Treasury Department Releases Text of Letter from Secretary Geithner
to Hill Leadership on Administration’s Exit Strategy for TARP
WASHINGTON – The U.S. Department of the Treasury released the
text of identical letters sent today from Secretary Tim Geithner to
Speaker Nancy Pelosi and Senator Harry Reid outlining the
Administration’s exit strategy for the Troubled Asset Relief Program
(TARP) established by the Emergency Economic Stabilization Act of 2008
(EESA). The text of the letter to Speaker Pelosi follows.
December 9, 2009
The Honorable Nancy Pelosi
U.S. House of Representatives
Washington, DC 20515
Dear Madam Speaker:
I am writing to update you on the status of the Obama
Administration’s financial policies, including programs initiated under
the Troubled Asset Relief Program (TARP) established by the Emergency
Economic Stabilization Act of 2008 (EESA), the results they have
achieved, the challenges ahead, and our plan for exiting TARP.
These policies are working. When the Obama Administration took
office, the financial system was extremely fragile and the economy was
contracting sharply. The Administration’s financial and economic
policies have helped to shore up confidence in our financial system.
Credit is starting to flow again to consumers and businesses, and the
economy is growing. Further, private capital is replacing public
capital in our major institutions.
As a result of improved financial conditions and careful stewardship
of the program, losses on TARP investments are likely to be
significantly lower than previously expected. We now expect a positive
return from the government’s investments in banks. These banks will
soon have repaid nearly half of the TARP funds they received. We also
expect to recover all but $42 billion of the $364 billion in TARP funds
disbursed in FY2009. Further, we plan to use significantly less than
the full $700 billion in EESA authority. As a result, we expect that
TARP will cost taxpayers at least $200 billion less than was projected
in the August Mid-Session Review of the President’s Budget.
But significant challenges remain. Too many American families,
homeowners, and small businesses still face severe financial pressure.
Although the economy is recovering, foreclosures are increasing, and
unemployment is unacceptably high. Businesses are still cautious in
the face of uncertainty about the strength of the recovery, and many
small businesses face very difficult credit conditions. Although bank
lending standards are starting to ease, many categories of bank lending
continue to contract. This contraction has hit small businesses very
hard because they rely heavily on such lending, and do not have the
ability to substitute credit from securities issuance. Commercial real
estate losses also weigh heavily on many small banks, impairing their
ability to extend new loans.
Further, the recovery of our financial system remains incomplete.
And near-term shocks to that system could undermine the economic
recovery we have seen to date.
Exit Strategy for TARP
Our exit strategy for TARP balances the mandate of EESA to address
these challenges with the need to exercise fiscal discipline and reduce
the burden on current and future taxpayers. There are four broad
elements to our strategy.
First, we will continue terminating and winding down many of the
government programs put in place last fall. In September, Treasury
ended its Money Market Fund Guarantee Program, which guaranteed at its
peak over $3 trillion of assets. The program incurred no losses, and
generated $1.2 billion in fees. The Capital Purchase Program, through
which the majority of TARP investments in banks have been made, is
effectively closed. Before this Administration took office, nearly
$240 billion in TARP funds had been committed to banks. Since January
20, we have committed about $7 billion to banks, much of which went to
small institutions. Major U.S. banks subject to the “stress test”
conducted last spring have raised over $110 billion in high-quality
capital from the private sector. And banks will soon have repaid $116
billion of TARP funds
Second, we will limit new commitments in 2010 to three areas.
- We will continue to mitigate foreclosure for responsible American
homeowners as we take the steps necessary to stabilize our housing
- We recently launched initiatives to provide capital to small
and community banks, which are important sources of credit for small
businesses. We are also reserving funds for additional efforts to
facilitate small business lending.
- Finally, we may increase our commitment to the Term
Asset-Backed Securities Loan Facility (TALF), which is improving
securitization markets that facilitate consumer and small business
loans, as well as commercial mortgage loans. We expect that increasing
our commitment to TALF would not result in additional cost to taxpayers.
Beyond these limited new commitments, we will not use remaining EESA
funds unless necessary to respond to an immediate and substantial
threat to the economy stemming from financial instability. As a nation
we must maintain capacity to respond to such a threat. Banks are still
experiencing significant new credit losses, and the pace of bank
failures, which tend to lag economic cycles, remains elevated. At the
same time, many of the Federal Reserve and FDIC programs that have
complemented TARP investments are ending. This creates a financial
environment in which new shocks could have an outsized effect –
especially if an adequate financial stability reserve is not
maintained. As we wind down many of the government programs launched
initially to address the crisis, it is imperative that we maintain this
capacity to respond if financial conditions worsen and threaten our
economy. However, before using EESA funds to respond to new financial
threats, I would consult with the President and Chairman of the Federal
Reserve Board and submit written notification to the Congress. This
capacity will bolster confidence and improve financial stability,
thereby decreasing the probability that it will need to be used. This
is the third element of our exit strategy.
In order to accomplish these goals, pursuant to Section 120(b) of
EESA, I certify that I am hereby extending the authority provided under
the Act to October 3, 2010. This extension is necessary to assist
American families and stabilize financial markets because it will,
among other things, enable us to continue to implement programs that
address housing markets and the needs of small businesses, and to
maintain the capacity to respond to unforeseen threats, as described
While we are extending the $700 billion program, we do not expect to
deploy more than $550 billion. We also expect up to $175 billion in
repayments by the end of next year, and substantial additional
repayments thereafter. The combination of the reduced scale of TARP
commitments and substantial repayments should allow us to commit
significant resources to pay down the federal debt over time and slow
its growth rate.
Even with this extension, we expect that TARP will cost taxpayers at
least $200 billion less than was projected in the August Mid-Session
Review of the President’s Budget, including $25 billion in potential
costs from new TARP commitments in 2010. We expect that the vast
majority of these potential costs would come from mitigating
foreclosure for responsible American homeowners as we take the steps
necessary to stabilize our housing market.
The final element to our exit strategy is how we manage equity
investments acquired through EESA while protecting taxpayers. We will
continue to manage those investments in a commercial manner and seek to
dispose of them as soon as practicable. We will exercise our voting
rights only on core issues such as election of directors, and we will
not interfere in the day-to-day management of individual companies. In
addition, as the steward of taxpayers’ funds, Treasury will continue to
manage investments in a manner that ensures accountability,
transparency and oversight. And we will work with recipients of EESA
funds and their supervisors to accelerate repayment where appropriate.
We want to see the capital base of our financial system return to
private hands as quickly as possible, while preserving financial
stability and promoting economic recovery.
History suggests that exiting prematurely from policies designed to
contain a financial crisis can significantly prolong an economic
downturn. We must not waver in our resolve to ensure the stability of
the financial system and to support the nascent recovery that the
Administration and the Congress have worked so hard to achieve.
Improvements in the financial performance of EESA programs put us in a
better position to address the economic and financial challenges many
Americans still face. I look forward to continuing to work with you to
Timothy F. Geithner
Identical copy of this letter sent to:
The Honorable Harry Reid
cc: The Honorable Barney Frank
The Honorable Spencer Bachus
The Honorable David Obey
The Honorable Jerry Lewis