RTTNews - Treasury Secretary Timothy Geithner faced lawmakers Wednesday, updating them on the progress of the $700 billion financial rescue plan known as the Troubled Asset Relief Program, or TARP. Geithner said that the financial system is stabilizing, and issued a timeline for further action by the Treasury.

Although the outlook is getting brighter, Geithner cautioned that it will take time for a full recovery.

Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks, Geithner told the Senate Banking Committee.

In mid-March, the Obama administration revealed its plan to solve the massive, debilitating banking crisis that continues to hold the financial system in its crushing grip. The plan is to buy up toxic assets through a combination of $100 billion in TARP funds and private investment. Geithner said Wednesday that the plan will be put into place in July, six weeks from now.

The official title of the program is the Legacy Loans program, the process through which the Treasury and private investment will purchase the toxic assets. Banks will determine which loans they would like to sell, and the Federal Deposit Insurance Corp. will subsequently determine the amount of funding that it can guarantee for the loans.

The pools of loans will then be auctioned to the highest bidder, who will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.

The buyer will then receive financing through issuing the FDIC-guaranteed debt, and the FDIC will receive a payment in return for its guarantee.

The Treasury will manage its investment and will provide 50 percent of the equity capital for each fund. However, private managers will remain in control of the asset management, albeit subject to oversight from the FDIC.

These assets continue to weigh on the U.S. financial system, Geithner warned, which is prohibiting the credit markets from making a full recovery.

This constraint on capital reduces the ability of financial institutions to provide new credit and uncertainty about the value of legacy assets is constraining the ability of financial institutions to raise private capital, he said.

There is still $124 billion of the $700 billion left, around $10 billion less than the previous estimate in March of $135 billion.

The figure assumes that $25 billion will be paid back over the next year. Without that $25 billion, there is around $100 billion left.

However, despite continued problems in the markets Geithner offered an optimistic outlook, stating that the financial system is starting to heal.

Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk and banks are funding themselves more conservatively, Geithner said.

In terms of the embattled auto industry, specifically General Motors Corp. (GM), Geithner assured lawmakers that the administration is continuing to work with GM to produce a viable restructuring plan.

We will continue to work with GM and its stakeholders in the lead-up to the June 1 deadline, Geithner said. We will also continue our significant efforts to ensure that financing is available to creditworthy dealers and to pursue efforts to help boost domestic demand for cars.

Committee chairman Christopher Dodd, D-Conn, suggested the Treasury Secretary increase the number of appearances before the committee, perhaps on a monthly basis throughout the duration of the financial crisis.

Despite the efforts of the Treasury it is still too soon to tell if we are seeing the progress that we need, Dodd warned.

Specifically, he warned of the potential negative effect of a faltering commercial real estate sector, which threatens to further destabilize the broader financial sector,

Overall, the picture remains mixed, Dodd said.

Ranking member Richard Shelby, R-Ala, was outspoken in his opposition the passage of the TARP. He had harsh words for Geithner, and the way the funds have been spent.

Congress panicked, he said, adding that a more methodical, thought out approach to TARP would have benefitted the recovery.

Since TARPs' creation treasury has vacillated as to how to spend the funds, Shelby said.

He added that in his belief the actions of the Treasury and the Federal Reserve made the financial crisis more severe, and the severe economic downturn could have likely been avoided with a better approach from the organizations.

Today, the problems with our banking system remain unresolved, Shelby said. Lending is still severely depressed and questions remain about the financial health of many of our banks despite the stress tests.

In the question and answer portion of the hearing, Shelby asked Geithner if he believed the Treasury would be involved in American International Group, Inc. (AIG) a year from now.

Geithner responded that it is very likely the AIG debacle would take more than a year to resolve.

I think, realistically, this is going to take time, he said. In some parts of the financial system.it's going to take a longer period of time than that. AIG too.

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