Remarks by Timothy Geithner, Secretary of the Treasury
Subject: His Upcoming Trip to the G-8 Finance Ministers Meeting in Italy
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SEC. GEITHNER: Nice to see you all. I travel to Italy on Thursday night to attend a meeting of the G-8 finance ministers. A few words about our agenda and then I'd be happy to take your questions.
The principal focus of our conversation will be to take stock of efforts, policy efforts undertaken by the G-8 and around the world, to help lay a foundation for recovery, address the crisis, and to take stock of the progress we're making, in building consensus for a reform of the international financial system and the international financial institutions.
That's the basic G-20 agenda from London. That will remain the principal focus of our cooperatives globally for some time to come. I think if you take stock, step back, and look at what's happened since April, since the G-20 heads-of-state meeting in April, in London, I think, it's fair to say that the force of the global storm is receding -- (audio break) -- encouraged by the progress we're seeing on the financial regulatory-reform front.
As you know, we've laid out some substantive proposals in a number of areas -- systemic risk, derivatives, resolution authority, consumer protection -- and we're going to lay out a broader framework of reform to begin the legislative process quite soon.
And we are looking forward to a chance to sit around the table with the other major economies and take stock of their efforts domestically, and our collective efforts undertaken in the context of the Financial Stability Board to lay a consensus for stronger international standards across the major global institutions, global markets.
So that's our agenda. It's, you know, recovery and reform, as it was going to London. And I think you should view this mostly as a stock-taking effort. Obviously, it's important. We start to build consensus for the leaders' meeting of the G-8 in July, and we're all working towards the next meeting of the G-20 heads of state at the -- in the fall in Pittsburgh.
Who'd like to start?
Yes.
Q (Name inaudible) -- from Dow Jones. So as you take stock, is it your sense that the other leaders are doing enough, the other countries are doing enough, on both demand -- the demand front and the financial front -- (off mike)?
SEC. GEITHNER: Well, you know, you -- everybody's got a different system, different set of challenges, different kind of judgments to make. I do think it's important to say that if you just look at what's happened since London, again, just to pick London as a key point, the scale of fiscal efforts put in place cumulatively across the G-20 have intensified modestly at the margin, largely because of what Japan's done, but other countries have moved too.
There's been substantial actions -- I won't -- I don't talk about central banks, but there's been other policy actions by other entities of governments. And, you know, we'll have a chance to listen from them, see where they are, what they think about evolving risks and challenges.
And, as I said, our -- the basic commitment we all made in London was that we're going to keep at it until we get this thing fixed and we get a strong foundation for recovery in place. And we are serious when we say we want the IMF to play its basic role as providing an objective source of analysis to monitor and assess the scale of efforts that all countries are making, both on the macroeconomic front and on the financial front.
Yeah.
Q Thanks. Do you think that there are countries that have not yet done enough? Are there people who've --
SEC. GEITHNER: You asking the same question again? (Laughs.)
Q I am -- but I'm asking specifically if you think there are differing views about what's needed, particularly with the concern about budget deficits, the concern about inflation, and particularly some of the G-8 nations, not the G-20, as you were just talking about. I mean -- (off mike) -- but there are other countries that may be -- (audio break).
SEC. GEITHNER: (In progress following audio break) -- has been -- has had important effects in reducing concern about a much deeper, more retracted global recession, about deflation risk and about risk in financial systems.
And in the United States, in particular, the combined effect of those policies on reducing concern about macroeconomic risk, combined with the disclosure and clarity brought by the stress test in the United States, has, I think, improved confidence in important ways.
Now, of course, every time I say that, I try to underscore the fact that we still see significant challenges ahead. And, you know, for large parts of the U.S. economy, I think the average business or family would still feel they were in the most challenging period that they've seen in their lifetimes -- many of their lifetimes.
And so that's one reason why I think people need to be a little tentative in assessing what -- (inaudible) -- and why I want to underscore again why I think the dominant (priority of policy ?) still around the world is to make sure we get a stronger foundation for recovery put in place.
Yes.
Q Mr. Secretary, the president today said, in talking about the banks that have returned the TARP money, "The return of these funds does not provide forgiveness for pass excesses or permission for future misdeeds."
What does that mean? Does that mean that banks that have pulled out of the TARP program should somehow comply with the executive compensation rules that those who are in the program have to comply with? Or what is the president getting at?
SEC. GEITHNER: Well, why don't I answer this way, Mike. We, as you know -- and the president will do this himself, is we're going to lay out a broad program of reforms of our financial system, because we need to change a lot of things if we're going to be able to offer the prospect of a system less vulnerable to this kind of crisis in the future.
And that's a critically important thing for us to achieve, and that's going to require very substantial changes in not just the quality of judgments that boards of directors bring to the management of financial institutions, but it's going to require very substantial changes to the basic framework within which institutions operate, rules on capital, things like that. And it's going to require very substantial changes to the overall oversight framework, so there's less opportunity for arbitrage, more even, consistently enforced rules of the game.
And I guess on the other hand, the score is that, again, you know, these are, I think, encouraging signs of healing. But, you know, it's going to take us a while, still, to get through this and be more comfortable, we have a -- just to repeat it again -- a strong enough foundation for durable recovery in place.
So I think I these -- I want to underscore that these, again -- these are important things, they're good signs, but we got a lot of work to do ahead. Not just, again, making sure we get growth back on track, durably, we got a, you know, foundation for a more balanced, more sustainable recovery, but we're reforming the basic framework in which the system operates, both in the United States and globally.
Q (Off mike) -- refer to? Is he saying that people are going to have to in some way -- I don't know, be punished for -- (audio break).
SEC. GEITHNER: (In progress following audio break) -- a very substantial reform to the basic framework in which institutions operate in the United States.
Q Do the Europeans and the other G-8 partners think that enough is being done here, or is there concern there that there is -- there seemed to be earlier some concern that things were not going to be moving fast enough --
SEC. GEITHNER: I never thought there was any basis for that concern, and I doubt there is any basis now for that. But, no, we're doing this for the United States, and we're going to do what's necessary to make sure we help restore confidence in the basic fabric of our financial system, because it's so important to the basic functioning of the U.S. economy that we do that. And as we do that, we're going to try to make sure the world moves with us to raise the basic standards that operate across, again, the major globally active institutions and the major global markets, because we can't be really effective in doing this here unless we do that with them. And I think -- again, just based on what I hear from my counterparts, I think there's a lot of support for that.
You know, remember, this was a -- the crisis is so severe in part because it was a global crisis, and because many of the basic factors that made this crisis so severe were common to many, if not most, of the major economies.
Yes?
Q Yes, I wanted to circle back around to efforts to clean up the financial system. You mentioned that the stress test created a lot of confidence in the market and it saved a lot of transparency. Is there something in the way that the Europeans have handled their banking system that you feel is lacking, that maybe they need to change?
SEC. GEITHNER: Look, you guys are trying to support -- I just want to say, you know, I'm very careful and tentative in not commenting in public on the judgments other countries are making about the judgments they have to make in response to somewhat different problems. You know, they're going to make different judgments that we are and -- partly because they have different systems, different constraints, different opportunities. And I think what matters to all of us is, are they going to achieve enough? That's the standard we should be held to, and that's the standard I think that we'll hold them to.
Q (Off mike) -- explain your position, what our stress test has achieved, maybe they'll take some lessons from that?
SEC. GEITHNER: No, I wouldn't say it that way. I just said, you know, we'll lay out what we've done, what our challenges are, and they'll tell us what their challenges are, too, and then we'll see. And you know, people will come to these things with a different path, and that's okay. What matters is, what does it do in terms of addressing the problems that we're facing together?
Yes.
Q Are you going to be able to assure your counterparts that the U.S. will come up with the money for the IMF, or is that a concern?
SEC. GEITHNER: You know, I think that we're in a -- we're making a lot of progress on that and, of course, hope to be in a position to do that.
Yes?
Q Mr. Secretary, just picking up a little bit on Mike's question to you: While you're waiting for this regulatory reform overall to be put into place, you've allowed these banks to pay back their TARP funds. To what extent are you worried or do you feel like you've gotten assurances that these banks aren't going to get themselves into the same sort of trouble in the intervening period?
SEC. GEITHNER: Well, as you know, the way the law is written, the basic judgment about whether a company should be -- it would be prudent for them to repay is a judgment made by the relevant federal banking agency. And the Fed went through an elaborate process to make those judgments and they've made the judgments you've seen.
The strategy we had from the beginning was a strategy of allow for differentiation, because there's a lot of differentiation across the U.S. financial system. And one of the virtues of bringing this level of disclosure and transparency to these institutions is that the market can make judgments for themselves about relative strength. And I think it's -- there's virtue in differentiation.
And again, I think that on balance, we should be reasonably encouraged by what we've seen; again, not just in what you're seeing in terms of money coming back in -- and that's a very substantial amount of resources coming back in relative to anybody's expectations two, three, four months ago, but the scale of equity that's been raised across the system in response to those. So I would put more emphasis, in some ways, on the equity raised and what that means for the basic strength of the system.
Obviously, what we want to do, we want to see a financial system that's strong enough that it's going to be able to support a reasonable recovery, and we're in a much better position today than I think we could have expected to have been, again, six weeks ago, two months ago, three months ago, four months ago.
Q Have they learned their lesson?
SEC. GEITHNER: Well, I think this has been a searing experience for financial institutions across the world. And I think we're going to live with -- the greater risk we're going to live with for a long period of time is that risk aversion stays very high, rather than we see an early return to the kind of dynamics that we saw that helped produce the late stages of this boom.
Q (Off mike) -- you think that given the capital they've raised and the issues this raised, will there be enough of a -- a strong enough return to lending, given that the pressure to sell off some of the toxic assets that have been weighing them down seems to have diminished?
SEC. GEITHNER: Well, you know, again I think, you know, capital is very -- capital is critical for this. There is substantially more capital in the system where it needs to be than there was. And that means there's a stronger foundation for that kind of basic credit infrastructure in banks than there was before.
That is good for the economy.
Alongside that, you're seeing a basic improvement in tone in the markets that go around banks, outside banks, exist in parallel to banks, and the securitization markets and the asset-backed securities market. That's also substantially the result of policy actions we helped put in place to help unfreeze those markets, and those two things together are important.
But again, these are early signs of repair and improvement, and, while encouraging, you know, we got some challenges ahead still.
Q Secretary, any comment to Elizabeth Warren's concerns raised this morning about the stress tests, and particularly that unemployment is already worse than the worst-case scenario, and also that the time frame was too short to account for the expected hit to commercial real estate?
SEC. GEITHNER: Well, this is really a question that should go to the Fed. But let me just say -- I'll repeat something I said when we were first laying out the results, alongside the Fed, of this stress test.
The critical constraining factors in the stress test were the loss estimates that were defined, and the allowance made for future earnings. The unemployment and macro assumptions were not the binding constraint. What mattered were the conservativeness of the loss estimates and the earnings estimates.
And, as you know, those of you who looked at the Fed's release, if you just look at the basic chart they use to show how the -- conservative those losses were, they were more conservative than peak losses during the Great Depression, when unemployment was three to four times its current level. The earnings estimates themselves also were at the way lower end of analysts' expectations.
So it's -- both dimensions were quite conservative. So it's not appropriate to look at the unemployment assumption in the Fed's scenarios as a(n) indication of conservativeness.
But again, one of the virtues of doing a test like this is that, you know, people can make their own judgments. People that decide whether to put capital in institutions can make their own judgments about whether they thought it was conservative or not from whether the quality of disclosure was sufficient to give them comfort.
Yes.
Q Given the improving signs, and also given the FDIC's recent decisions that have pulled back on the home-mortgage part of the public-private partnership, what's going to happen with the securities part of the PPIP?
SEC. GEITHNER: Could I just say, generally, on these legacy asset facilities that we announced a little more than two months ago and that are a coordinated and cooperative program with the Fed and the FDIC, because there's a little bit less concern about acute risk in the financial system and in the world -- the global economy, and because banks have been able to raise capital to a greater extent than I think they realistically thought, and because there is still some concern among participants about the implications of coming into these programs, given what people refer to as political risk or potential uncertainty about future conditions, it's possible that even as these programs get laid out, that there will be less participation at an earlier stage than people would have thought.
But they can still have a helpful effect on -- as sort of a backstop for -- to help underpin basic improvement in the -- in conditions in these markets. And I think that they provide some insurance value too.
And so I -- I think that makes sense to go ahead and put them in place, even though, as you say and as you've reported, it's possible, given these basic other factors, you're going to see somewhat limited -- somewhat more limited participation than people might have thought at the beginning. But those are, I think, encouraging things, on balance -- not completely, but on balance, encouraging things.
Yes?
Q Are you concerned about the impact on the recovery of a delay in the sale of Chrysler to Fiat and also the possible implications of a delay there on the General Motors bankruptcy as well?
SEC. GEITHNER: Don't want to comment on that, just because it's pending. But we hope it -- hope and expect it's going to be resolved quickly.
STAFF: Last question.
Q If I could --
(Cross talk.)
SEC. GEITHNER: Yes?
Q Are you concerned about the pushback you're getting on the idea of recycling returned TARP funds?
SEC. GEITHNER: No, I'm not concerned. I think that the way the law is written, the money that comes back goes into the Treasury, reduces the amount we have to borrow. That's a good thing.
But the law's also written to provide some flexibility in the event that we face some compelling need to use the full authority to help reinforce the -- this initial progress we've seen in improving credit conditions. And I think that flexibility is prudent, and I think the balance is right.
But it is good to remind people that what this means is a -- you know, it's a material reduction in resources outstanding, coming back at a reasonable return to the taxpayer, way ahead of expectations, in terms of timing.
Thank you all very much. Nice to see you.
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