Geithner Announces Bailout Repayments Will Be Reused for Smaller Banks

Treasury Secretary today says the financial system is starting to heal.

May 13, 2009 -- In a speech this morning in Washington before the Independent Community Bankers of America, Treasury Secretary Tim Geithner announced the government would use government bailout money the bigger banks already paid back to help struggling smaller community banks.

The spotlight recently has been on the nation's 19 biggest banks that were subjected to the government's stress tests, but today's announcement signaled that the Treasury Department has not forgotten about the smaller banks.

"Using proceeds of those repayments, we plan to reopen the application window for banks under the Capital Purchase Program with total assets under $500 million and raise from 3 percent of risk rate of assets to 5 percent the amount which qualified institutions can apply for," Geithner said, prompting the hotel ballroom to erupt in applause.

"In addition, we're going to … reopen the time period in which the small banks can form a holding company for the purposes of this capital program," he said. "Both the window … to establish a holding company and the window to apply or reapply for capital will be open for an additional six months."

Hundreds of small banks have already received cash infusions as part of the government's $700 billion Troubled Asset Relief Program, launched last fall as the country suffered under the weight of the economic crash.

Geithner has said that about $110 billion remains in the program and has estimated that Treasury will receive an additional $25 billion this year as banks repay the government.

A dozen small banks have already repaid the federal funds they received, and some big banks have announced plans to follow suit, with JP Morgan Chase CEO Jamie Dimon recently calling participation in the program "a scarlet letter."

Some Lawmakers Unhappy

Despite the warm welcome Geithner's announcement received from the assembled bankers, some Capitol Hill lawmakers are none too happy with the plan to send repaid taxpayer money back out to the smaller banks.

Rep. Brad Sherman, D-Calif., blasted Geithner on the House floor today, citing part of the original TARP bill -- section 106D -- that he said meant that these plans were "illegal."

"It is being widely accepted in the press and on Wall Street and in Washington that whatever the secretary gets back from the banks will instead be part of some revolving fund from which the secretary of the Treasury may make additional bailouts in addition to the first $700 billion of expenditures," Sherman said. "Well, the statute is very clear to the contrary -- whatever is returned to the Treasury goes into the general fund."

Sherman said the administration's decision to reuse this money meant its approach was essentially, "It's not illegal if Wall Street wants it."

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Geithner Expects Economic Recovery

Geithner also expressed an optimistic outlook for the nation's financial recovery, touting the progress made because of the administration's recent efforts.

"On the strength of these efforts, the financial system is starting to heal," he said. "Concern about systemic risk is substantially reduced. And overall lending conditions have begun to improve."

Later Geithner added, "This recession is now about six quarters old, and we have seen very substantial, very dramatic adjustments in our financial system already. Leverage has declined. The more vulnerable parts of the nonbank financial system no longer exist. Banks are funding themselves more conservatively. And these are necessary changes. One of the great strengths of our financial system, of our economy as a whole, is these adjustments, when they have to come, come with great speed and force."

Geithner predicted the administration will take further action on financial regulatory reform in the coming weeks.

"We want to move while the memory of the damage of the crisis is still acute," he noted. "And it's going to be a difficult, complicated task, but I think we have the best chance in a generation to fix this system."

He also voiced support for a measure that would increase the limit on the FDIC's borrowing from Treasury from $30 billion to $100 billion.

Following a very brief question-and-answer session, the bankers presented Geithner with a Ben Bernanke stress test doll, referencing the Federal Reserve chairman.

"Anytime you feel stressed, give Ben a squeeze," they told Geithner.