"Geithner Reviews TARP Funds"

MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel. The nation's new Treasury secretary moved into his office today. The Senate approved Timothy Geithner last night after dealing him a few bruises in the confirmation process, and once they had the go ahead...

(Soundbite of oath of office)

Vice President JOE BIDEN: I, Timothy F. Geithner.

Secretary TIMOTHY GEITHNER (United States Department of the Treasury): I, Timothy F. Geithner.

Vice President BIDEN: Do solemnly swear.

Secretary GEITHNER: Do solemnly swear.

Vice President BIDEN: That I will support and defend the Constitution of the United States...

SIEGEL: Vice President Biden led Geithner in the oath of office in the Treasury's ornate cash room. With the economy still suffering from a lack of credit and confidence, Geithner has major challenges ahead. And NPRs John Ydstie is here to talk about how Geithner and his colleagues plan to deploy the second half of the $700 billion TARP financial rescue package. Hi, John.

JOHN YDSTIE: Hi, Robert.

SIEGEL: How is the approach going to be different from that of the Bush administration?

YDSTIE: Well, let's just start by saying that during the Bush administration, Treasury Secretary Paulson used most of the TARP funding to inject capital in the banks. There's a pretty broad agreement that the banking system is still shaky and that Timothy Geithner will have to do more of that.

That said, there'll be significance differences from the Paulson approach. First, President Obama has said that the 50 to 100 billion in TARP funds will be used to help homeowners struggling to avoid foreclosures. He's also promised more oversight, including a requirement that participating banks increase their lending.

And there's one more big change. Officials in the Obama administration say they're looking at ways to get the toxic assets, those nasty-mortgage back securities, separated from the banks in some way.

SIEGEL: Which was the original Paulson plan for the TARP when it first began until they moved to become preferred shareholders. I mean, it seems as though that was tried and didn't work. So, why would you go back to it now?

YDSTIE: Well, there's a growing consensus that these toxic securities still a huge problem and that they're undermining confidence and bank lending. Private investors don't want to put up new capital into banks because they still don't know how much banks are going to lose on these bundles of mortgages.

And as foreclosures soar, banks are having to take more and more write downs on the securities, eroding what little capital they have left. As a result they're afraid to make loans and that chokes the economy. So the thinking is that banks need to get rid of or isolate these toxic assets somehow.

SIEGEL: So, how is the Obama economic brain trust going to solve that problem?

YDSTIE: Well, we don't know the details yet and they may not either, though Secretary Geithner has said that they'll have a comprehensive approach within a couple of weeks. We do know broadly that the idea of creating a bad bank is on the table. That would be a government entity that would purchase the toxic assets from the banks and hold them and sell them off overtime, hopefully, making some money for taxpayers or at least not losing too much.

SIEGEL: Mm hmm.

YDSTIE: The theory is that not all of the mortgages in these securities are toxic. Many of the mortgages are being paid on time, but nobody knows their value so there aren't many buyers for them out there.

SIEGEL: Well, how would the government figure out what the value is if the government would buy them?

YDSTIE: Well, that's the hard part. They don't know what to pay so much the taxpayers lose lots of money. They don't want to pay so little that the banks are hurt even more. One possibility is to use companies like PEMCO, the biggest investment firm, which already buys some of these assets to help find a market price.

There's one other idea - something called a Ring Bank where a bank cordons off its bad assets and then the government doesn't buy them, but takes part of the risk if the losses on these securities go above a certain level. This is basically what happened with Citigroup.

SIEGEL: Is it assumed that $350 billion, what's left in TARP, is enough to do it what the Obama administration and Secretary Geithner want to do?

YDSTIE: You know, probably not. It's likely that the Obama administration is going to have to go back to Congress some time in the next few months and ask for few billion dollars more.

SIEGEL: Thank you, John.

YDSTIE: You bet.

SIEGEL: NPR's John Ydstie.