"There are encouraging signs that the financial system is starting to heal," Geithner told the Senate Banking Committee this morning. "Concern about systemic risk has diminished and overall credit conditions have started to improve. These are welcome signs, but we have a long way to go."
On Capitol Hill to give lawmakers a status report on the administration's rescue efforts, Geithner today estimated that there was about $100 billion left in the government's $700 billion bailout program.
He said 10 of the country's 19 biggest banks that need to raise more capital as a result of the stress tests have already raised $48 billion in the last two weeks alone. And he predicted that the administration's plan to entice private investors to partner with the government to buy toxic assets off of banks' balance sheets will begin in the next six weeks. Positive developments, he noted, are now evident.
"We've already seen a very substantial amount of adjustment in our financial system," the Treasury chief said.
But Republican senators on the committee had a status report of their own for Geithner. And some said the signs they were seeing were not so encouraging.
"The programs laid out thus far by you, Mr. Secretary, go well beyond what is appropriate and necessary," the committee's ranking member Richard Shelby told Geithner, adding that "the problems with our banking system remain unresolved despite Treasury having committed approximately $600 billion."
About the only thing the Troubled Asset Relief Program (TARP) has accomplished, Shelby said, other than being a "massive waste" of taxpayer money, was "covering up the egregious failures of our banking regulators over the past decade."
The Alabama lawmaker singled out the "failure" of the Federal Reserve, noting that before Geithner came to Treasury, he was in charge of the New York Fed.
Republicans Criticize White House Bailout Plan
From the government's $180 billion bailout of embattled insurance giant AIG to Treasury's plan to re-use taxpayer money that banks re-pay, Republicans queued up behind Shelby to voice their criticisms.
One key issue was the influence and involvement that the government now has in the private sector after all the recent rescue efforts. In March, General Motors CEO Rick Wagoner resigned at the administration's request.
"The frightening thing for me today is that you're speaking and we're questioning you as the chief executive officer of America's financial system, of our banks, of our largest auto company, of our largest insurance company, so we're playing right along," said Sen. Jim DeMint, R-S.C. "And to me this is not a mission creep -- this is a stampede of any traditional understanding of Constitutional boundaries."
While Geithner said he understood the lawmakers' concerns, he stated that it is the administration's "obligation" to make sure these companies have management capable of leading a successful restructuring effort.
"When institutions get themselves to the point where they need to come to the government for assistance to restructure and there's no alternative for them, then it is our obligation to make sure they have a strong enough board of management so they're going to be able to emerge from this viable and without government assistance over time," Geithner said.
The government has also appointed new management at AIG, a company that it now holds an 80 percent stake in, after providing it with the largest corporate bailout in history. Today Geithner acknowledged that unraveling the insurance giant's worldwide business web has turned out to be more difficult than the government and the company ever expected.
"There is is no doubt, that this company -- not just to the Fed and the Treasury, but to its board and management -- proved much more complicated, much more risk than people thought and it's proved much harder to disentangle and separate," Geithner said.
Geithner: Economic Recovery 'Going to Take Time'
When Shelby asked if the government would still be involved in AIG a year from now, Geithner preached patience.
"I think realistically this is going to take time," he replied.
In order to prevent future situations like AIG, the administration now wants so-called "resolution authority" to enable it to wind down systemic risks to the overall economy, similar to what the FDIC can currently do with small banks.
With all of the difficulties encountered in dealing with AIG, Sen. Bob Corker, R-Tenn., asked Geithner why the administration did not just ask Congress for a "one-off" deal to help it resolve AIG.
"On a one-off basis, if you were to ask for that instead of pumping additional monies into a company that really has turned out to be a honey pot for many of the institutions that have relationships with it, my guess is that -- we've had numbers of vehicles come through this body -- that would pass pretty quickly," Corker said. "So I don't know why the Treasury hasn't asked for conservatorship ability to deal with that entity. Again, my guess is it would be like 100 to zip in the Senate and 435 to zip in the House."
In response, Geithner indicated the preference was for a long-term authority, not a short-term fix, stating that "it's hard to do as a one-off thing."
Moments later, Sen. David Vitter, R-La., questioned Geithner on Treasury's plan to re-use taxpayer money that banks re-pay as they get out of the government program.
"When TARP funds are paid back to the Treasury, the common understanding on Capitol Hill -- I think this is very fair to say -- is that that would be paid to reduce the federal debt and would be a permanent reduction of the initial $700 billion," Vitter said. "That is not how Treasury is interpreting it or putting it into practice, and a lot of us are very concerned about that -- certainly me."
"As we read the law and as we think it was designed, it works the way I described, which is a dollar that comes back to us goes in the general fund, but that does create additional room to make another dollar of commitments," Geithner responded. "Now, we are going to use that flexibility very carefully. We're only going to do it if we think there's a -- it is very important to this broad objective of trying to make sure there's credit flowing across the financial system and the economy."
Geithner: Economic Bailout 'Will Never Be Perfect'
"I think the political rationale behind it is to avoid coming back to us for anything," Vitter said. "My suggestion is you'd better be perfect in that execution, because if you have to come back, you've -- you've built up with a lot of members' complete distrust of the next step because of these interpretations."
"We will never be perfect in execution on anything, but we will be exceptionally careful," Geithner replied. "And, senator, as you know, we have crawling all over us that congressional oversight panel, the GAO, the special SIGTARP."
On Thursday, Geithner returns to Capitol Hill for his second hearing in two days, an appearance before the House Appropriations Subcommittee on Financial Services starting at 10 a.m. ET.