Bloomberg News

Geithner Says European Debt Crisis Poses Significant Risk

October 06, 2011

(Updates with comments on housing, China and bank risk starting in eighth paragraph.)

Oct. 6 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner said the debt crisis in Europe poses a “significant risk to global recovery” and it is critical that governments and financial institutions have a “powerful financial backstop.”

“Our direct financial exposure to those governments and their financial institutions is quite small, but Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand,” Geithner said in testimony before the Senate Banking Committee.

He assured lawmakers today that there is “absolutely” no chance of another U.S. financial institution collapsing like Lehman Brothers Holdings Inc. in 2008.

Geithner testified before the Senate Banking Committee and the House Financial Services Committee on the Financial Stability Oversight Council’s previously released annual report.

“If the annual report is an accurate representation of the Council’s progress, I remain as skeptical of its chances of success as I was when my friends on the other side of the aisle proposed its creation,” said Senate Banking Committee ranking Republican member Richard Shelby of Alabama.

More Guidance

The FSOC meets on Oct. 11, when Geithner said it will provide more guidance to the market on the designation of systemically significant non-bank institutions.

Geithner also said the Federal Housing Finance Agency will provide more clarity in the next few weeks on a plan to encourage mortgage refinancing. He said the housing market remains “terrible” and will take years to fix.

The foreclosure process is “essentially broken” and the housing servicing framework “is not doing a good enough job of helping people stay in their home or transition to other forms of housing,” Geithner said. The government needs “to help people refinance, even people under water” on their homes and help change empty properties into rental housing, he said. He said Treasury doesn’t have the “power to compel” the largest parts of the mortgage market to act more on principal reduction.

The Federal Housing Administration “is prohibited by law and Fannie and Freddie -- we can’t compel them to do it -- have been unwilling to move in that direction to support targeted principal reduction where it makes sense, but we’ve been supportive of it,” Geithner said.

Penalize China

He said Congress needs to address whether a bill that would penalize China for the value of its currency violates international agreements.

“If this bill were to advance, then Congress would, or should, address the concerns that have been raised about the consistency of some provisions with our international commitments,” Geithner told the House Financial Services Committee in a second round of testimony today.

The Senate today advanced legislation letting U.S. companies seek duties to compensate for a Chinese yuan that lawmakers say is undervalued. The senators approved by 62-38 a motion limiting debate on the bill backed by Democrats such as Senators Sherrod Brown of Ohio and Charles Schumer of New York and Republicans including Lindsey Graham of South Carolina and Jeff Sessions of Alabama.

The legislation, opposed by business groups such as the U.S. Chamber of Commerce, may stall in the House. Republican Speaker John Boehner of Ohio said today that the bill could start a trade war.

Jobs Plan

President Barack Obama’s $447 billion jobs plan would put “more resources into neighborhoods most affected by the foreclosure crisis,” Geithner said. “That’s expensive, but we can afford it, and it’s a good use of scarce resources.”

Geithner said the biggest risk to the U.S. economy is “institutions not taking enough risk.

“You need to make sure that people are willing to take risks,” Geithner said. “You don’t want to lose that capacity.”

House Financial Services Committee Chairman Spencer Bachus, a Republican from Alabama, said based on that quote he’s not sure Geithner has “a clear picture of reality.”

“If in fact you are correct and banks are not taking enough risks, I would submit to you the problem doesn’t lie with the loan officers in the community and regional banks; it lies in the regulatory approach of the very members of the FSOC,” Bachus said.

The banking committee also approved the Obama administration’s nomination of Cyrus Amir-Mokri as Treasury assistant secretary for financial institutions. Amir-Mokri’s nomination still must be approved by the full Senate. He would replace Michael Barr, who left the Treasury in December 2010.

--Editors: Kevin Costelloe, James Tyson

To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net; Ian Katz in Washington at Ikatz2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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