A report card for Geithner's first year
Here's a look at how Treasury Secretary Timothy Geithner has dealt with the challenges he faced when his tenure began.
By Lauren Tara LaCapra, TheStreet
Treasury Secretary Timothy Geithner was appointed to office with three goals: repair banks, fix housing, and stimulate private investment.
While Geithner has come under sharp criticism recently for his role in the American International Group (AIG) counterparty scandal, it's worth taking a look at what he's achieved in a remarkably short period.
Geithner unveiled a wide-ranging reform proposal just 15 days after he was sworn in on Jan. 26, 2009. Here's a look at how these initiatives have fared during Geithner's first year in office:
Saving the banks:
Counted among Geithner's successes are recoveries of TARP funds from banks that have not only been repaired but have prospered during his first year.
Through Jan. 28, the Treasury has recouped $162 billion of the $245 billion it injected into the banking industry in exchange for preferred stock. It has also sold related warrants to purchase common bank stock for $4 billion and collected $12.9 billion in dividends and interest from the industry -- roughly a 10% return on money that has been repaid so far.
While Geithner has put some taxpayer money to profitable use, the banking industry is far from fully repaired. Regulators have closed 180 banks since the start of 2008, including six last week. The Federal Deposit Insurance Corp. estimates that 550 more are at risk.
Further, banks have been contracting their loan books for at least the past nine months, something that is not helping the recovery effort. Consumer credit has declined from a seasonally adjusted, annualized growth rate above 5% in mid-2008, to a 3.9% drop in November, according to Fed data.
Small-business lending has gotten off the ground in recent months because of incentives unveiled by the Small Business Administration, but it hasn't accelerated at the pace needed to stimulate job growth, according to a recent SBA report.
With stubbornly high unemployment and correlating credit costs, banks are hesitant to open the lending flood gates.
"It gives banks the opportunity to grow their way out and repair their balance sheet, but at the same time, you can't argue that they need to be lending," says Hank Smith, chief investment officer at Haverford Investments. "If you look at any past economic cycles, right now, banks are only going to be lending to people who don't need to be lent to."
Geithner grade: A-
HAMP was announced with much fanfare in February 2009, but has helped only a quarter of its 3.3 million eligible borrowers since then.
Through June, servicers had offered workouts to just 242,366 borrowers and begun to adjust just 152,965 loans. Given banks' HAMP resistance, Geithner tried to shame them into adopting it.
Over the summer, the Treasury released its first monthly performance report, ranking companies by how much HAMP headway they had made. Even by July, some servicers hadn't started any trial modifications, and the largest lender, Bank of America (BAC), had started assisting just 4% of its eligible borrowers.
"These mortgage programs have done very little to help borrowers," says Ann Lee, a former Wall Street trader who now teaches economics and finance at New York University School of Continuing & Professional Studies. "I think his approach has been terrible, because he's been putting Wall Street interests first and ignoring Main Street's concerns."
The Treasury's nudging got banks to boost performance, but as of Dec. 31, just 1.2 million borrowers have been offered modification proposals. Only 787,231 of those were in active trials -- a sad set of statistics, given the current incentives for homeowners, and the likelihood that costs will increase in the near-term.
Geithner's team has extended the time frame for HAMP incentives, giving more time to borrowers who had issues with sluggish banks. The Treasury recently eased the paperwork process as well, part of a broader effort to push trial modifications into permanent solutions for homeowners.
The rest, it seems, is up to the banks.
Geithner grade: B+
It appears that handling bad debt has been the most difficult task for Geithner and others in the regulatory sphere for the past few years.
TARP was intended to be a Toxic Asset Relief Program, but instead of taking the assets off banks' books, it injected capital to cover related losses. An alternative plan -- the PPIP, or Public-Private Investment Program -- was unveiled as a cure-all to soothe bank balance sheets once and for all. But it was then whittled down to a fraction of its initial size, and only recently got off the ground.
As of Dec. 31, the handful of private investment groups selected by the Treasury Department had drawn down just $4.3 billion to buy toxic assets, out of an available $40 billion.
Perhaps more effective than these programs -- though more controversial -- has been the government's handling of toxic assets without private partners. The Treasury plunged $70 billion in capital into AIG to cover escalating losses, while the New York Fed -- which Geithner led at the time -- bought a huge swath of AIG's toxic assets. The Fed also distributed $105 billion in related collateral payments to counterparties.
Those decisions have put taxpayer dollars on the line but also restored confidence in the financial system, and the outcome may not be as dire as some people predict.
The toxic assets that the Fed purchased from AIG have gained $8.8 billion in value over the past year. AIG is now close to paying back $25 billion in debt to the Fed. And while the Treasury expects to lose $30.4 billion on its AIG investments, it has slashed loss estimates as the markets and economy have improved. Even GM, the once-bankrupt automaker, announced earlier this month that it would pay back its entire $6.7 billion TARP investment.
Still, politics are at play, and Geithner's job appears to be on the line in large part because of decisions regarding AIG.
Lee calls Geithner's performance "completely dismal." She believes the government should have allowed financial companies to fail, let their toxic assets rot, and used bailout funds to spur technological innovation.
But Smith thinks Geithner losing his job "would be unfortunate, because the whole AIG mess is being displayed as the poster child for greedy Wall Street, and I think Geithner has done a good job."
Geithner grade: C-
Geithner may go out of office surrounded by as much controversy as he came in with. During confirmation hearings, he was blasted for failure to pay $34,000 in back taxes.
While he has promised the imposition of "new, higher standards for transparency and accountability" since then, the government has been less than forthcoming about the AIG bailout. As information has come to light, that very accountability may be what brings Geithner down.
Yet it's still worth noting that when Geithner took office, the economy had just contracted by 5.4%, and shrank another 6.4% during the first quarter of his term. The following quarter, GDP losses abruptly moderated, and the U.S. economy actually grew at a brisk 5.7% seasonally adjusted, annualized rate last quarter.
The six biggest banks in the country, JPMorgan Chase (JPM), Bank of America, Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS), went from owing the federal government $145 billion at their collective peak, to paying off that debt entirely, with dividends and interest. Over the course of the year, they earned a collective $43.4 billion, excluding those preferred dividend payments.
Private investment has soared, as evidenced by tremendous improvements in the stock and bond markets. Major indexes have climbed by 50% or more, while credit markets were healthy enough for banks and investors to earn big profits in fixed income trading last year, even if lending continues to stall.
The housing market has shown signs of improvement as well, albeit in fits and starts. Prices and sales have been supported at times by buyers stepping back into discounted markets, while other struggling homeowners have weighed down the market at other times.
Geithner's contributions are difficult to measure, and his tasks were large. He has been charged with developing complicated economic and financial programs, while bridging the gap between the industry that must implement them and the populist masses they are intended to serve. So what's his final grade for the first year in office?
"I'd give Geithner a B, and I'd give Ben Bernanke an A," says Smith. "What's the difference? I hate to be political, but I'm not in favor with his administration's policies."
Says Lee: "I'd give them an F because it's been clear that they have completely favored the very powerful banking interests there. The AIG scandal has, as far as I'm concerned, bordered on illegal activity, and they're just enabling this oligarchy to take over our government. This is not a democracy anymore."
Geithner's final grade: B-
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