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Geithner “Exit” May Start

Appearing yesterday in front of the Congressional Oversight Panel for TARP, U.S. Treasury Secretary Timothy Geithner said a strengthening economy means the government can end some of the extraordinary support I put in place for the markets and prepare for a slow recovery.

He touted the repayment of $70 billion of capital injections by banks which has reduced the US Treasury’s total investment to $180 billion. He expects another 28% to be repaid in the next 18 months. He mentioned the winding down of CAP and Money Market Guarantee Program that offered support to banks and money market funds.

Timothy Geithner
Source: Pete Souza
Timothy Geithner

Unfortunately, he also indicated that the US Treasury would be adding assets via the PPIF or public-private investment fund that is to buy toxic assets from banks.

The first purchases are expected to begin by early October.

While a Treasury "official" said there was a great deal of interest from investors to buy the assets, there was not a lot of interest by banks to sell the assets. This sets up an intriguing scenario where banks that still have capital injections by the Treasury are asked/arm twisted to sell their assets to investors.

This is done with the good intention of relieving banks of assets that they are losing money on and have to maintain loss reserves or capital. The theory is that then the banks would begin lending more aggressively to stimulate the economy. Unlike the Chinese, the US can't officially mandate that banks reach a target level for loans.....a power I'm sure President Obama wishes he had to stimulate the economy.

On CNBC last night, Geithner said, "We have to have much stronger rules of the game in place with much stronger constraints on how much risk can take place,"he said. "People are so angry. They have had this searing experience that caused so much damage and I think generally people understand that we're going to have to change things. We can't let things go back to the way they were."

I wonder if this is a foreshadowing of how aggressive the US Treasury will be in prying toxic assets away from the banks . If things have really improved as much as Geithner has said, then it's an odd way to start an exit program by adding assets.

  • Watch CNBC's Town Hall with Secretary Geithner

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Andrew Busch
Andrew Busch

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .