Reuters - Geithner says U.S. making headway in battling crisis

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Geithner says U.S. making headway in battling crisis

Wednesday, May 20, 2009 6:19PM UTC

By Glenn Somerville

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said on Wednesday the Obama administration was making headway in calming financial markets and would have a program to cleanse toxic assets from banks' balance sheets up and running by July.

He told the Senate Banking Committee the U.S. financial system was "starting to heal" after a period of severe trauma, crediting an array of emergency government programs for helping ease a crisis sparked by a surge in mortgage defaults.

But Geithner said the outlook remained fragile and the administration had to be cautious about how it uses the dwindling money left in a $700 billion financial rescue fund Congress approved in October.

"We still face a very challenging economic and financial environment, and we need to be careful to preserve substantial resources and flexibility to deal with future contingencies," he said.

Geithner estimated about $123.7 billion remained in the fund, down from about $135 billion in March, but he said that reflected a conservative forecast that banks would repay just $25 billion they have received and added that Treasury might not finance other programs as fully as it currently plans.

The U.S. financial system stumbled into one of its most severe crises since the 1930s as rising failures in subprime mortgages drove lenders to the wall and helped drive the U.S. and much of the world economy into deep recession.

The administration has taken unprecedented steps to inject taxpayer capital into banks to try to foster lending and, in company with the U.S. central bank, to set up facilities for buying debt to keep the financial system liquid.

FACING BAILOUT CRITICS

With a number of big banks now lining up to return money, some Republican lawmakers argued those repayments should pay down U.S. debt rather than be recycled for further bailouts -- an interpretation of the law that Geithner disputed.

"I think it's important that the government ... has that flexibility, because we are still in an enormously difficult, challenging, fragile period of time and there may be circumstances where the necessary thing for the country is to use that authority carefully to support expanding these programs," he said.

Geithner said the administration had no choice but to act aggressively to avoid a financial meltdown. He conceded, however, that winding down the government's deep involvement in business was an important challenge ahead.

"Crises this severe don't burn themselves out. To fix them requires the action of government," he said.

But he added it was too soon to lay out a plan for withdrawing the government's unusual support for private firms. "I'm not prepared to talk to that today," he said. "We're not quite there yet."

SMALL BANKS TO GET AID

Geithner said financial companies were adjusting their operations in ways that will make them less vulnerable to shocks like the one they have gone through.

"Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively," he said.

While public attention has largely centered on big banks, including the 19 that underwent "stress tests" to see whether they needed to raise more capital, Geithner said small banks also will get an expanded chance to qualify for taxpayer aid.

He said these companies would now have six months to make themselves into bank holding companies that would qualify for aid, or to reapply for aid if they are already eligible.

Geithner also said a plan to entice private investors to buy distressed assets from banks by putting up government capital alongside private money -- a cornerstone of the administration's financial rescue plans -- would begin operating over the next six weeks.

Geithner said a presidential task force set up to deal with the collapsing U.S. auto industry would keep working with General Motors Corp right up until a June 1 deadline the government has set for the automaker to come up with a viable long-term business plan. GM may need to enter bankruptcy to restructure, as the Chrysler Corp already has done.

Geithner said the Obama administration would ensure that financing remains available for remaining creditworthy auto dealers and also will try to boost demand for new cars.

(Additional reporting by David Lawder and Corbett B. Daly; Editing by Neil Stempleman)