A Conversation with Timothy F. Geithner

Speaker: Timothy F. Geithner, Secretary of the Treasury, U.S. Department of the Treasury
Moderator: Roger C. Altman, Chairman and Chief Executive Officer, Evercore

March 25, 2009

Video Audio

ROGER C. ALTMAN:  Good morning, everyone.  I'm Roger Altman, and welcome -- (audio break) -- on Foreign Relations and today's event featuring Treasury Secretary Geithner.

I'd like to say that this meeting is being teleconferenced to council members elsewhere in the U.S. and, indeed, around the world. Also, we are on the record today.  And please, if I might, would everyone be sure to turn off their cell phones and their BlackBerrys and turn them off entirely?  We appreciate that.  Thank you.

It's my distinct honor to introduce Secretary Geithner.  He'll speak for a few minutes and then take questions, initially from me and then from all of you.  I'm not going to recite his resume, but instead just make this point:  Very few have ever come to this position, the position of finance minister, better prepared to respond to a powerful global economic and financial crisis like the one we're facing than Tim Geithner.

Tim served in the Treasury as under secretary for monetary affairs, the key international and monetary post, from 1999 to 2001, and in the Treasury in other positions before that.  He then served as president and chief executive of the New York Fed over the 2003 to 2008 period.  And as most of you know, it is the New York Fed which executes the market operations through which monetary policy and crisis intervention are actually conducted.

And therefore, for the first 18 months of this crisis -- in other words, most of it -- it was Tim who executed the multiple special interventions in credit markets which our government mounted.  And to date, at least according to Bloomberg, those operations have aggregated 14 trillion (dollars) in total federal support for credit markets.  Mr. Geithner managed the vast bulk of that.  Therefore, he was uniquely prepared to assume the position of Treasury secretary in the midst of this crisis, and in my view, the nation is quite fortunate to have him.

Ladies and gentlemen, Secretary Geithner.  (Applause.)

SECRETARY TIMOTHY GEITHNER:  Nice to see you all.  Nice to be in New York.  I don't know if you are here -- if any New York Fed people are here, but if you're here -- and even if you're not here -- I just want to begin with a brief tribute to you.  As Roger said, the people down there on Liberty Street at the New York Fed are the most exceptionally capable group of public servants I've ever worked with.  They are smart, brave, intrepid, tough, fair, creative, and they have done extraordinary things throughout this period.  And it was my great privilege to work with them there.  And I hope all of you appreciate the burden they carry and the work they've been doing.

Great to be back at the Council.  Compliments to Richard, who's not here, for having me.  Nice to see Pete Peterson.  I hope he's being sufficiently generous to the Council.  (Laughter, applause.) You know, this room looks a little crowded, Pete.  (Laughter.)  I think you might want to build up, maybe.  (Laughter.)

And of course, great -- great to be here with Roger Altman.  You know, we all sort of spent our days studying what Roger did, hoping to replicate so many of his accomplishments at the Treasury.

So let me just begin with a few brief comments about where we are in our agenda.  We're facing, of course, here in the United States and around the world really extraordinary challenges, and these challenges are going to continue to require extraordinary actions.

President Zedillo had this great line in his country's moment of financial peril, when he said, you know, markets overreact, so policy has to overreact.

The great risk in financial crises is that governments underdo it, not overdo it, and our response is shaped by that basic judgment of history.

Now, no crisis like this has a simple or a single cause, but to -- just to make it basic, as a country, we, like many countries around the world, borrowed too much.  We let our financial system take on too much risk.  And those decisions, those judgments and responsibility for this is broadly shared.

Those decisions have caused enormous suffering.  Much of the damage, of course, has fallen on ordinary Americans, on small businesses, people who were fundamentally responsible and conservative in how they ran their lives.  And this is what's fundamentally unfair about financial crises.  The damage caused by financial crises is indiscriminate.  It falls on the most vulnerable and on the most responsible as well.  And the American people are justifiably angry and frustrated by that fundamental reality.

Now, the imbalances that caused this crisis built up over a long period of time, and they will take a long time to work through.  The absence of a serious recession over the past two decades bred a degree of confidence in the future and a stable future that was just fundamentally unjustified.   Relatively accommodative monetary policy and high foreign demand for U.S financial assets pushed down rates, encouraged borrowing, pushed up asset prices, not just in housing and not just in the United States.  Financial innovation produced products whose complexity escaped, went well beyond the capacity of the checks and balances in the system.  Compensation practices overwhelmed the basic disciplines of risk management, leaving our financial system too fragile and too unstable.

And when the crisis started, with the losses building in the mortgage market, the results cascaded across the financial system. House prices fell, of course.  Critical funding markets for households, banks and businesses froze.  Major banks and other financial institutions turned defensive.  And the financial system became burdened by a backlog of mortgages and other real-estate- related assets that they could -- they could not price and could not sell.  And these problems spilled into the real economy here and in countries around the world.

Now, working closely with the Congress, the president has moved very quickly, with very forceful action to help get people back to  work and get the economy back on track.  And we're moving to repair the financial system so that it works for, rather than against, the recovery process.

Last month, we laid out a framework of initiatives to work alongside the economic recovery plan to attack and address the four critical problems at the heart of the financial crisis:  falling home prices, frozen credit markets, weakened bank balance sheets and bank balance sheets burdened by these legacy assets.

And we've made some significant progress.  We're at the beginning of this process, though, and it's going to take some time to work through this process.

We've launched a very substantial plan for the housing markets. It'll help stabilize those markets by keeping mortgage interest rates low and ensuring that millions of Americans are able to refinance and take advantage of lower mortgage payments.  And if you just look at the cumulative effect of these actions and those taken by the Fed, 15- and 30-year mortgage rates now have fallen to near record lows.

We've launched a program to help jump-start critical markets for securitizations.  They're already providing new credit for households and businesses.  This program, which is a joint Treasury-Fed program, which launched last week, launched with $9 billion in new securitization, more than the past four months combined -- materially -- impact in spreads resulting from that.  Very promising program, and we're going to improve -- expand its scale and scope as we go forward.

And we've put in place a new capital facility as a form of insurance against a deeper recession, to make sure that banks are able to provide the credit necessary to help sustain -- to help bring about recovery.

On Monday we laid out -- we added to this basic arsenal of tools a new public-private investment program that'll provide a market for some of the real-estate-related assets that are clogging the financial system and help restart a private market for those assets.  Under this program, as you've read, the government will provide financing to investors on a competitive basis, for them to purchase assets, and the purchase will be structured so that investors share the risk of loss and taxpayers share in the eventual profits.

The combination of this capital assistance program and the asset purchase program will help banks clean up their balance sheets so that they can go back to doing what they must do in order to help bring about recovery, which is to provide credit to the American economy.

Now, it's very important to emphasize that, alongside this financial program, we need to begin the process -- the difficult, careful process -- of putting in place reforms to help ensure that this country is never again confronted with the untenable choice between catastrophic financial risk and massive taxpayer bailouts.

We came into this financial crisis as a country without the authority and without the tools we needed to contain the damage to the economy.  We're moving now to ensure that we're equipped both in the future and as soon as possible with a more modern framework of regulation to, again, leave us less vulnerable to these kind of things in the future.

One of the key lessons from this crisis, of course, is the destabilizing danger that can come from institutions outside the banking system that are vulnerable to some of the same basic pressures that led the United States a century ago to put in place a full range of protections around banks.

Yesterday, I testified before Congress about the need for legislation that would give the government the authority to help a large, complex financial institution, to intervene in that kind of context where stress on that institution, its prospective failure, could cause risk to the stability of the financial system.

Tomorrow, I testify in the House and begin the process of laying out a broader framework of financial reforms.  And we're going to lay out a range of measures to help produce a more stable financial system in the future.  Among other things, we're going to propose substantial changes to the basic prudential requirements, those that affect capital, liquidity, reserves, so that once we get through this crisis the large institutions that pose systemic risk to this system in the future have much greater cushions against future stress and shocks. We want these to be designed in a way that dampen rather than amplify future financial crises.

And we're going to lay out over the coming weeks a broad range of additional proposals to help provide better consumer protection, better protection for investors.  One of the most tragic and surprising things about this crisis was, of course, the basic failures in consumer protection caused deep damage to the stability of the financial system as a whole.

And because we've learned that risk does not respect national borders, our plan will not focus solely on improving the basic framework in the United States, but we need the world to move with us and reach consensus on a broader set of global standards that can be applied more evenly, enforced more credibly around the world.  And President Obama travels to London next week for the G-20 leaders meetings to help build consensus on a broader framework, stronger framework of global standards over the financial system.

Now, we're going to do what's necessary to stabilize the system, and with the help of Congress make sure we have the tools in place for the future to prevent a crisis like this from happening again.

We are a strong and resilient country.  This is about will, not about ability.  To get through this, we need the private sector to  take risk, and in order to do so they need confidence about the rules of the game going forward.  But the American people need confidence, too, that the resources they provide are going to be provided in ways that are used wisely and that will benefit them.  But the financial and the business community also need to recognize and they need to demonstrate that they're -- they can make the changes and sacrifices alongside -- that the American people are making.

And most importantly, the world needs to see America come together, the administration and the Congress, with a commitment to action that's commensurate with the deep gravity of the problems we face.

Thank you.  (Applause.)

ALTMAN:  Tim, I thought your first point about Pete's generosity was really a good one.  (Laughter.)  I've had the same concerns for quite some time.  (Laughter.)  Probably speaking for all council members on that point.

GEITHNER:  When he was chairman of the board of the New York Fed, he was just brutal on those basic things.  (Laughter.)  A real -- a real challenge.

ALTMAN:  Well, having worked with Pete for many years professionally, I can identify with that.  (Laughter.)

GEITHNER:  Of course, we are all fiscal hawks now because of Pete Peterson.  (Laughter.)  There are no doves left on the fiscal side.  (Laughter.)

ALTMAN:  And he deserves credit for that.

Well, let me start out with this question, if I can.  You laid out on Monday the framework for the public-private investment partnership.  That's, of course, the key initiative toward toxic assets, which are at the heart of the crisis.  How quickly can we expect to see results from this effort?  I've heard a number of reasonably informed people question whether the sellers, so to speak, are prepared to sell, particularly if they're facing prices below their marks.  So how do we measure how well this is doing in, let's just say, three months from now?  How much actual volume of toxic- asset transactions do you expect to see?

GEITHNER:  Okay.  Let me do timing first.  This framework builds on an operational capacity that the FDIC uses for loans and then a framework the Fed's evolved for this term asset-backed lending facility for securities.  But even though we're building off some of the existing infrastructure, it's going to take some time for these -- the operational infrastructure to be put in place before we actually can start.  So I want to begin with that.

Second, the effects of this are not going to be judged -- you can't measure these solely on the basis of how much activity you get through these funds.  The existence of these facilities will help change behavior, just in the way a (sort ?) of broader backstop mechanism by a central bank can as well.  So you will be able to see effects on liquidity in the markets and on pricing and spreads, even if you see gradual takeup in terms of relative use of these things.

But on the question you raised about the incentives, for banks in particular, you're right that banks are looking at this and saying, "Is this going to be economic enough for us?  Will the market clear at a rate that's close enough to our marks to make it in -- a -- compelling for us to sell?"  But the balance in this is designed to, in some sense, make it easier for people to raise capital from the markets.

And the incentive banks face is, by taking advantage of this facility, they'll be able to show a cleaner institution, easier for the market to judge the risks from the remaining -- rest of the balance sheet of the institution, and that should make it easier for them to raise capital as a whole.  And of course, banks are going to want to raise capital from the markets if they can avoid -- so they can avoid taking capital from the government.

So I think you have to look at the economic incentives a bank faces through that broader prism, not simply on the -- what a market with leverage from the government will provide in terms of pricing.

ALTMAN:  But if a bank in the real world is faced with the choice of going ahead with a sale of some toxic assets, triggering further losses, triggering a deficiency of capital, and then having, as its only recourse, the government, the TARP, do you think that's going to be a deterrence?

GEITHNER:  Well, we're going to provide -- you know, the -- a core part of this program, as I said, is the government's going to provide, in the form of insurance, a capacity for banks to take capital from the government to make sure they've got a sufficient cushion in the event of a deeper recession.  But what's happening right now in the system is banks, because the market doesn't know how to value the assets on the balance sheet, is uncertain about the scale of losses they face, they're asking banks to hold higher levels of capital than the regulatory requirements require now.  And that's probably because of the uncertainty premium there.

So they, I believe, have an incentive to clean up those balance sheets.  And that will make it easier, I think -- and I think they're going to want to take every advantage, again, to try to raise capital from the market so they're not in a position of trying to raise it from the government.  Now, we want people to be willing to take capital from the government, because that's important as insurance against a deeper recession, but we also want to get the incentives right so that the government's not taking on all that risk itself.

ALTMAN:  Well, in that same vein, the administration's budget includes a provision whereby the TARP would be replenished, another $750 billion, with a budget cost of $250 billion.  If Congress were asked to vote on that today, I don't think it would be --

GEITHNER:  Overwhelming support.  (Laughter.)

ALTMAN:  It wouldn't, probably, be as close as you'd like. (Laughter.)  So the question is, how bad is it if you can't replenish the TARP?

GEITHNER:  Congress gave us substantial resources.  We're going to use those quickly, as effectively as we can, make sure we allocate them that we're getting the highest return and getting credit markets working again.  And -- but we're going to make sure that we work with the Congress over time to make sure we can do this on the scale and force that's necessary to help get us through this as quickly as possible.

It's going to be extraordinarily difficult.  The politics of this here, everywhere, are very, very hard.  That's why crises are so hard to manage, in some sense, because it's so hard to make people understand that recovery requires a financial system that's working.

And that will require government taking risks, providing the support in some sense.  But you know, we're just going to have to work at it, make that case.

I do think people understand that fundamentally, because they're seeing now the consequences across the country of even smaller banks pulling back because they're being more conservative.  And businesses are seeing the consequences of that stuff.  And so I think that over time we'll be able to make sure there's broad enough support that we can do this on a scale that may be necessary.  But we have substantial resources now.  We're going to move forward to use those as effectively as we can.

ALTMAN:  How much is left in the TARP?

GEITHNER:  Very -- very reasonable amounts of money, significant enough money.  We've, you know, committed to put 50 billion (dollars) aside to help fund this housing program.  We've put significant resources aside to help fund these liquidity financing programs for markets, including what we announced on Monday.  But we still have substantial resources left to help make sure that we can meet other contingencies and fund whatever capital requirements the system needs.

ALTMAN:  One last question from me.  The foreclosure mitigation initiative, I hear a lot of skepticism as to the real impact that can have.  I think all of us heard what you said about mortgage rates being at record lows, and there are other ways to measure how you're succeeding on the entire housing problem.  But your precise initiative there, what do you expect in terms of actual loan modification rates and actual tangible progress?

GEITHNER:  Right.  Well, let me just step back for a second. This housing thing has four really important pieces.  One was an effort to make sure that GSE borrowing costs and spreads to treasuries come down.  So as a key part of this program, we've put substantial additional resources into the GSEs so that they are able to do what they need to do in this market.  Remember, they're now about three- quarters of the market, so their borrowing costs have a huge impact on mortgage spreads.

Second is, the Fed has a very dramatic program, smaller program alongside the Treasury, to provide direct purchases of agency securities and MBS.  That, too, has helped bringing down spreads.

Third piece was a new program to allow people to refinance a conforming mortgage with a higher LTV, loan-to-value ratio, than is typically required -- permitted for GSE eligibility.  That will allow 3 (million) to 4 million Americans who would otherwise not be able to refinance to take advantage of this very substantial fall in mortgage rates.

Now, in addition to that, of course, we laid out this broad loan modification program that will provide pretty significant incentives to investors and servicers to reduce interest rates, principal payments, where it's economically sensible for them to do that.

And it will be hard for people to judge whether we got those incentives right from the beginning.

And you won't know, I think, what's happening to modifications in that program for probably, realistically several more weeks, maybe a couple months.  And we can't be certain that we're going to get that balance right.

But I think this is the first time we made the incentive powerful enough that we have a shot at a broader program, on a standardized basis, that's going to work for us across the system.

And I think all banks and services will commit to participate in this program.  And with the uniformity across the GSEs and the FDIC, other programs across the government, this has a pretty good chance of getting traction.

ALTMAN:  Let's open this up to questions.  I'd like to remind everybody please to wait for the microphone and then to please identify yourself.

Yes, sir, right here.

QUESTIONER:  Good morning.  My name is -- (inaudible).

Secretary Geithner, would you respond to the argument that the TALF is going to be challenged by the basic premise -- this is a solvency crisis, not a liquidity crisis -- and that banks need to in some quarters fail and other quarters, you know, be nationalized?

GEITHNER:  This financial crisis, like all financial crises, involves both capital and liquidity.  And as I said, our program, like classic doctrine would require, makes it clear that we're going to make sure there's capital available, where necessary, to help the financial system get through a deeper recession, but also provide very substantial funding to markets, on terms that are good for the taxpayer, to help get these markets going again.

You need to do both those things together.  Because our system, as you know, is not a bank-dominant financial system.  And even though banks are critical to getting through this, we need to make sure these broader markets that are so central, to all lending in the United States, also get going again.

So we're not treating, have never treated, this as a liquidity crisis.  It has those two core dimensions.  And as you can see, in the president's broad agenda, you know, you're not going to be able to fix the financial system without very strong, sustained support from monetary and fiscal policy.  And that broad package together has the best chance of getting us quicker -- more quickly to the path of recovery.

ALTMAN:  Yes, sir, here on the left.  Right here.  Yes, sir.

QUESTIONER:  Benjamin Barber from Demos here in New York.

I'm a political theorist, not an economist.  And when I teach the theory of capitalism, it suggests that profit is the reward for risk.

Whenever government --

ALTMAN:  That sounds like an economist, sounds like an economist.

QUESTIONER:  Well, that starts there.  You'll see it doesn't end there however.

And where -- what seems to have happened recently is that whenever anyone talks about nationalizing the banks, people scream socialism.  But the current administration seems to be wanting to socialize risk but keep profits private.

And that seems to be the new capitalism in the United States, where the taxpayers take a lot of the risk, but the market continues to enjoy profit, should there be any.

And the real question, I think, is whether there are mechanisms that would allow, if taxpayers are going to take the risk, for them to enjoy all, not some, of the profits, rather than a system in which you're trying to revive the markets on the taxpayers' back.

GEITHNER:  Understand your concern, but let me just be clear about this.  To solve financial crises, governments have to be willing to take risk, because the definition of "financial crises" is the markets are not willing to take risks that looks -- otherwise would be economic.

The central fact is that governments have to be prepared to take risks the markets can't take, for a temporary period of time, in order to get a firmer foundation for repair.

Of course you want to do that in ways -- doesn't have the government assuming all the losses in the system.  And what makes these things hard to solve is because the world ultimately will want us to take more risk than we think is prudent for the taxpayer.  And the programs we're designed -- we're designing or pursuing are very cognizant of the risks you said.

And again, just think about the alternatives that most people advocate in this kind of context.  The mode -- the dominant alternatives that we're proposing would have the government come in and purchase these assets on their own, hold them on the government's balance sheet, take all the risk in that choice.  And you know, the -- this is a system that's much, much more complicated than what we went through in the '90s and what other major economies went through over the last couple decades.  And because of the basic complexity of these products, scale of these institutions, that, in our judgment, would pose much, much greater risk to the government; that taxpayers are assuming greater share of losses than is necessary or prudent, and taking risks they cannot effectively manage.

ALTMAN:  Yes, sir?

QUESTIONER:  Thank you.  Mr. Secretary, my name is Roland Paul.  I'm a lawyer.  What is the Treasury's estimate of what the original cost or the face amount or the pre-meltdown carrying value of these toxic assets that are held by -- you can pick it, but say the 10 biggest banks?

GEITHNER:  For lots of reasons, that's a -- like a hard question to answer.  (Laughter.)

What we do is -- I mean, if it was -- if that was a knowable number with high precision, we wouldn't have a financial crisis. (Scattered laughter.)  But --

QUESTIONER:  (Off mike.)

GEITHNER:  Yeah.  So -- but you know, what we do is -- you would expect your government to do, is we have a range of basic judgments we can look at to provide broad orders of magnitude.  So we look at what the economists -- and the army of smart economists in the Federal Reserve, for example -- produce in terms of range of potential loss estimates.  We look at what the supervisors expect we might see over time.  We look at what a range of analysts in the private sector produce in terms of loss.  We look at all the academic community estimates, and we try to array those to make sure that the judgments we're making are not excessively optimistic, are sufficiently conservative that we're going to not put ourselves in the position, again, where we're too tentative and gradual in putting in place our solutions.

But as you know, there's a range of estimates out there because we're facing a highly uncertain macro-environment.  We haven't been through anything like this before.  People don't really know how credit is going to perform across the cycle, because there's been no cycle like this in the past, and that creates a lot of uncertainty.

That uncertainty is magnified by the fact that we're in a market where there's so little financing available, and therefore you have huge liquidity risk premia, risk premia, in many of the markets that trade.

Just to cite the specific example, you know, if you had to sell your house tomorrow in a market where no one can get a mortgage, the price you would get in that environment would be very different from what -- if you could decide when you sold your house, over time, and you had a well-functioning financing market, mortgage market to sell into.

And that gap itself is one source of the huge disparity in range of estimates you're seeing across the financial system and that's why you're seeing really so much reluctance for people to take risk and exposure to a financial institution; why banks in some ways are -- many banks are being more defensive than would be helpful for what the economy's going through.

ALTMAN:  I guess that's why Pete isn't selling any of his houses right now.  (Laughter.)

Let's get someone in the back.  Yes, sir.  John.

QUESTIONER:  (Off mike.)  If a bank or financial institution fails a stress test -- I have a two-part question relating to confidence.  If a bank or financial institution fails the stress test, will the degree of failure be quantified, or will -- is there a period where that private institution can cure?

And secondly, relating to that is --

GEITHNER:  Can I just do that one first?  Because that's a complicated question, okay, and there's a little bit of care and thought.


GEITHNER:  Okay?  So let me just provide a little context for what we're doing.

Right now, as I said in response to Roger's first question, you know, markets look forward.  And they look beyond the horizon that gap accounting and regulatory accounting normally looks at.  And they're looking ahead to the potential losses in a more deeper recession, and they're applying a -- in a sense, a greater uncertainty premium, loss premium to assets on bank balance sheets in that context.

Now, stress testing is an integral part of what banks do -- people who run banks do and what supervisors do, but there's a lot of variance across institutions in how they conduct those, how conservative those tests are.  So what we thought was a necessary step for trying to make sure there's enough capital in the system was to get the supervisors of your country together to agree on a more consistent, more realistic, more forward-looking set of standards, so you brought a little bit more confidence, frankly, to those basic judgments.

It's not a pass-fail test.  It's designed to assess whether -- what additional margin of capital institutions might need to comfortably get through a deeper recession, because with that they'll have greater lending capacity and you're likely to have better outcomes for the economy as a whole.  If you just left this dynamic in place today, you'd face greater risk that, again, you'd have further cycles where banks, because they're -- individually be more defensive, put us in a situation where we have a deeper recession than we otherwise need to be.

So the basic rationale for this, as I said -- and that's a sort of necessary condition to giving the broader confidence in the markets, that there's going to be sufficient capital in the system across -- appropriately distributed to get through a -- to provide insurance against a -- against a deeper recession.

It's not pass-fail.  You know, when a quarterback throws the football, he throws to where the receiver's going, not to where the receiver is.

And that's how the markets judge risk in institutions.  And we need to try to get ahead of that process.

QUESTIONER:  I appreciate that answer, but the question still had to do with if where the receiver's going there's going to be a deficit of capital, whether there's a chance to (cure ?), which leads to the second point.

Would not confidence be increased if the government said that we would not take capital ownership of the financial institution over a certain percentage, and any incremental capital the government supplied would carry a very high, burdensome rate of interest you got to pay back?  Because my view is that confidence is shattered by the uncertainty of what percentage the government is going to own of important financial institutions.

GEITHNER:  Remember, we're living with that uncertainty now. The choice we have is whether we can -- how best to remove that uncertainty, or reduce it to tolerable levels.  The plan the Fed laid out when we initiated this program made it clear that this'll be done by the end of April.  It's a relatively short, attenuated process.  We wanted to produce as much confidence as possible in the integrity of the results.  And again, we're trying to create a system where there are very substantial incentives for people to go raise this capital from the market, with a backstop from the government.  That's the basic objective.

ALTMAN:  Mr. -- way in the back.

QUESTIONER:  Hi.  Good morning.  Good morning, Mr. Secretary.  Doug Smith, Standard Chartered Bank.  Wonder if I could change the subject for a second.

GEITHNER:  Former Treasury official.  Distinguished Treasury official.

QUESTIONER:  Well, thank you.  Wonder if you could comment on two related things.  One, the Chinese government proposal about a global currency; and about the IMF regulations that were -- the new IMF idea about, you know, very general agreements to borrow and having a faster ability to disburse to the (margin ?) markets.

GEITHNER:  On the first question, I haven't read the governor's proposal.  He's a remarkably -- a very thoughtful, very  careful, distinguished central banker.  Generally find him sensible on every issue.  But as I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights.  And we're actually quite open to that suggestion.  But you should think of it as rather evolutionary, building on the current architectures, than -- rather than -- rather than moving us to global monetary union.

On the IMF piece, you know, emerging markets are facing a very sharp pullback in capital flows, which -- like we're seeing here in the United States -- is -- creates greater risk.  You're going to have a deeper contraction in activity than would otherwise be necessary just adjusting to the end of the boom.  And the IMF and the World Bank exist to -- created to -- exist to -- their principal rationale for existence is to be responsive to trying to attenuate those kind of pressures.  But to do that, they need a much more substantial contingent capacity to lend in this (context ?), lend with conditions targeted to where the world needs it.

And what we've proposed is that we put to place -- put in place a very substantial, $500 billion facility as a crisis facility for the -- for the IMF to rely on.  And that, alongside with greater resources from the World Bank and the regional development banks, would provide a -- again, a much stronger form of finance to help attenuate the pressures we're seeing outside of the United States.  And you know, we want recovery here to be reinforced by recovery around the world.  And I think there's going to be broad-based support for substantial progress in this dimension.

ALTMAN:  Let me just follow that up for one second.  A number -- I haven't read the governor's essay, either, but a slew of news reports interpreted his comments to suggest that the world needs a super reserve currency, and that the dollar, on some gradual basis, ought to be replaced in favor of that.  And I wasn't entirely clear what your response was.

GEITHNER:  Well, as I said, I haven't read his proposal, but I thought the initial reaction was sort of ahead of the details of the proposal I saw.  The only thing concrete I saw was a reference to expanding the use of the SDR, but I look forward to reading his figures.  As I said, I have tremendous respect for him.  He's a really thoughtful, pragmatic guy, and he has a great record of credibility in China as a whole, so anything he's -- he's thinking about deserves some consideration.

It is very important just to underscore that the future evolution of the dollar's role in the system depends really primarily on how effective we are in the United States in getting not just recovery back on track, our financial system repaired, but we get our fiscal position back to the point where people will judge it as sustainable over time.  And the president's budget, although it has some very important long-term investments in improving health care -- our health care system, improving education outcomes, energy efficiency, quality of infrastructure, it does that within a framework which proposes to bring down our deficits to a level that is -- achieves sustainability at the five-year horizon; sustainability being a deficit small enough so that our overall debt burden, relative to the GDP, is stable, at reasonable levels.

And I think that if you think about how the politics of this stuff has evolved over the last few years -- not just because of the leadership of Pete Peterson -- I think the politics are in a better place on this.  I think there is much broader support now for the  basic proposition that we're going to have to get back to sustainability quickly; and yet, to commit to do that just as we're doing the exceptional things necessary to dig out of the hole we started with.

ALTMAN:  Yes, sir, here in the back.

QUESTIONER:  I'm Joel Motley.  We've heard a lot about potentially easing mark-to-market rules to take pressure off the banks.  Do you think there are some regulatory adjustments you can find that might help that aspect of it without compromising transparency?

GEITHNER:  You got the choice right, the balance right. It's a very hard balance to strike.  FASB's out with some proposals for changes that people have a chance to comment on now.  You're hearing a bit of comment on it now.  Very important to me that we don't undermine basic confidence in the quality of disclosure.

You know, one of the strengths of our system is that we've had -- not ideal, probably not good enough, frankly, but I think better quality of disclosure for public companies in the United States than has been true in many countries around the world, and we need to preserve that.

ALTMAN:  Yes, sir?

QUESTIONER:  John Beatty (sp) from UBS.  One of the positive features of the legacy assets program is the competitive bidding process to establish market prices for illiquid --

GEITHNER:  Did you say one of the many positive?

ALTMAN:  Yes, he did.  (Laughter.)

QUESTIONER:  I said one of --

ALTMAN:  I think, John, you said one of the countless, countless positive benefits.  (Laughter.)

QUESTIONER:  (Laughing.)  I said one of the positive -- (laughter).

The Financial Accounting Standards Board, as you mentioned, proposed new guidelines for applicability of fair value accounting to illiquid securities.  And one of the factors they propose considering is the presence of competitive bidding for those securities.  As was previously discussed, it is possible that if the clearing prices are substantially lower than the market value ascribed to those securities, that you may have additional writedowns taken and possibly more capital infusions required.  Conversely, if the clearing prices  are substantially higher than the prices -- market values ascribed to those securities, the public-private partnerships will essentially be paying a premium for those securities; and if there's further market deterioration, they may have to take those losses.

What sort of policies do you think can be implemented to address some of these risks, recognizing, of course, that pricing is a (subset ?) of the broader picture of financial stability?

GEITHNER:  Well, I think you said it exactly right.  And, you know, you'll be able to -- you'll see in our framework how we think we strike that balance.

And you know, it's important to understand, you know, this is part of this broader framework of proposals, on the capital side and on the financing side.  And this itself, even optimally designed, would not on its own get us out of this.

You need to look at this, look at this together.  And again part of its virtue is providing financing that's not now available in the market.  And helping to attenuate that problem is a necessary condition for starting to open up these markets more over time.

But I think, as Roger cautioned at the beginning, it's going to take some time for us to work through this.  And you know, you're not going to see a financial system that, you know, built up a entire machinery of credit creation and provision, on an assumption of continuous liquidity, build up huge amounts of leverage, particularly outside the banking system.

You're not going to see that process of adjustment and repair end quickly.  But that underscores, I think, the importance of trying to make sure we have a broad, forceful framework of things, in place, and that we make sure there's going to be enough resources and support for that, over a sustained period of time.

ALTMAN:  (Inaudible.)

QUESTIONER:  (Inaudible.)

Evidently regulations that we had were purely inadequate.  And maybe things would not have gotten as bad as they got.  Do you think that we can make important changes in the regulations and include perhaps things like global margin requirements, things that will stop some of these practices that went on?

GEITHNER:  I think we have a moment now where there's broad- based will, to change things that people did not want to change in the past, both on capital, liquidity, the degree of conservatism in prudential requirements, not just in institutions but also for a broad range of instruments, transactions.  And I think you're right.  We have to do it globally for it to work.  Otherwise you'll just have more arbitrage, and the resources will just flow around the standards where they're highest.

You know, part of the problem, in our system, is again we just had a system where people could choose their regulator.  They could  choose the basic tax, capital, accounting treatment of an instrument. And that undermined the effectiveness of the basic protections we put in place, to make sure the system's more stable across circumstances. And we're going to have to change that, so that we're regulating institutions for what they do, instruments for what they are economically, not by their precise legal feature.

And it will be a challenge.  But I think we want to take advantage of the moment to try to begin that process.  And we have a big debate always about whether, you know, we need to, you know, get through the crisis first before we begin the process of broader reform.

And you know, we're going to do what it takes to get through the crisis.  But we want to begin the process now, of trying to build consensus, while people recognize and are feeling so acutely the damage caused, by those basic failures in regulation.

ALTMAN:  Yes, ma'am.

QUESTIONER:  Thank you.  (Inaudible.)

I'm wondering, what would you believe to be a good contribution to be made, at the G-20 summit, by countries like China and Saudi Arabia?

GEITHNER:  Let me just start by saying, I think, that I think you're seeing, around the world, a very strong commitment to action on the global crisis.

I think if you look at what's happened to monetary policy, fiscal policy across the countries of the G-20, you have a lot of financial force now coming on-stream and that will start to get traction.

If you contrast what's happening in this crisis to what we saw in the last -- the major global crises of the last several decades, I think you're seeing more action now, broader scale, world coming together on that front, and I think that's very promising.  You see it not just in the major economies but you see it across many of the major emerging market economies, including China and Saudi Arabia, and I think they're playing a very constructive role.

But you're also seeing again, I think, a very broad-based consensus on the need for higher global standards over the financial system more evenly applied, more effectively enforced so that the major global institutions that pose systemic risk, the major markets that are critical to how the system functions in stress come within a more effective framework of oversight with greater protections against future stress.

We won't -- we'll have different ideas about how best to do it. We still have different structures of our financial system.  You see gaps still between the approach that people in parts of the world prefer relative to us.  But I think there's much, much convergence now than I've seen in a very long time, again, motivated by the damage people have seen from the consequences of past choices.

ALTMAN:  Yes, sir.

QUESTIONER:  I'm -- (name inaudible) -- from Columbia Presbyterian.  You told us that you're looking forward to appearing before Congress tomorrow morning.  (Laughter.)

GEITHNER:  And I really meant it.

ALTMAN:  Term of art, sir.  (Laughter.)

GEITHNER:  And I just want to -- this is important -- I'll answer your question -- but this is an important thing.  You know, the debate that happens in those rooms is very important.  We have to have that debate, and I actually enjoy it, because it's a necessary thing to go through.

It's not -- it's not -- well, I'll just leave it there. (Laughter.)

QUESTIONER:  But as they say, seriously -- (laughter) -- specifically what do you see the role of Congress to help you execute and implement the framework?

GEITHNER:  Oh, well, you know, under the structure of our government, Congress is necessary to everything.  And, you know, as I said in response to one of the questions, you know, you don't -- you can't solve these crises without governments being willing to carefully deploy taxpayers' resources on conditions that protect the taxpayer but still do what's necessary to get through this kind of thing.  And that's something that Congress is ultimately the arbiter of.

And they need to be part of this.  And they will be, of course, because, you know, we're a great nation and when confronted by crisis, this country comes together and it does what is necessary.  But it takes a lot of care and work to try and do that, and we need to spend -- and frankly, you in this room need to spend a huge amount of time and effort in trying to lay the foundation for the kind of sustained commitment to policies that we're going to need to get through this -- not just to get through the crisis, of course, but to get the long- term investments in place we need to make our economy more productive in the future with the incomes more broadly shared and get us back to the point, as we -- as we emerge from the crisis, where we're on a path to a more fiscally responsible position.

And that's why I think the work of institutions like this and so many public policy institutions around the world is so important now, because we need to have a much higher level of public understanding about what it's going to take in terms of economic policy than exists today.  And it's not something that can be just simply on the -- on the shoulders of the executive branch.

ALTMAN:  If we could just get, as you said before, better facilities here, we could do that work even better.  (Laughter.)

QUESTIONER:  Hello.  (Name and affiliation inaudible.)  You mentioned optimism about international coordination, yet you have a divided European Union, divided often from what we want and divided among itself.  And while you're over there, are you going to speak to Sweden at all?

There are lots of economists who thought you should have done Scandinavian lite.

GEITHNER:  (Chuckles.)  (Laughter.)  I've said this before: We are not Sweden.  But we looked carefully at what Sweden did in their experience so that we can learn from not just their experience but the lessons of many other -- many other countries.  And there's a lot good (sic) in the approaches they adopt, and a lot not good -- not -- I mean, a lot to be avoided.  But absolutely, we look at -- we look at the experience of -- across our -- whole range of countries.

Again, the basic -- the basic lesson of these crises is, again, that -- probably because the politics are so difficult -- is that countries tend to underestimate the scale of the problem, move a little late, little slowly to escalate, don't keep at it long enough that you're really firmly on the other side; tend to put the brakes on too early.  And those are lessons that will shape everything we do, and we're not going to do that.

ALTMAN:  Yes, sir.

QUESTIONER:  Herbert Levin.  To what extent do exchange rates play a role in your thinking on these questions?

GEITHNER:  Is that a trick question?  (Laughter.)

They play a central, important role, as you would expect. (Laughter, applause.)

ALTMAN:  Jeff?

SEC. GEITHNER (?):  I'm looking at my watch now because I fear -- (chuckles).

QUESTIONER:  Jeffrey Rosen.  You mentioned a moment -- the question a moment ago was about the European Union, and part of your answer was that frequently governments underreact and stop too soon.  There is a debate as to whether the European countries are engaged in sufficient stimulus and whether they think we're engaged in too much.  Which side of that debate do you come out on?  (Laughter.)

GEITHNER:  We're not engaged in too much.  And actually, they're doing quite a lot.

You know, the important thing is for people to say that they're going to do what it takes and they're going to make sure it's sustained over a period of time that matches the likely duration of the recession, so that people aren't seeing a -- don't behave on the expectation it's going to be pulled back too soon.

But I really want to emphasize what I said at the beginning.  If you just look at the pattern of action across the major economies, there is a very substantial amount of, I would say, fiscal monetary force in place now.  People aren't debating whether this is a global crisis anymore.

They're moving together, and they're fundamentally with us on these things.

ALTMAN:  I'd like to ask a question which was submitted by a member who's not in the room but listening elsewhere around the country, which is the following question.  It concerns the Fed's balance sheet and whether there is an explicit or an implicit limit on the degree to which the Fed can expand its balance sheet and the Treasury can support that expansion.

GEITHNER:  We have an independent central bank.  Although I was a central banker, don't comment on actions of the central bank. That's a very important question, though, and the chairman has spoken directly to that, not just over the last few weeks and months, but if you look carefully at a -- we issued a joint statement together on Monday afternoon, which provides a -- I think, kind of a thoughtful view of where that balance lies.  And I would commend that to your attention.  But that's really a question for the chairman.

ALTMAN:  I think we have time for one more here.  Yes, sir?

QUESTIONER:  (inaudible)  Tim, you were recently at a ministerial of the G-20, and you will accompany the president to the G-20 leaders' meeting.  Could you share with us what your expectations are coming out of that meeting, what we would like to achieve, and what proposals we will lead or support, and which ones we would oppose, and then what headline you would like to be the next day coming out of that meeting?

GEITHNER:  I don't know this is a headline -- (chuckles) -- but broad, coordinated action to help bring recovery about, not just on fiscal monetary policy but action to repair, stabilize the financial system so we're having credit flowing again; very forceful package of financial programs for the international institutions, so that they can provide resources to the emerging markets, developing countries; and broad consensus on their reform agenda that will raise global standards, prevent a race to the bottom in the future, more evenly enforced.  And at the broad level, that's what's critical.

And again, my sense is -- you know, I sat around those tables for many years in my past, and I have not seen it -- I've not been at those meetings before with that level of common conviction on not just the basic diagnosis but what it's going to take and the details of what's going to be required.

And you know, people will look for differences in relative emphasis, because we have different systems, different capacities to act.  But I think there's really a remarkably strong consensus now.

And ultimately, of course, what matters is what people do, not what they say.  And you'll be able to watch what we do.  We'll watch together.  And that'll help make sure that action is sustained in a way that is commensurate, again, as I said, with the scale of the challenges.

ALTMAN:  I'm going to ask for one last --

GEITHNER:  You -- oh --

ALTMAN:  Did I interrupt you?

GEITHNER:  No, no, go ahead.  (Laughter.)

ALTMAN:  I'd like to ask one final question, in effect, on behalf of the market.  It might be useful if you tried to clarify your earlier comment on the reaction to the central bank governor of China's idea, and so let me ask the question this way.  Do you see any change over the foreseeable future in the basic role of the dollar as the world's key reserve currency, or the reserve currency?

GEITHNER:  I do not.  I think the dollar remains the world's dominant reserve currency.  I think that's likely to continue for a long period of time.  And as a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets, and in the productive capacity of this economy and in our long-term fundamentals.

ALTMAN:  Thank you.  I'd like to thank Secretary Geithner. (Applause.)

I think we all just saw why we're in good hands.  Thank you all. (Applause.)









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