e c o n o m i c r e p o r t p r e s i d e n t

At President-Elect Obama’s request, President Bush notified Congresson January 12, 2009 of his plan to release the second $350 billion of TARPfunds. With strong support from the incoming Administration, the Senatedefeated a resolution disapproving the release. These funds provided policymakerswith critical resources needed to ensure financial stability.On February 10, 2009, Secretary of the Treasury Timothy Geithnerannounced the Administration’s Financial Stability Plan. The plan representeda new, comprehensive approach to the financial rescue that soughtto tackle the interlocking sources of instability and increase credit flows.An overarching theme was a focus on transparency and accountability torebuild confidence in financial markets and protect taxpayer resources.A key element of the plan was the Supervisory Capital AssessmentProgram (or “stress test”). The purpose was to assess the capital needs ofthe country’s 19 largest financial institutions should economic and financialconditions deteriorate further. Institutions that were found to need anadditional capital buffer would be encouraged to raise private capital andwould be provided with temporary government capital if those efforts didnot succeed. This program was intended not just to examine the capitalpositions of the institutions and ensure that they obtained more capital ifneeded, but also to strengthen private investors’ confidence in the soundnessof the institutions’ balance sheets, and so strengthen the institutions’ abilityto obtain private capital.Another element of the plan was the Consumer and Business LendingInitiative, which was aimed at maintaining the flow of credit. In November2008, the Federal Reserve had created the Term Asset-Backed SecuritiesLoan Facility to help counteract the dramatic decline in securitized lending.In the February announcement of the Financial Stability Plan, the Treasurygreatly expanded the resources of the not-yet-implemented facility. TheTreasury increased its commitment to $100 billion to leverage up to $1 trillionof lending for businesses and households. By facilitating securitization,the program was designed to help unfreeze credit and lower interest ratesfor auto loans, credit card loans, student loans, and small business loansguaranteed by the Small Business Administration (SBA).A third element of the plan was a Treasury partnership with theFederal Deposit Insurance Corporation and the Federal Reserve to createthe Public-Private Investment Program. A central purpose was to removetroubled assets from the balance sheets of financial institutions, therebyreducing uncertainty about their financial strength and increasing theirability to raise capital and hence their willingness to lend. Partnership withthe private sector served two important objectives: it leveraged scarce publicfunds, and it used private competition and incentives to ensure that thegovernment did not overpay for assets.50 | Chapter 2