Wednesday, June 23, 2010

Geithner: Credit conditions won't stall economic recovery

WASHINGTON — Forceful government actions, including the $700 billion bank rescue fund, have created an environment where credit conditions are no longer an obstacle to a U.S. economic recovery, Treasury Secretary Timothy Geithner said Tuesday.
"Credit conditions overall, which dragged our economy into a deep recession in 2007, no longer pose an obstacle to growth," Geithner said in testimony before the Congressional Oversight Panel for the Troubled Asset Relief Program.

"I don't think on the available evidence today you can say that the financial system itself is operating as a significant drag on the recovery," Geithner said.

Elizabeth Warren, who heads the panel, and Geithner remain at odds over the issue of credit.

Warren's watchdog panel had previously said that TARP might have stopped the global financial meltdown but hasn't lived up to its promise in terms of stimulating credit availability.

Warren said she was worried that "thousands of small banks could capsize" as a result of what she sees as a coming tidal wave of losses from the commercial real estate sector. About half of $1.4 trillion in commercial real estate loans will be underwater by the end of the year, she said.

Warren also said that six of the 19 biggest banks hold commercial real estate loans that exceed 100 percent of their Tier-1 capital — the benchmark for measuring a bank's capital adequacy. So-called stress tests of banks conducted by the government cover only losses through 2010, she noted.

The TARP fund, embroiled in controversy from the time it was created, is scheduled to expire at the end of this fiscal year, after which the government will seek to exit from remaining investments — notably in Citigroup, AIG and General Motors.

Geithner estimated that TARP would end up costing taxpayers $105 billion.

He indicated that the Obama administration had no plans for any new programs under TARP to help small or big banks grapple with losses from their commercial real estate loans.

Geithner also said in testimony that commercial real estate loans will continue to challenge banks.

However, bank losses are doing better than projected under the stress tests, he said.

A 'healthy adjustment'

In making the case that the availability of credit has improved, Geithner cited surveys that banks have finished tightening credit standards. He said the cost of small-business loans is lower than it was going into the crisis.

In addition Geithner said delinquencies for many loan categories appear to have peaked: The cost to insure against the risk of default of banks is less than half of what it was last March.

Declining loan balances at banks, Geithner said, reflect "a natural and healthy adjustment as borrowers and lenders de-leverage after a period of aggressive credit expansion."

By the same token, "it does mean that many consumers and businesses are still finding it difficult to get new credit."

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