Geithner Issues a Call to Action

U.S. Treasury Secretary Timothy Geithner delivered a speech this week at New York University’s Stern Business School to kick-off the massive effort to craft new financial regulations to comply with the Dodd-Frank Act of 2010.  In his speech, he promised to streamline and simply the rules while working to codify them at an expeditious pace.  He also provided the following call to action for the financial services industry.

For the financial industry, your core challenge is to restore the trust and confidence of the American people and your customers and investors around the world. You will have to make your own decisions about how best to do that, but, I thought, given that I’m here in New York, I’d offer a few suggestions as an interested observer.

Don’t wait for Washington to draft every rule before you start changing how you do business. Get ahead of the process and out in front of your competitors. Find new ways to improve disclosure for your consumers.  End hidden fees. Don’t push people into loans they can’t afford.

Demonstrate to your business customers – small and large – that after running for cover during the peak of the crisis you are ready and willing to take a chance on them again. Change how you pay your executives so you are not rewarding them for taking risks that could threaten the stability of the financial system.

Make sure you have board members who understand your business and the risks you are taking. And, focus on improving your financial position so that your financial ratings, your cost of capital, the amount you have to pay to borrow, all reflect your own financial strength and earnings prospects, not the false expectation that the government will be there in the future to rescue you.

You can do all of that right now, even before the first new rule of financial reform is written.

Secretary Geithner is right to encourage banks to move now in the right direction as opposed to waiting for the rules to be written.  Doing so will not only better prepare the companies for the change to come, but will also provide a significant competitive advantage that will surely result in a similar increase in shareholder value.

TARP Critical Success Factors

U.S. Treasury Secretary Timothy Geithner will particpate in a hearing today conducted by the TARP Congressional Oversight Panel.  The focus of the discussion will most likely be the contents of a report issued by the Panel about the Treasury’s TARP Strategy.  In the report, the Panel explores various governmental interventions over the past century and identifies their sources of success.  Here are the four critical success factors: 

  • Transparency.  Swift action to ensure the integrity of bank accounting, particularly with respect to the ability of regulators and investors to ascertain the value of bank assets and hence assess bank solvency.
  • Assertiveness.  Willingness to take aggressive action to address failing financial institutions by 1) taking early aggressive action to improve capital ratios of banks that can be rescued, and 2) shutting down those banks that are irreparably insolvent. 
  • Accountability.  Willingness to hold management accountable by replacing—and, in cases of criminal conduct, prosecuting—failed managers. 
  • Clarity.  Transparency in the government response with forthright measurement and reporting of all forms of assistance being provided and clearly explained criteria for the use of public sector funds.  

The report falls short of offering an ultimate view on the best strategy to take in the current crisis.  However, it does indicate that there is dissent among the Panel members on efficacy of the Treasury’s current strategy. This dissent will most likely lead to a very interesting hearing.

tim-geithner

Making the Grade?

During what is spring break for many students across the U.S. this week, some corporate students will be wondering what grade they will receive on their recent tests.  Of course, these students are the nation’s largest banking institutions and they are sweating the results of the “stress tests” that have been conducted over the past month.  While the Federal Reserve and Chairman Bernanke have been steadfast in their views that the tests are not “pass/fail” by nature, the results could prove to be highly impactful to the institutions.  Here is what the Wall Street Journal reported today.

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country’s 19 largest banks, people familiar with the matter said. Regulators announced the tests two months ago as part of an effort to determine how much assistance big banks might need to continue lending if the economic downturn worsens. The government is wrestling with how to bolster the lenders without appearing to prop up banks that are beyond repair.  Meanwhile, Treasury Secretary Timothy Geithner said Sunday that the Obama administration would consider removing top management and boards at financial companies if the government were to offer “exceptional” assistance to keep the firms operating.

The next few weeks could be very interesting as the test results shape actions by the regulators.  At the same time, first quarter earnings will be released which could prove to be a “double whammy” for some firms.  

[Timothy Geithner ]
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