Financial Reform Watch

On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.

Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.

Federal Deposit Insurance Corporation Chairman Sheila Bair in a CNBC interview this morning stressed the importance of getting back to the TARP’s original purpose. "This is why we need a Troubled Asset Relief Program to get banks lending again so we get out of this self-reinforcing cycle of a deteriorating economy, " Bair said. She further explained, "The aggregated bank might have an advantage in the sense that it actually moves the assets off the balance sheets, freeing up better lending capacity, which is really the whole public purpose of all these initiatives."

Geithner’s and Bair’s comments may have sparked a midday rebound in the S&P 500 Financials Index, which was up 5 percent then and 14.5 percent by day’s end. At today’s closing bell, Citigroup, Bank of America, and Wells Fargo recaptured most if not all of their losses from yesterday, finishing up by 29 percent, 30.9 percent, and 17 percent respectively.