The Obama administration’s revamped program to fix the nation’s ailing financial markets was met with harsh criticism Tuesday, as the stock market tumbled and lawmakers complained that it lacked details and missed essential targets.
The generally negative response to the new plan unveiled by Treasury Secretary Timothy Geithner means the White House will clearly have to invest more time, energy and political capital into explaining the package and selling it to Congress.
It’s unclear whether the program requires any specific congressional action to implement. But Congress is not without other weapons, including hearings and oversight that can bog down the bureaucracy.
Lawmakers are still seething over how the Bush administration used the first $350 billion installment of the Troubled Asset Relief Program, and they have already signaled they will put more pressure on Obama’s team to justify its use of the second $350 billion — and prove that it is having a positive impact.
“A lot of us are very, very skeptical,” said Sen. Richard Shelby (R-Ala.).
In his address at the Treasury Department, Geithner made it clear that he’s aware of the work ahead.
“Our challenge is much greater today because the American people have lost faith in some of the leaders of our financial institutions and are skeptical that their government has used taxpayers’ money in ways that will benefit them,” he said. “This has to change.”
Just hours after he announced the revamped plan, Geithner was grilled by Shelby and other members of the Senate Banking, Housing and Urban Affairs Committee over the details, the potential cost to taxpayers and if the plan will actually succeed in jump-starting lending to consumers and business.
“It appears here that your plan is offering only at this point a conceptual plan with many details yet to be filled in,” Shelby said during the hearing. “Is there a concrete plan here?”
The Obama administration also took heat for putting off unveiling any details about their plans for the housing crisis, highlighting how important the foreclosure element is to shoring up congressional support for its ongoing economic agenda — especially if the White House ends up needing more money or other legislative authority from Congress.
Treasury Department documents show that only $50 billion of the remaining $350 billion bailout funds would go toward foreclosures. And Geithner said the administration would announce details of a comprehensive housing plan in “the next few weeks.”
“I’m concerned that $50 billion to reduce foreclosures understates the amount that we will need, and we need some assurance that, assuming this works as we hope it will, there will be more money available,” House Financial Services Chairman Barney Frank (D-Mass.) said in a statement after Geithner’s speech.
He also called the administration’s plans to release a “comprehensive” housing plan in the next few weeks “too much time,” urging financial institutions to hold off on foreclosures until Obama announces his housing plan.
“Until housing is addressed in my state of Arizona, housing prices will continue to decline, and that creates a downward spiral which exasperates the recession,” said Sen. Jon Kyl (R-Ariz.). “You’ve got to stop that downward spiral.”
A senior Treasury official, however, told reporters during a background briefing that the administration was committed to directing more resources beyond the $50 billion toward housing.
Senators also questioned what several saw as a lack of transparency by the Federal Reserve.
“The American people are the ones on the hook if the Federal Reserve causes inflation, causes credit problems for the United States,” said Sen. John Ensign (R-Nev.).
“The reports are literally from $1 trillion to $3 trillion. If they’re going to take and leverage the money in TARP, how are they going to do that? What processes are in place?” Ensign asked.
The new president and his economic team see a long road ahead as they contemplate economic recovery, and they know they will need great stores of patience and goodwill from the American public to complete the journey. Hence the improved transparency and accountability standards — including the new CEO compensation restrictions announced last week — that are designed to get the public to buy into the financial rescue.
“I want to be candid: This strategy will cost money, it will involve risk and it will take time,” Geithner said in his speech. “As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families and for businesses and for our nation.
“We will have to adapt our program as conditions change. We will have to try things we’ve never tried before,” he said. “We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted.”
To the senators, Geithner pledged to consult over the details as the administration’s economic team fleshes them out. That includes the final cost, a topic of particular concern for lawmakers since Geithner discussed pumping as much as $2 trillion into financial markets.
For now, the administration is merely talking about leveraging the remaining $350 billion left in the bailout fund to mobilize the greater figures being discussed. Congress has already authorized substantial resources to fight the crisis, “and I think our first obligation is to move to use those resources as carefully and effectively as possible,” Geithner told the banking panel.
“As we develop the details of this plan in consultation with you, we’ll have a better sense about what it’s going to take to make it work and whether we’re going to need additional resources and authority,” Geithner said. “And, absolutely, we can’t come to you and ask you for that unless we give you something that you can react to and evaluate on its merits.”
The administration’s efforts to separate itself from the much-maligned bailout management of the Bush administration have even led Geithner to rename the revamped bailout program the Financial Stability Plan.
Geithner announced three new programs that make up the bulk of the administration’s new financial rescue effort. The first is a coordinated effort by all the federal bank regulators to assess the health of the nation’s biggest banks, conducting “stress tests” to ensure they can weather a variety of economic scenarios.
Needy banks will receive capital injections to keep them lending through the downturn, rather than sitting on the government money as many banks are doing now.
Second, aiming to unthaw frozen capital markets, the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. will create a new public-private investment fund that aims to entice private companies to buy up toxic assets weighing down bank balance sheets. Government capital and financing will leverage private capital to buy up the bad bets.
The Treasury is still deciding on how to structure the program, Geithner said, which will begin by providing up to $500 billion in financing capacity, but that number could ultimately double in size.
Third, the Obama administration will undertake a major expansion of a consumer-business lending program to kick-start secondary markets and get much-needed credit flowing to consumers and businesses.
The joint initiative with the Fed will leverage up to $1 trillion in new lending.
The new administration will require banks receiving aid to show how the assistance will expand lending, participate in mortgage foreclosure mitigation programs, and limit executive compensation, shareholder dividends and acquisitions, though details remain scarce.