billions of dollars into "h comment on why haven't -- why hasn't the treasury made as a condition of receipt of t.a.r.p. funds a condition requiring an increase in lending and full transparency? >> senator, excellent question. i can just start by saying this? this is a crisis produced in significant part by two things. one is families across the

country substantially increased the amount they borrowed. so household debt rose dramatically as a share of our overall economy and we had pockets of excess leverage, too much lending build up across the financial system. now we're going through a very deep recession. in any recession, the demand for credit falls because economic activity falls and the recession that follows a long credit boom like this, you would normally have expected credit to fall quite sharply. that's important because it's hard to know how best to measure the full impact of these programs because again, it would have been under any circumstance we would have had a period where borrowing would fall as homeowners, as families decide to go back to living within their means and decide to save more, reduce their debt outstanding and lending would fall as the weaker part of the financial system declined to a more sustainable level. now, it is very important to us that we have better ways of measuring the impact of these

programs. so when we came into office and we nut place a much more comprehensive set of reporting so that all banks that received t.a.r.p. assistance would report on what's happening to lending behavior. we started with the major banks and we extended that out to all t.a.r.p. recipients and you'll be able to see monthly now on the treasury website what banks are doing in terms of lending and that is the ultimate measure of these the capital assistance programs. we are very committed to improving the overall quality of transparency and accountability across these programs and each of the programs we designed provides for an exceptionally careful level of oversight and a level of transparency so people can measure the actual impact in effects. there if there are other things you can do it strengthen that, we can do it because nothing is more important than a better sense among the american people that they have a better sense to judge with the american impact. just to finish quickly where you began.

the program that congress authorized last fall and the actions that my predecessor took initially to put capital into the u.s. banking system were absolutely essential to prevent a catastrophic financial collapse. if you look back to the period of time lending absolutely stopped and because lending stopped and because confidence was so badly damaged, basic business stopped, and it happened around the world. when that capital was put into those banks initially, that was the first step in beginning to lay a foundation for recovery and repair. we cannot know with certainty what would have happened in the absence of that action, but my judgement is that without those actions you would have faced the prospect of a catastrophic failure in the u.s. financial system and much, much more damage to economic activity than we already saw. now, today we're seeing over the last several week, we've seen some very impressive and encouraging signs of improvement in the overall credit conditions. so if you look at concern about risk and exposure to banks.

if you look atablity of banks to raise equity and replace the government's investment. if you look at what's happening to borrowing costs for businesses across the country. look what's topped mortgage rates and interest rates, there have been substantial improvements in the basic measure of the banks. mience sense is in the early days, and this is just the beginning, but where the government has acted you can see very tangible benefits in improvement. we have a ways to go. the condition of this crisis took a long time to work through, but i think these programs are having -- are achieving traction and they're the right mix of programs and we will do everything we need to do to make sure that we are adopting sensible recommendations by not just the t.a.r.p., but by the congressional oversight panel and gao who are looking very, very carefully at all these programs. >> thank you. >> senator lautenberg? >> thanks, mr. chairman. mr. geithner, the financial

crisis we're seeing was, in my vi view, due in significant part to poor management of these companies and particularly contained by the outcome of the management years in the automobile industry who refused to see what the public appetite was and refused to be competitive and thus, jobs have been lost and an industry practically destroyed, that we loved and admired for so many years. well, when we look at risks taken by corporate executives and decisions made, many of these executive pay packages insulate ceos from the risk and again, i may -- i don't want to take you out of your bail, but

to avoid this excessive mismanagement, should executive compensation be tied to the long-term health of a company? where do we have a right to interject our views? >> senator, this is a very important issue, and i agree with you that i think although many things caused this crisis, what happened to compensation and the incentives that created for risk taking did contribute in some institutions to the kind of vulnerableity that we saw in this crisis. we need to increase reforms particularly in the financial industry because of the dependence of the economy and a well functioning, more stable set of judgments by financial institutions. i think the board of directors does not do a good job. i think shareholders do not do a good job in terms of compensating practices and a

centerpiece of sensible reforms would be to tie compensation to better measures of long-term investment and return and to adjust them to reflect risk. that's part of the reforms and we are, as part of our broader regulatory reform proposals, our proposals to reform the whole framework of the regulations of the united states will include suggestions for trying to encourage reforms in compensation practices. >> where does the start begin? is it in treasury or irs or the sec? how do we get things introduced into the governance of these things? >> well, as you'll hear from us over the next few days, the sec has some important responsibilities and obligations in this area and some tools and authorities they may seek in

this area. the bank supervisors, under the leadership of chairman bernanke and others, have already initiated a process to define standards and principles that supervisors would use to help bring about reforms and compensation practices in the financial industry. those are two ways we can have influence over the shape of practice in these areas. there are other ways too, but my own sense is that the core will be those two authorities. >> if senator nelson mentioned something about government owning shares in these companies and it -- i think it has to happen. who, for instance, would own the shares? would the government be on would the american government be appointed the board of directors and have them make the decision? >> senator, this is an enormously important set of questions. as we said before the president

of the united states, we are aye an extremely reluctant investor. we are an investor. we do not want to be in the business of managing these companies on a day-to-day basis. we want to make sure we have the ability to get out as quickly as we can as the companies emerge on their own as viable entities and have the capacity to raise capital in the markets to repay the government's investments. to underscore that, we are -- we've designed a set of policies and mechanisms that will ensure that people understand we only tend to use our voting rights for a very limited number of core judgments of financial structure of the firm to make sure that there's a strong board and management in place at the time we take our equity investments so the taxpayers are protected. so we have confidence in the ability to oversee a sufficiently robust

restructuring plan. we do not want to leave the impression or the reality in place that the government of the united states will -- will be able to and will have the capacity to exercise judgments over the day to day operation of the businesses and we think they'll be damaging to franchise value and damaging to the interest of the taxpayers and trying to make sure we can get out as quickly as possible and our hope is we designed a set of institutional protections to avoid that risk. >> thank you. thanks, mr. chairman. >> senator bond? >> thank you very much, mr. chairman and mr. secretary, a lot of us in the heartland are wondering why you're treating failed financial institutions differently than gm and chrysler. they forced them into bankruptcy and it seems that failed financial institutions like citi into restructuring. we've seen in the past that large organizations, want as large as citi, but indymac has

gone through an fdic cleansing program and this one is outside of politics and when you do it through the fdic you don't get the political questions that are asked. you don't get the political involvement in it and as "the wall street journal" asked today, citi is not forced into an fdic-like restructuring. how can you assure the tax payers that we won't continue to return for billions and billions of bailouts which i think all of us have heard great concern from our constituents? >> senator, i share those concerns, and i think it's important to acknowledge that the actions that the government's had to take over the last 12 months in particular to help protect the economy from this crisis have created -- well, they've been exceptional and extraordinary and they've created the risk that unless we reform the system, we'll face a greater risk of financial crises

in the future because we would have created moral hazard that would make the system more vulnerable in the future. i am deeply worried about that and i share that concern and that is why it is so important that we put in place against constraints in the future. what the president will recommend in terms of financial reform will be a set of much more conservative set of constraints and risk taking across the financial system with a more effective oversight and as part of that, we need to have a better capacity to deal with the potential failures of large institutions. the system that you referred to and the system that congress helped put in place built around the fdic, strengthened the weak of the crisis is a very effective crisis, but it was designed to deal with relatively small banks and thrifts, and it was not designed for a crisis of this severity. that is why we did not have -- and that system was not designed to deal with a more complex type of failure, for example, like

aig. that's why a centerpiece of what the president will recommend will be stronger capacity to resolve, address, better manage the risks to the system imposed by those types of institutions. i just want to underscore a couple of things about contexts. when i came into office the government of the united states had already invested roughly $200 million in our nation's banks. as i said to senator collins, it was an essential thing to do. >> mr. secretary, i'm running out of time, but i think everybody would agree that the federal reserve came in and flooded the system with money. we put -- the t.a.r.p. money went in, but now we're past that and unless we take some steps to deal with too big to fail, and we've got that moral hazard, and i'm also worried about the ppip. a lot of people are saying the banks aren't participating because it looks like it will be political, and if they get in, who would want to get in partnership with the federal government when they see what

some of our fellow members of congress are doing? are you going to be able to get any of these toxic assets out with ppip? where are the -- where are the participants? >> listen, i want to underscore that you're right. that's yet president wants to move so quickly on legislation. on the issue of the legacy assets that are still in the books of the nation's banks you're right that there is some concern in the market still about participation and whether that brings some risk of political conditions imposed in the future and that could limit participation in the beginning and that would be an unfortunate thing and i think we have the responsibility to reduce the sense of risk and uncertainty about the rules of the game. it's also true that -- that banks have found it more easy to raise equity than they thought and that combined with the slight improvement and confidence in the system may also reduce participation. also reduce participation. in my judgment, though, these@@

have further questions for the record and mr. chairman asked that my full statement and all my good advice would be included in the record in the hopes that somebody might read it some day. >> we look forward to reading that and we'll gladly be inserted. senator bond and senator nelson? >> thank you, mr. chairman. secretary geithner, you mentioned that we're reluctantly in a position of holding shares

of general motors and perhaps in a position of controlling other institutions, but we're doing so reluctantly. i'm so reluctant to be one of those holders of that stock, that i'm introducing a resolution as a sense of the senate resolution that we begin the process to divest ourselves of the stock ownership over a reasonable period of time, making clear that we're only a temporary shareholder and that we should take all steps to protect the american taxpayer dollars and begin to invest the ownership as expeditiously as possible and call for a gao study to help determine the period of time that it may take to return gm and chrysler's solvency and complete its divestiture. i think that says what i'd like to say. in addition, i've heard it said

that for those who worry that somehow we're drifting into socialism, that socialism is where the government wants to take over profitable ventures as opposed to being where we are right now. apart from the levity, i think it is probably accurate, so i hope that the administration will be supportive of every effort to make the public statements that this is a temporary situation, not one that is optimum -- or optimal in terms of what we would prefer to do, but where we are at the moment, but to make certain also that we're not going to stay there one day longer than we should in that position of ownership. and i'm encouraged when you say that we won't exercise day-to-day judgment over many of the decisions and opportunities that the industry will have. i've got some other questions about that, and that relates to the -- to the dealerships.

i know they're very concerned about summarily being dismissed after decades of relationships with the auto industry. is there any effort to try to establish some sort of a recognition of the rights, and not just contractual rights, but somewhere the rights of dealerships in this dismissal where any compensation is being directed toward those dealerships to soften the blows? it's not taking their position that's so important, it's recognizing that in small communities all across america, particularly in nebraska where dealerships are going to be lost, people are going to lose their jobs as well in small communities where the job replacement can be even more difficult than in the urban centers. i wish you might comment on that. >> senator, can i just begin where you began to say and i think you said it right in terms of the government stake where we

take the stake, temporary, clear path to exit, no day-to-day management. this brought up the impact of communities and the substantial reduction in dealerships that the automobile companies decided was necessary to get back on a path to viability, i want to underscore that these were their judgments based on the careful analysis of what was necessary again to get them down to a cost basis that was more a tenable over time, but i understand the concern about the impact and would be happy to explore with you and talk to my colleagues about -- to make sure that you have responses to your thoughtful questions about what the companies themselves might be able to do to help soften the blow. >> i appreciate that. >> but it has to be their judgments. >> of course. of course. the -- in terms of financial regulations, can you give us a preview of what you have planned for financial regulation? for example, are there any plans

to change the state-based regulation of insurance? will you propose an office of insurance information or similar position or will you seek authority to regulate insurance at the federal level? >> senator, i don't want to get ahead of the president of the united states on this. he's going to lay out a com pro hencive set of proposals next week. in that context, we'll lay out our judgment about what we think is the most practical way to help begin the process of ensuring more effective supervision of at least parts of our insurance industry, but i don't want to get out in front of him, but we've been taking a careful look at what is the most practical way to help begin progress against that objective. >> as you take a look at the case of aig, although it's an insurance holding operation, keep in mind that the insurance subsidiaries were profitable, that they didn't have bad assets, that this is not something that has rippled

through the insurance industry, but focus on what happened with the glass steagall modifications that permitted aig to do what it did and so let's don't cure problems that don't exist as we try to take a quote, unquote, comprehensive approach. let's just make sure it is not so comprehensive that we sweep in regulatory schemes and mechanisms that are currently working. >> senator, i completely agree and we're bringing a broader, prague matec spirit and exercise and trying to focus things central to the crisis, not things that were not. on things that were necessary to do, not just those -- not those that would be desirable to achieve over time. we may not all agree on the adjustments we're making, but that's the framework. >> you're making the commitment not to have collateral damage, right? >> that is an obligation that we all share and we're careful to try to avoid that, but senator,

we did have really systematic failures across the regulatory framework of the united states and we are going to have to change a lot of things to address those failures. >> thank you. thank you, mr. chairman. >> thanks, senator nelson and senator tester. >> so many questions, so little time. secretary geithner, in your budget there's a financial stabilization reform of $250 million. in front of banking last week herb allison will oversee the t.a.r.p., hopefully, he talked about -- he called it head room. i interpret it as being reserve of $100 billion. can you tell me why we need 250 million in the budget? >> senator, can i just begin by saying i announced this morning that banks have -- we've indicated the banks that the fed has indicated banks repurchase $68 billion of those initial investments and those will be coming back into the general fund. the eesa legislation that is

designed that does create additional flexibility to allow us to use those funds if we believe there's a strong and compelling case and since we're -- all those thing are getting better in the financial system, i think to be realistec, there's a lot of risk ahead for us and we need to be careful to remind people that the flexible sit important. in the reserve fund the president put in the budget this additional reserve fund and in the abundance of caution against the possible they we could face a deepening crisis. we do not expect at this time to come back to congress to ask for authority to use those resources. i began by pointing out the $68 billion repayment thing because it does provide modest encouragement, i think, that we'll be able to get through this without having to put you in the position of coming back for substantial additional funds. >> and we appreciate that. i guess the question is out of $750 billion, $250 billion, even though it's a ton of money, it's

like spitting in the ocean. >> you're right. we're a $14 trillion economy, this is a very bad financial crisis and -- particularly if you wait to solve them. >> i interpreted by your answer of the last question that you anticipate that the money will be paid back and will go into the general fund and not reinvestment into other troubled banks. >> by law it does go intoet general fund, it does give us flexibility to use that if we think there's a compelling case. >> in the end, you have the opportunity to extend it to the fall of 2010, the t.a.r.p. program. >> we do. >> do you anticipate the trigger will be asked for? >> i don't know at this stage. there's a range of exceptional programs put in place and some of them expire in the end of october and some of them have a longer fuse on them. some of them can be extended and we'll have to make that judgment as we get a little more -- >> if you ask for an extension

it's for all of the money and not just a portion? >> the authority is over the 700 and it applies to the full 700. >> okay. you talked about, and it's been referenced before, about reluctant investor not involved in day to day decisions. it's been pointed out to me that some of the t.a.r.p. funds were being used for banks and speculation in the oil market and the commodities market and is there transparency for you to know that? >> well, i think that's really a question that i would have to refer to the supervisors. the supervisors of those banks and received the systems have the full capacity to judge what kind of risk they're taking generally and whether those risks are appropriate given the conditions of the -- >> i know you don't want to be on the day to day and i don't want you to be in the day-to-day decisions and do you think that's the appropriate use of t.a.r.p. money. >> i would make a distinction between banks and others.

banks, because of the risk they pose to the economy, because of the protections they enjoy, they are subject to a very intense of level of supervision and regulation by the nation's banking authorities. that was not strong enough in some cases. it needs to be stronger, but that is a perfectly legitimate public policy interest because of the interest of the system. i would distinguish that from the role of the government as temporary shareholder. >> okay. the previous question, you said that as far as closing down dealerships, that was their decision. who is they? >> the companies themselves and their boards. >> okay. in the -- in the plan for gm, the investment of billions of dollars into that, were there any assurances that they wouldn't move manufacturing overseas? >> in the context of gm, the company has publicly committed to lay out a path for production

of the united states as a share of total production and in those plans they've indicated that they production to be maintained at current levels and perhaps expand slightly as they build this new plan for small cars. so their plans now are -- and these are part of a framework established for a bunch of reasons. they expect the production of the united states to not just level off, but expand slightly. >> thank you. >> thanks, senator tester. going back to the repayment of t.a.r.p. of $of 8 billion which was announced this morning, so what is the expected return on investment for taxpayers? >> well, the way the terms were initially established, these preferred investments of stock came with a 5% coupon. i don't have my press statement with me, but the treasury has already burned several billion dollars in terms of those dividend payments on the preferred. the full terms for the government include the value of

the warrants that treasury took as part of these investments. we're in the process of going through a judgement about what fair market value for those warrants is likely to be and in the release we put out this morning is i'm not sure we made an estimate, but some of the estimates now are in the several billion dollar range for the banks that are repaying. government, so people will bring all sorts of financial prissps to judge the return. of course, you'll have to look at return of the country and not the direct financial return, and they're quite significant and you have to look at the broader benefit because there is dramatically more credit available today than there might have been if the banks were forced to shrink dramatically. >> that's the question. assuming you wouldn't allow repayment if there was any question of soundness to the institution, what kind of assurance do you have that the banks that return this money are going to be issuing credit which was one of the original goals? >> right. the judgment under the law was

made by the federal banking agency that was responsible and there is a careful process of judging whether they could prudently repay this money and the figure reflects the judgment of the federal banking agencies. that means these banks are in a position where they can make normal business judgments about lending and i think by many measures lending is a very economic -- expanding credit is a very economic thing to do today, but as i said, we are in a recession that followed a huge boom in credit. so it's going to be for many parts, many families and many businesses, borrowing will decline will as we go through this and that is a healthy and necessary thing. it makes it hard to judge because you don't know what would have happened and what lending would have been produced, but i think you have a financial system today that's sub tshlly stronger than it was two, three, six, nine months ago and is in a much better position to provide the credit necessary to hel g