Dec. 10 (Bloomberg) -- Treasury Secretary Timothy Geithner said the government is unlikely to recoup its investments in insurer American International Group Inc. or the automakers General Motors Co. and Chrysler Group LLC.
Geithner, in testimony today before the Congressional Oversight Panel, also said he chose to extend the $700 billion Troubled Asset Relief Program to give the Obama administration more time to unwind its bank-rescue efforts. The economy faces “significant headwinds,” and housing markets remain dependent on government support even as they are stabilizing, he said.
Still, U.S. financial and economic conditions have improved, Geithner told the panel in Washington. The Treasury now expects to make money on its banking investments, if not on its efforts to stabilize the automobile and insurance industries.
“It’s unlikely that we will be repaid for all of our investments in AIG, G.M. and Chrysler,” Geithner said.
The Government Accountability Office yesterday said that U.S. taxpayers will lose $30.4 billion from the auto-industry bailout, down from a prior estimate of $43.7 billion. The GAO report predicted a similar loss of $30.4 billion in AIG, down from a previous estimate of $31.5 billion.
Bank Repayment
Asked about future repayment by the largest banks still with government investments, Geithner said it is “generally desirable” that they raise all the money they need to repay in equity offerings.
“Cleaner exit is better than a staged exit,” he said. “I’m not sure that is going to be possible in every circumstance.”
While he didn’t discuss Citigroup Inc.’s efforts to extricate itself from the TARP, Geithner did note Bank of America Corp.’s repayment, which came yesterday. “I got a check for $45 billion,” he said, adding that was a “good thing.”
Under questioning by panelists, Geithner defended the government’s handling of last year’s AIG rescue, which has come under fire because banks were given the full value on credit- default swaps purchased from the New York-based insurer. Geithner was president of the New York Federal Reserve at the time and had a leading role in the bailout.
“You cannot selectively default on contractual obligations without courting collapse,” Geithner told the panel, explaining why the government paid banks 100 cents on the dollar. “There is no other way in the context of that storm to protect the economy from that failure.”
Extend TARP
The Treasury chief also faced skepticism about his decision to extend the TARP until next October.
The program is “essentially a blank check to finance any macroeconomic stimulus initiative that the executive branch can imagine, to the tune of hundreds of billions of dollars,” said panel member Paul Atkins, a former Republican member of the Securities and Exchange Commission.
“The economy would not be growing again without TARP,” Geithner said.
The U.S. economy expanded at a 2.8 percent annual rate in the third quarter after shrinking for a year. The economy will expand 2.6 percent in 2010, according to the median forecast of 58 economists surveyed by Bloomberg News this month. The jobless rate will average 10 percent next year.
Assisting AIG
While assisting AIG and the auto companies will cost taxpayers, the Treasury predicts a $19 billion profit on its banking investments, Geithner said.
Long-term TARP costs will be no higher than $140 billion, the Treasury said. The ultimate return will depend on how the economy fares, Geithner said.
The Treasury expects “substantial income” from sales of TARP warrants, received as part of the government’s investment in banks, in coming weeks, Geithner said. He said that auctions will often bring the highest returns for the government.
Banks that pay back their capital injections must also dispose of the warrants that the Treasury received, either by repurchasing them or allowing the department to sell them. Goldman Sachs Group Inc. redeemed its warrants for $1.1 billion, while JPMorgan Chase & Co. opted to allow the government to auction its warrants after the Treasury rejected an appraisal as too low.
Personnel Shift
Geithner appeared before the panel, led by Harvard law professor Elizabeth Warren, as it prepared for a personnel shift. Representative Jeb Hensarling, a Texas Republican, resigned yesterday.
Hensarling, who is being replaced by Dallas attorney Mark McWatters, has repeatedly criticized the bailout. George Rasley, a spokesman for the congressman, said Hensarling had agreed to stay on the panel for the expected duration of the TARP. The effort was set to expire Dec. 31 until Geithner extended it yesterday.
In his testimony, Geithner told the panel that the Treasury can’t force small banks to participate in initiatives aimed at stimulating small-business lending. He said these programs have been less successful than hoped because banks have been wary of submitting to the extra regulation that comes with taking TARP aid.
Geithner said parts of the securitization markets are “still impaired,” especially for securities backed by commercial mortgages. He also hailed improvements in the markets for asset-backed securities, which he said are no longer as dependent on publicly supported markets like the Federal Reserve’s Term Asset-Backed Securities Lending Facility.
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