Treasury Secretary Timothy Geithner defended the bank rescue program devised by the Obama administration Tuesday as the International Monetary Fund predicted U.S. financial institutions could lose $2.7 trillion from the global credit crisis.
Geithner, testifying before the rescue plan's Congressional Oversight Panel, faced a battery of questions over the Treasury's public-private partnership investment plan to rid financial institutions of their troubled assets.
His testimony came in the wake of a watchdog agency report that warned Obama administration initiatives could increasingly expose taxpayers to losses and make the government more vulnerable to fraud.
A special inspector general assigned to the Treasury's $700 bailout program concluded in a 250-page quarterly report to Congress that the private-public partnership is tilted in favor of private investors and creates "potential unfairness to the taxpayer."
Geithner, in prepared testimony, said the new plan "strikes the right balance" by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.
"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," Geithner said in his remarks. "Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."
Geithner said these bad assets have created uncertainty about the health of individual banks and reduced lending across the system. "For every dollar that banks are short of the capital they need, they will be forced to shrink their lending by $8 to $12," he said.
While credit conditions have improved in the past few months, "reports on bank lending show significant declines in consumer loans, including credit card loans, and commercial and industrial loans," Geithner said.