Administration strikes cautious economic tone as G.M.'s new C.E.O. makes the Sunday rounds

General Motors' new C.E.O., Fritz Henderson, appeared this morning on NBC's Meet the Press and CNN's State of the Union to say that G.M. would survive as a company, even though bankruptcy loomed as a viable option. Henderson took the reigns at G.M. after the Administration asked former-C.E.O. Rick Wagoner to resign.

Henderson said that G.M. was focused on quickly returning to profitability so that they could repay the taxpayer's money.

"The day we took money from the taxpayer was one of the -- one of the most difficult days of certainly my career and of the history of General Motors," he said. "We need to respect the fact that we need to look after the taxpayer, we need to justify to the consumer and the taxpayer that we’re going to succeed going forward. And one of the -- one of the happiest days of my future career is going to be the day we pay the loans back."

Henderson refused to rule out the possibility of bankruptcy, saying that the company would do whatever was necessary to meet the goals set by the President's Task Force on the Auto Industry.

"Now we’re 55 days, not 60 days away -- and we either accomplish this job outside of bankruptcy in the short term; or alternatively, if it’s necessary, we’ll go into bankruptcy in order to get this job done," he said.

White House Senior Advisor stressed on Fox News Sunday that G.M. still had much work to do. "Whether it comes through some sort of structured bankruptcy or another process," he said, "there is no doubt that for General Motors to survive and prosper, as we all want them to, they’re going to have to do serious restructuring."

Speaking to the broader economy, Treasury Secretary Timothy Geithner stressed on CBS' Face the Nation that even as the economy recovers, it may take some time for the unemployment rate to fall.

"The typical pattern of recoveries," he explained, "is that growth recovers, growth starts to turn positive, people start to spend more, people -- businesses hire more, they invest more, before you see unemployment peak. That’s the crude reality of recoveries."

Geithner also left open the possibility that the government would ask bank executives to resign.

"If, in the future, banks need exceptional assistance in order to get through this, then we’ll make sure that assistance comes with conditions, not just to protect the tax payer but to make sure this is the kind of restructuring necessary for them to emerge stronger," he said. "Where that requires a change of management of the board, we’ll do that."

Geithner also emphatically denied reports that the Administration was working to circumvent Congress' restrictions on executive pay.

"Our obligation is to apply the laws that Congress just passed on executive comp," he said. "And we’re going to do that."

The Sunday talk shows also discussed North Korea's failure this morning to launch a missile that could deliver a payload into orbit. Susan Rice, the U.S. Ambassador to the U.N., appeared on ABC's This Week before heading to New York for an emergency meeting of the Security Council.

"Our assessment is that their pursuit of a missile capability is of grave concern and that their aim is to achieve the capability to deliver a weapon as potentially as -- to North America. I think we have to look at exactly what transpired today and make a new assessment of the consequences," she said.

Obama and team flood Sunday talk shows to discuss the economy, Afghanistan

President Obama joined the Secretaries of Defense and the Treasury this morning on the Sunday talk shows to discuss the economy and the commitment of additional troops to the war in Afghanistan.

Speaking on CBS' Face the Nation the President recounted his tough conversation with the leaders of the nation's top banks.

"What I said was, look, first of all, there are a lot of bankers that are doing good work in the community, that are acting responsibly, that haven’t taken huge risks. I understand that. But understand that for the average single mom who is just barely struggling to pay her mortgage or medical bills for her kid, who is paying her taxes, who is playing by the rules, and then finds out that a taxpayer-assisted firm is paying out multimillion-dollar bonuses, that’s not just not acceptable."

The President reaffirmed his commitment to make permanent the two-year middle class tax cuts passed as part of his recent stimulus package. "I’m going to be pushing as hard as I can to get it done in this budget," he said. "If it’s not done in this budget, then I’m going to keep on pushing for it next year and the year afterwards, so that we don’t see a drop-off after the two-year tax cuts."

Over on ABC's This Week, Treasury Secretary Timothy Geithner stressed that the government's response to the crisis would not end soon. "The lesson of financial crises is governments tend to do too little," he said, "They wait too long to escalate."

On NBC's Meet the Press, the Secretary defended his decision to provide nearly $1 trillion public-private loan guarantees as a simple choice between action and prolonged economic turmoil. "We can let -- leave that as it is, hope that banks earn their way out of this over time. That would be a mistake," he said. "That would leave us with a strong -- with a deeper, longer recession."

The President also discussed his decision to commit additional troops to the war in Afghanistan, saying it was a vital step in combatting Al-Qaida.

"What we want to do is to refocus attention on Al Qaida.," he said. "We are going to root out their networks, their bases. We are going to make sure that they cannot attack U.S. citizens, U.S. soil, U.S. interests and our allies’ interests around the world."

Secretary of Defense Robert Gates agreed on Fox News Sunday that Al-Qaida remained a serious threat, saying that Administration was willing to consider alternate proposals if the troop increase proved ineffective. "I think [The President has] been clear -- and frankly, it was my view in our discussions -- that we don’t want to just pursue -- settle on this strategy and then pursue it blindly and open-endedly," he said.

Senator McCain speaking on Meet the Press endorsed the President's approach, saying: "I think this -- the outlines of this proposal are good. The best way to get out of Afghanistan fast is people to think we’re staying."

Stock markets soar after Treasury details plan to buy bad assets

With just about every member of the financial world looking on, Treasury Secretary Tim Geithner detailed his department's plan to launch a public-private partnership to buy toxic loans from struggling banks. And, if the stock market is a barometer of their mood, they liked what they saw.

The Dow Jones Industrial Average climbed 6.8 percent, closing up almost 500 points.

The S&P 500 ended the day more than 7 percent higher.

The NASDAQ Composite jumped more than 98 points.

Treasury Department's plan to fix banking starts with at least $75 billion

The Treasury Department's effort to clear bad loans off banks' books will begin with an investment of $75 billion to $100 billion, with the option to commit more funds later.

The government's money will be used to kick start investment in the "Public-Private Investment Program" which will buy up to $500 billion in troubled assets from banks.

Once those toxic assets--the Treasury calls them "Legacy Assets"--are cleared from the banks' balance sheets, those banks can begin offering new loans to power the economy, or so the Obama administration hopes.

The Treasury Department said its plan was designed around three basic principles:

• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The government also described how the process will work:

Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

The initial reaction from the financial community to the Treasury Department's plan seemed to be positive, as stock markets climbed in early trading. At 11:30 a.m., the Dow was up about 275 points and the NASDAQ was up around 50 points.

More information about the Treasury Department's "Public-Private Investment Program" is available at financialstability.gov.

Administration set to announce regulatory reform and recovery proposals

The Administration tomorrow will announce a long awaited plan to help banks grapple with the financial crisis, along with a regulatory reform proposal that would grant the government broad new powers to protect the economy against financial shocks.

The Administration is preparing to spend up to $1 trillion to lift the toxic assets at the heart of the financial crisis from banks' balance sheets. The government plan would create a new entity called the Public-Private Investment Program to held distribute the risk between taxpayers and private investors.

Under the plan, the government would offer billions in low-interest loans to help the private sector purchase toxic assets. Using money from the $700 bank bailout fund, the government would match private investments dollar for dollar and share in both the losses and the potential profits.

The Treasury would also expand its recently-launched $1 trillion Term Asset-Backed Securities Loan Facility to help sweep up toxic assets. The TALF is currently setup to guarantee the loans behind securities backed by consumer debt such as auto loans, student loans, and credit card debt.

The FDIC would also be called upon to share their expertise in managing the toxic assets retrieved from failed banks.

“We’re going to move quickly to lay out a new financing program to deal with these legacy assets,” Treasury Secretary Timoth Geithner told Bloomberg News. “We have and expect to see a lot of support for this program.”

Under the proposed regulatory framework, the Treasury Secretary, with the permission of the President and the Federal Reserve, would be empowered to place into government conservatorship ailing institutions whose collapse could threaten the financial system.

The Treasury Secretary would then be permitted to dissolve contracts and limit payments to creditors. These powers would largely prevent a recurrence of the bonus debacle currently plaguing A.I.G.

The Public-Private Investment Program will be announced tomorrow, with an announcement concerning the new regulatory framework coming by Tuesday.

Administration moves to reduce the cost of small business loans

The Administration is expected tomorrow to unveil a plan to aid small businesses by unfreezing the credit market to reduce the cost of business loans. Congressional Republicans have complained that the Administration's recovery plans primarily helped the financial service and not small business owners.

The Administration will direct $730 million from the economic stimulus package to raise from 85% to 90% the government's guarantee on Small Business Administration loans under $150,000. The government will also eliminate common fees and processing charges that lenders pass on to borrowers, which can add up to 3.75 percent to the cost of a loan.

The Administration aims to unfreeze the credit markets by spending up to $20 billion to buy up loans from primary bank lenders. This in turn should allow the primary lenders to make new loans to other small business owners.

The Small Business Administration usually guarantees loans worth $20 billion each year, however new lending is on track to fall below $10 billion this year, according to Administration officials.

Speaking today on Meet the Press Christina Romer, the Council of Economic Advisors said, "We know that small businesses are the engine of growth in the economy, and we absolutely want to do things to help them... We’ve talked to a lot of small business owners, and one of the trouble they’re having is just community banks don’t want to lend to them because the secondary market in SBA loans has virtually disappeared. So one of the things we’ll be announcing is a program to get that market cleared and working again."

Minority whip Eric Cantor agreed this morning on Meet the Press that government action can unfreeze the markets. "I think the crux of the issue is the only credit markets that are working, by and large, are the credit markets where the government has stepped in to guarantee the issuance of the debt," he said.

The President is expected to announce the new measures tomorrow from the White House with Treasury Secretary Timothy Geithner.

President's economic advisors forecast eventual economic recovery

As the effects of the President's $787 billion stimulus package continue to take hold, the President's economic advisors this morning emphasized that nation was just beginning to walk the long path to economic recovery.

"We haven’t won yet," said Christina Romer, the chair of the the Council of Economic Advisors speaking on NBC's Meet the Press. "We have staged a wonderful battle. So we have put in place just a host of programs: the stimulus package, the financial rescue plan, the housing plan. We think it’s the right medicine and we think it will work."

Larry Summers, director of the National Economic Council, agreed, saying that while recent short-term gains were encouraging, economic recovery was still a long-term prospect. "We’ve got an economy that’s losing 600,000 jobs a month," he said on ABC's This Week. "That’s probably not going to stop imminently. And so, while there is signs that some of the things that the president is doing are starting to have effects, these problems did not get made overnight. They didn’t get made in a year. And they’re not going to get fixed very rapidly, either."

The President's advisors emphasized that the country was on solid economic footing.

"We know that, that temporarily we’re in a mess, right?" said Romer, before adding "the fundamentals are sound." Summer, on CBS' Face The Nation agreed, saying that Treasury bills would retain their status as "the asset of choice for people around the world."

The Administration is continuing to develop plans to address the toxic assets plaguing bank balance sheets, which remain at the heart of financial sector's unease. "I can tell you that that kind of a blueprint is top on our agenda," Romer said "and I expect it to come out very soon."

Summers did reveal that any eventual plan requiring the use of taxpayer funds would wipe out investors. "No taxpayer in these arrangements is going to lose money until the investor who put up the money has lost 100 percent of the money they put up," he said. "So until whoever it is who buys it, whether it’s an insurance company or a hedge fund, until whoever it is who buys it is completely wiped out, the government financing isn’t going to be touched at all."

Meet the Press host David Gregory asked Romer what responsible consumers should do during the crisis.

"That’s an excellent question," Romer responded. "I think we know that consumers have lost a lot of wealth and that normally what you’d say is they should be saving more. I think the truth is consumers have also not done a lot of spending for the last 14 months.

So what I would predict and I think would be a perfectly reasonable thing is you go out and you buy that car that you’ve been thinking about for 14 months and you do some of the spending. And then, over the long haul, I’m hoping we’ll come back to probably a higher savings rate, because we know we were at kind of a historic low before this all happened."

Fed chief: Stabilize economy first, then overhaul regulation to minimize the next crisis

There are ways to fight off the nation's next financial crisis, Federal Reserve Chairman Ben Bernanke said today, but before we worry about that governments must get financial systems working again to stabilize the economy.

Speaking at the Council on Foreign Relations, Bernanke said the U.S. government will continue to pour money into financial institutions if necessary.

"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said. "In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn."

He went on to say that new regulations could "make crises less frequent and less virulent."

First among his four reform proposals was to deal with companies that are "too big to fail" before they fail. The government already has Citigroup and AIG on life support--costing hundreds of billions of dollars--and Bernanke, without mentioning any company by name, said the Fed's "commitment to avoiding such a failure remains firm."

"Looking to the future, however, it is imperative that policymakers address this issue by better supervising systemically critical firms to prevent excessive risk-taking and by strengthening the resilience of the financial system to minimize the consequences when a large firm must be unwound," Bernanke said.

The second step would be to strengthen the rules under which the financial markets operate, making sure the infrastructure remains strong in times of stress.

Third, Bernanke said, regulations need to be flexible so as not to "overly magnify the ups and downs in the financial system and the economy," such as allowing banks to lend more money in a bad economy than in a good economy.

Lastly, Bernanke proposed a government group that would monitor and address large-scale systemic problems.

Bernanke said his own agency may or may not be able to do the job but should certainly be involved.

"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.

The stock markets reacted well to Bernanke's comments, particularly about not letting big banks fail. Financial stocks rallied in the morning, climbing around 10 percent after weeks of declines.