doing a lot soon and staying with it,” he said.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net;