Treasury Secretary Geithner Introduces Financial Stability Plan

Emphasizing the need for sustained and aggressive action, Treasury Secretary Timothy Geithner unveiled on February 10 the Obama administration's highly anticipated plan to address the financial crisis and institute comprehensive regulatory reform of the financial sector.

The Financial Stability Plan is intended to attack all key aspects of the credit crisis while strengthening America's financial institutions. The following is a summary of the Financial Stability Plan's core components:

Bank "Stress Test" and Capital Assistance

Federal bank regulators will institute uniform standards to help strengthen banks. They will also conduct "stress tests" to ensure the nation's largest banks can withstand a worsening economy. The stress test will assess whether U.S. financial institutions have sufficient capital to continue lending and absorb potential losses due to the declining economy. Banks in need of help will be given a capital buffer, enabling them to weather economic downturns and continue lending to consumers and businesses until they can attract additional private capital.

Term Asset-Backed Securities Loan Facility

The Treasury and the Federal Reserve will use $100 billion to leverage up to $1 trillion dollars to broaden the resources of the Term Asset-Backed Securities Loan Facility in order to stimulate secondary lending markets. TALF will provide financing to private investors to unfreeze credit for cars, small businesses, and other consumer and business credit and will now include commercial mortgage-backed securities. TALF may later be expanded to include other asset classes, such as residential mortgage-backed securities.

Public-Private Investment Fund

The federal government will partner with the FDIC and Federal Reserve to create a new Public-Private Investment Fund. The fund will provide government capital and financing to leverage private capital to buy up the "legacy" assets that are impeding lending and the flow of credit. The initial public investment will be up to $500 billion with the potential to expand to $1 trillion. Geithner said the Treasury is still looking at ways in which it can help private sector buyers price these assets.

Housing Support and Foreclosure Prevention Program

The federal government will launch a comprehensive housing program to help curb the housing crisis. The plan will lower mortgage interest rates for consumers, and the Treasury will work with the Federal Reserve to commit $50 billion to reduce monthly payments and establish loan modification guidelines. The Financial Stability Plan will require firms receiving federal funds to participate in foreclosure mitigation plans to stem the ongoing housing crisis. Details of the housing and foreclosure prevention program are forthcoming, according to Geithner.

Other Program Components

Increased Transparency and Public Monitoring

The Treasury intends to increase transparency, monitoring and accountability in the financial sector. In doing so, it hopes to reassure the public that taxpayer monies are being provided and used in a manner that will strengthen the economy.

As part of this initiative, the Treasury has launched a new Web site—FinancialStability.gov—that will list all recipients of government assistance. The Web site will also include reports on how many new loans recipients have provided to businesses and consumers and how many asset-backed and mortgage-backed securities they have purchased.

The Treasury will also post on the Web site reports on the impact of the Financial Stability Plan on the credit markets.

Accountability for Firms That Receive Assistance

The Financial Stability Plan will also include tougher standards (applied prospectively) for firms receiving taxpayer assistance. These standards will do the following:

• Require banks receiving assistance to show how government assistance will expand lending and how they intend to use taxpayer dollars
• Restrict dividends, stock repurchases and acquisitions to provide assurance that taxpayer money will promote lending
• Limit executive compensation, restrict golden parachutes and require disclosure of luxury spending provisions within compensation agreements

Plan Details Still Forthcoming

While Geithner has provided an outline of the Financial Stability Plan, many key details have yet to be announced. Geithner emphasized the complexity of the financial crisis and that recovery will "cost money, involve risk, and take time."