Treasury Secretary Timothy Geithner told a congressional panel yesterday that as the U.S. economy continues to struggle against "headwinds," the government must be prepared to respond to more unexpected crises, leaving open the possibility that insurers receiving Troubled Asset Relief Program funding may not be expected to repay their entire debt.
Testifying before a congressional panel that oversees TARP, Geithner cautioned against becoming too optimistic about a rebound.
"The financial and economic recovery still faces significant headwinds," he said, citing high unemployment and home foreclosure rates, tight credit and impaired securitization markets, especially for mortgage-backed securities.
Geithner also told the panel that not all TARP investments will be returned.
"There is a significant likelihood that we will not be repaid for the full value of our investments in AIG, GM and Chrysler," he said, though some $15 billion more likely will come back than was originally projected.
Geithner laid out a strategy for winding down the bank bailout program, but also defended his decision on Wednesday to extend it past a scheduled year-end expiry, until next Oct. 3, as a necessary guard against a sudden economic relapse, according to a Reuters report.
"History suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn," he said.
TARP was approved by Congress last year as a $700-billion program to buy toxic or impaired assets from banks, but was immediately converted into a fund for Treasury to make capital injections into ailing banks.
Big banks now are eager to exit TARP by repaying their bailout money, partly to free themselves from pay restrictions. With the government now holding an 80% stake in the company, AIG, meanwhile, has spent the past several months parting with companies that are not performing.
Geithner said it was "a good thing for the country that banks are eager to get out" of TARP, but it has to be done with care. "We are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead."
Where and how remaining TARP money will be spent has been the fodder of the larger press this past week. Geithner said he was extending TARP on a modified basis through next October because he didn't want the government to face another situation in which the feds potentially face a crisis without having adequate tools on hand to deal with it.
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