Feb. 10, 2009 -- Treasury Secretary Timothy Geithner outlined a massive $2 trillion plan today that he said is meant to stabilize the nation's banking sector and restore the public's faith in the government's ability to handle the crisis.
About an hour after the plan was announced, the Senate narrowly passed President Obama's $838 billion economic stimulus bill. The measure was approved by a vote of 61-37. At least 60 votes were needed to prevent Republicans from blocking the measure.
Geithner said the American public has lost confidence in bank CEOs and is "skeptical that their government has -- to this point -- used taxpayers' money in ways that will benefit them."
"This has to change," Geithner said as he unveiled a new plan to use up to $2 trillion of taxpayer and private funds to stabilize the banking sector.
The cost of this latest bailout effort by Treasury was much larger than most people were expecting. After months of numbingly large government bailouts, even $2 trillion had the ability to shock. In the minutes after Geithner's speech, the Dow Jones industrial average fell about 3.5 percent.
To put $2 trillion into perspective, consider this: That's enough money to outright buy 8 million homes at $250,000 each.
The plan released by Geithner, coupled with Obama's economic stimulus bill working its way through Congress, brings the cost of the administration's economic rescue efforts to nearly $3 trillion.
The latest plan will replace the highly criticized Troubled Asset Relief Program, known as TARP.
Geithner conceded there will be risks with such a gargantuan and untried plan.
"I want to be candid. This strategy will cost money, involve risk and take time," he said in a much anticipated speech.
"We'll have to try things that we never tried before and we'll make mistakes," Geithner said.
But the cost of complete collapse of the financial system "would be incalculable," he said.
Geithner promised that the Obama administration would take a different approach to the financial crisis. He said there will be more transparency and accountability than provided in the Bush administration.
The revised financial rescue plan will inject banks with fresh capital, work with the Federal Reserve to support an increase of $1 trillion in lending, provide incentives for private investors to work with the government to buy up the bad assets weighing down banks, and commit $50 billion to help struggling homeowners avoid foreclosure.
"When our government provides support to banks, it is not for the benefit of banks, it is for the businesses and families who depend on banks and for the benefit of the country," Geithner said.
Federal regulators will institute uniform standards to clean up banks, performing "stress tests" to assess the health of these banks. As Treasury has done in recent weeks, Geithner will seek to improve the transparency and accountability of the embattled plan by launching a Web site to show how government funds are being used, insisting that banks show that federal help is serving the purpose of the program by increasing the flow of credit, and limit executive compensation and lobbying from banks participating in the government plan.
"This is a challenge more complex than any our financial system has ever faced," Geithner said.
Plenty of Blame
Geithner also made it clear that there is plenty of blame to go around. He attacked banks – and average Americans – for taking on risks they shouldn't have.
"Investors and banks took risks they did not understand. Individuals, businesses and governments borrowed beyond their means," Geithner said. "The rewards that went to financial executives departed from any realistic appreciation of risk. "
This Treasury plan is part of a broader offensive by the Obama administration to try and dig the nation out of recession. The Senates passed its version of Obama's $838 billion economic stimulus bill aimed at creating jobs. The plan must now be reconciled with an $819 billion version from the House.
Republicans have opposed both the House and Senate versions, saying they are too expensive. Republican senators held a news conference after the vote today to say they will continue to fight what they call "pork" in the measure during the House and Senate conference. "My guess is it gets even larger when it goes to conference," predicted Sen. John Thune, R-S.D.
The bill has been stalled as Democrats and Republicans fight over the role of government and whether the best way to tackle the problem is through additional spending or tax cuts. Obama has tried to gain public support for his plan through a prime-time press conference Monday, a campaign trip to Elkhart, Ind., and a today trip to the high foreclosure state of Florida.
The new spending by the Obama administration is in addition to the massive amounts of money that have already been poured into the struggling financial sector.
During the final months of the Bush administration, $250 billion was pledged to financial institutions, $40 billion to insurance giant AIG, an additional $20 billion to both Citigroup and Bank of America, and more than $17 billion to General Motors and Chrysler. Additional funds were used to guarantee various debts held by Citigroup and Bank of America and to support a new program by the Federal Reserve to purchase debt consisting of auto, student and credit card loans.
Let the Banks Fail
The government may eventually return to Congress to ask for more money for the banks, although that is considered unlikely in the immediate future.
"They need to be flexible in their approach and have a menu of options; one size doesn't fit all," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. "[They should be] speeding the relief to where the economy needs it most. The most important thing they can do is help restore confidence in the system, and by doing quick and decisive action, they will achieve a large measure of that."
Barry L. Ritholtz, CEO of Fusion IQ, an institutional research firm, and the author of "Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy," said he expects "more of the same."
"I thought this new administration was all about change we can believe in. Instead, it's really a carryover of some of the Bush-Paulson policies, which were all horrific and did not stop the crisis, did not repair the economy," Ritholtz said. "It was just flailing about and wasting money."
Ritholtz said it is time to stop throwing more cash at the banks and nationalize them.
"They need to, in my option, just admit the truth and recognize that these banks are insolvent," he said. "Essentially, they're wards of the state. Everybody's pretending that these are private companies. They've been effectively nationalized."
Shareholders and bondholders would lose out, but in the end, the financial system would move on, Ritholtz said, adding that it was time to "throw out the old management that has demonstrated the inability to walk and chew gum at the same time."
The new Treasury chief intends to revamp the embattled TARP program, which has come under withering criticism from both sides of the aisle, and increase transparency and accountability.
TARP Program Under Fire
Recent reports from congressionally mandated oversight authorities expressed concern that the lack of transparency raised questions about the success of the program in stabilizing financial markets and the long-term results of the rescue plan.
Lawmakers in Washington have criticized banking executives whose firms have received billions in taxpayer dollars for using those funds on billions in employee bonuses and luxury expenses instead of loans to individuals and businesses. According to the New York state comptroller, Wall Street firms dished out $18 billion in cash bonuses last year. In another case, Citigroup planned to finalize the purchase of a $50 million luxury jet, but later canceled the order after complaints from the Obama administration.
"Too many banks are given a free pass, too many TARP recipients use these funds for everything but lending," said Senate Banking Committee chairman Chris Dodd, D-Conn. "The public is outraged by this behavior and with good cause."
Just last week, the Congressional Oversight Panel looking into TARP determined that Treasury had overpaid by $78 billion for securities that it bought from banks as part of the program.
"The taxpayer deserves better than what they're getting," said Sen. Richard Shelby, R-Ala.
The special inspector general for TARP, Neil Barofksy, said it was "too early to tell" if the first half of the $700 billion had been spent wisely, but recommended that Treasury increase the level of transparency and develop a better strategy on how to manage the huge portfolio of investments it now holds on behalf of the taxpayer.
Treasury's announcement today will be just one part of a multi-pronged plan from the administration to pull the nation out of the longest recession since the early 1970s.
In an effort to get people back to work -- almost 600,000 jobs were lost in January, the most in any month since 1974 -- President Obama has pushed Congress to approve an $800 billion stimulus package of infrastructure spending and tax cuts. Since the recession began in December 2007, 3.6 million jobs have been lost, nearly as much as the population of Los Angeles.
Stuart G. Hoffman, chief economist at PNC Financial Services Group, said the stimulus package could grow.
"I call the fiscal stimulus plan a necessary evil -- I may emphasize, more necessary than evil," Hoffman said.
He expected the president and Congress to do something to jump-start the housing market and to stop the flood of foreclosures. That probably will include getting people to buy homes through tax credits and lower interest rates. To deal with foreclosures, an extreme measure such as reducing outstanding principle might occur.
"I think it's going to be attacked from all sides," Hoffman said.
He added there will be a strong push for new jobs.
"When the president talks about creating 3-4 million jobs, it doesn't mean that the government is going to create all those jobs but [it may] jump-start the private sector," he said.
Second Round TARP
Geithner had been originally planned to outline TARP 2.0 Monday, but postponed the announcement until today because the Senate was voting yesterday on the stimulus package.
Treasury spokesman Isaac Baker said in a statement released Sunday that both the financial stability plan and the stimulus are necessary to leading the country out of its current crisis.
"The economic recovery plan is critical to stemming the tide of this economic crisis," Baker said. "But, it alone won't solve all the problems that led us here. We need to stabilize and repair our financial system to maintain the flow of credit that families and businesses depend on to keep our economy strong. The plan that Secretary Geithner lays out on Tuesday will achieve that goal."
Congress will not have to wait long to hear from the leading policy-makers behind the new plans, summoning them to Capitol Hill this week. Geithner is expected to testify before two Senate committees today and tomorrow and Federal Reserve Chairman Ben Bernanke is expected to testify before the House Financial Services Committee today.
"We must see," Dodd said, "a sharp change in this program under new management."
And tomorrow, there could be a contentious hearing as Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, brings chief executives from some of the banks that have received the largest sums from the TARP -- including Vikram Pandit of Citigroup, Ken Lewis of Bank of America, Jamie Dimon of JP MorganChase and John Stumpf of Wells Fargo. The committee will undoubtedly want to learn what the banks have done with taxpayer dollars.
But after billions have been provided to the financial industry and a massive stimulus package could be approved, many analysts expect the administration will have to request even more money in the future to revive the struggling economy.
With reports from ABC News' Charles Herman