- The Washington Times - Thursday, January 22, 2009

Timothy Geithner, President Obama’s pick to head the Treasury Department, said Wednesday that the administration is considering setting up a “bad bank” to purchase toxic loans from troubled banks in a new program that could cost taxpayers $3 trillion to $4 trillion.

Mr. Geithner raised the prospect of a “bad bank” at a Senate Finance Committee hearing during which he was questioned about his nonpayment of past taxes and his role in overseeing the recent bailouts of failing Wall Street firms. His nomination appears headed to approval despite the questions.

The administration is under the gun to come up with a solution to remedy bank loan problems as stock indexes approach new lows and major banks such as Citigroup and Wells Fargo sink deeper under the weight of souring loans.

Big banks like these have already received more than $100 billion of assistance from the Treasury’s $700 billion bank bailout program, but many Wall Street executives are calling for more, including a program to relieve them of their bad loans.

Mr. Geithner, currently president of the Federal Reserve’s New York regional bank, appeared sympathetic to that call. “The good bank/bad bank-type solutions have been present at the solution to most financial crises around the world,” he said. “It is possible that something there will be part of the solution going forward.”

Morgan Stanley, the investment bank that advised the Treasury on how to structure its bailout program, has recommended that a “bad bank” be seriously considered as the best way to rid banks of their bad loans so they can start lending again.

The Obama administration has not decided what course to pursue and some insiders have said the cost to taxpayers may be prohibitive. Sen. Charles E. Schumer, New York Democrat, disclosed at Wednesday’s hearing that a full-fledged bad-bank program could cost between $3 trillion and $4 trillion. He said the idea is attractive but the price tag is so large it would “shake our financial system” and “create great worries for the dollar.”

“We want to be careful that … we’re using the taxpayers’ money most effectively,” Mr. Geithner said. “We want to have the best impact on the financial system with the least potential cost to the taxpayer” and get “the best possible return going forward.”

Later, Mr. Geithner said solving the financial problems will “take time” and “require action on a scale that we have not seen in generations.”

Despite vigorous questioning from committee members, several said they expect easy approval of Mr. Geithner’s nomination.

Sen. Charles E. Grassley of Iowa, the committee’s ranking Republican who led the aggressive questioning, called him “possibly the only man for the job of healing the recession before us and a very fractured economy. … To some, he is not only the best choice, he is the only choice.”

To assuage concerns among senators put off by revelations that he did not pay self-employment taxes from 2001 to 2004 while working at the International Monetary Fund, Mr. Geithner prefaced his remarks with an apology for his “careless” and “avoidable mistakes.”

Also to ease his confirmation, Mr. Geithner received a ringing endorsement from former Fed Chairman Paul Volcker, an economic adviser to Mr. Obama. Mr. Volcker said he sees “no end in sight” to “the mother of all financial crises.”

Other than the glimpse of a monumental new bailout program for banks, Mr. Geithner offered few direct answers or solutions to a critical line of questioning taken particularly by Republican members of the committee.

Mr. Geithner said details of the administration’s comprehensive plan for addressing the housing and financial crisis will be presented in a few weeks.

“We’re going to have to do more to make sure that institutions at the core of our system are strong enough that they can lend,” he said.

He told senators disgruntled with the way Treasury has carried out the bank rescue program that he and Mr. Obama “share your belief that this program needs serious reform.”

“This is an important program and we need to make it work,” he said. “We’re going to keep at it until we fix it.”

Mr. Geithner, as New York Fed president, has played a central though largely unseen role in events leading up to and addressing the financial crisis. His bank deals directly with the nation’s financial markets every day through money-market transactions, while it oversees the major Wall Street firms and money-center banks like Citigroup that reside in New York.

Citigroup, which Wednesday announced that it is replacing its chairman with longtime board member Richard Parsons in its latest restructuring move, has a representative on the Fed bank’s board of directors, as do most of the other major New York institutions.

Sen. Olympia J. Snowe, Maine Republican, asked Mr. Geithner why he failed to see the crisis coming or take steps to prevent it as head of the Fed’s most powerful regional bank. She also questioned why Mr. Geithner failed to see the problems with credit default swaps that led to the destructive demise of Lehman Brothers and the most massive bailout ever of American International Group.

Mr. Geithner deflected those questions by saying his “life’s work” at the Fed was to set up a formal system to clear credit default transactions, which was widely viewed as an important reform but which still failed to prevent the failure of banks like Lehman that played a pivotal role in the market.

Mr. Geithner also rebuffed questions about why he did not foresee or prevent the bad loan problems engulfing New York banks, though he conceded that regulatory oversight in the past was lacking and much stricter regulation is needed in the future.

“We need to move quickly to build a stronger and more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” he said.

Mr. Geithner said he continues to believe in free markets, despite all the problems.

“Markets are central to innovation and to growth, but markets alone cannot solve all problems,” he said. “Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy.”

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