Geithner Lays Out New Financial System Rescue Plan, Taxpayer Return Still Unclear

geithner.jpgAdmitting that previous actions were “inadequate”, and “not comprehensive or quick enough to withstand the deepening pressure brought on by the weakening economy,” Treasury Secretary Timothy Geithner unveiled a restructured plan to aid the ailing financial system today:

[The plan] would more closely scrutinize the risks banks are facing and offer public and private capital to those that need it; create a fund, with a starting value of $500 billion, to buy up toxic real estate loans; and commit up to $1 trillion to reopen lending markets for consumer, student, small business, auto and commercial loans.

This plan gets back to the original intent of the financial rescue, which was purchasing toxic assets off of banks’ books, freeing the banks up to boost lending — in theory, since banks will no longer be worried about having to cover losses from toxic assets, and hoarding money accordingly, they will lend more.

To purchase these assets, Treasury is planning a new public-private investment program, the details of which have not yet been finalized. As Globe Street reported:

Fittingly called Public Private Investment Fund, the program will leverage the Federal Reserve Bank’s balance sheet to loan money for the purchase of these assets. FDIC, for its part, will provide guarantees that their value will not drop below a certain level.

It is a good step for the Obama administration to acknowledge that the first incarnation of this bank rescue did not work out as well as it could have (though it likely did avert a larger catastrophe). However, that still leaves the question of return to the taxpayer on the purchase of these assets.

The first tranche of public investments in banks has not yielded much of a return, and while the new programs “are designed to ultimately return money to taxpayers,” it is not totally clear how that is going to happen. Geithner has included more provisions aimed at transparency and accountability — which were sorely needed — but that still doesn’t address the ultimate return on a dollar for the taxpayer. Will it be a dollar? Two? Fifty cents? How will we know and how soon will we know it? It’s too early to tell, but as more details are solidified within Treasury, and these answers become clearer, they should be announced and amplified, to assure everyone that this is not simply TARP II.