Pat Dollard

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Bloomberg:

Treasury Secretary Timothy Geithner said he’s prepared to oust executives and directors at banks that require “exceptional” assistance from the U.S. government.

“If in the future, banks need exceptional assistance in order to get through this, then we will make sure that assistance comes,” while ensuring taxpayers are protected, Geithner said yesterday in an interview on the CBS “Face the Nation” program. “Where that requires a change in management and the board, then we will do that.”

Geithner noted that American International Group Inc., Fannie Mae and Freddie Mac had their chief executives removed after it became clear the companies couldn’t survive without government rescues. The Treasury is reviewing how much capital the biggest U.S. financial companies need in order to endure a severe economic downturn.

“Where we’ve had to do exceptional things,” the government has replaced management and boards, Geithner said.

Geithner’s pledge comes as signs emerge that the world economy may be stabilizing. Confidence among U.S. consumers climbed last month from the lowest level on record, according to the Conference Board. U.K. house prices rose in March for the first time since October 2007, while Chinese manufacturing increased, reports last week showed.

Stress Tests

Federal bank regulators will meet early this week to discuss how to interpret the results of the so-called stress tests that are being conducted to determine how much capital the nation’s 19 largest banks need, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter.

Geithner, in the CBS interview yesterday, vowed to enforce congressional legislation that limits pay at companies receiving government loans. Geithner said the Obama administration has no intention of letting banks get around the rules.

“Our obligation is to apply the laws that Congress just passed,” he said. “We want the American taxpayer’s assistance going to generate greater lending, not providing excess compensation.”

Treasury last month proposed a public-private partnership to spur investors to buy — and banks to sell — the illiquid real estate assets clogging lenders’ books. The program relies on financing from the Federal Reserve and debt guarantees from the Federal Deposit Insurance Corp., and it could use as much as $100 billion from the government’s bank-rescue fund.

‘Do What’s Necessary’

Geithner, responding to a question about whether rules approved by the Financial Accounting Standards Board last week may deter banks from participating, said the Treasury will make sure companies do what’s needed to clean up their balance sheets.

“We will do what’s necessary to make sure our banking system emerges out of this stronger,” he said. He declined to say whether Treasury will force banks to sell assets.

Norwalk, Connecticut-based FASB voted on April 2 to let banks use “significant” judgment in gauging how much securities are worth. Richard Dietrich, an accounting professor at Ohio State University, said the change may discourage financial companies from selling securities because it may allow them to avoid writing down the value of their holdings.

Geithner, who accompanied President Barack Obama to London last week for the meeting of the Group of 20 policy makers, also said the administration will “keep acting as forcefully as we can” to pull the nation out of a recession.

‘Turning Point’

At the summit, the world leaders called for tougher oversight of hedge funds, executive pay, credit-rating firms and derivatives trading. They also boosted funding for the International Monetary Fund, increasing its resources to $1 trillion.

Obama called the event “historic” and predicted it will be a “turning point” for economic recovery across the world.

Geithner is pushing for an overhaul of financial rules that calls for putting big hedge funds and private-equity funds under stricter federal supervision, as well as regulating derivatives markets. He’s also seeking new powers for the government to seize and wind down nonbank financial companies whose size poses threats to the stability of the financial system.

The World Bank is warning of an “unemployment crisis,” and the U.S. lost 663,000 jobs in March, the Labor Department said April 3. The jobless rate jumped to 8.5 percent, the highest level since 1983.

Banks and financial institutions worldwide have reported more than $1.2 trillion in credit losses and writedowns. Many of those stemmed from mortgage-related investments that declined with the collapse in the U.S. housing market.