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Geithner says less need for government in markets

US Treasury Secretary Timothy Geithner said a strengthening economy means the government can end some of the extraordinary support it put in place for markets and prepare for a slow recovery.

Appearing before the Congressional Oversight Panel for the $700 billion Troubled Asset Relief Program, Geithner said the economy was in far better shape now than a year ago when it was “on the verge of collapse,” though it still had problems.

“As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system,” he said. “We are now in a position to evolve our strategy as we move from crisis response to recovery.”

Geithner faced a grilling from the TARP panel members, who wanted to know why taxpayer-provided aid was so available for financial firms but not to other types of businesses. He suggested the decision to aid banks was paying off.

At a later town hall meeting carried by CNBC television, Geithner told questioners that he was confident China will remain a big buyer of US debt securities because it also wants to see the global economy regain its balance.

But he said there must be tighter controls over risk-taking by banks, calling that “a critical part of creating a more effective financial system.” He also said they will include tying executives' pay more tightly to performance in future.

Geithner said banks that received capital injections have repaid more than $70 billion, reducing the government's total investment to $180 billion and estimated another $50 billion will be repaid over the next 12 to 18 months.

“We still have a long way to go before true recovery takes hold,” he told the panel, adding it will be necessary to keep applying stimulus measures as necessary to get growth firmly back on track.

Another senior Treasury official told reporters earlier that Treasury will allow its money market mutual fund guarantee program to expire on September 18.

The backstop program was created a year ago to prevent panic withdrawals of $3.4 trillion in savings after a key fund “broke the buck” when its net asset value per share fell below $1. The program took in $1.2 billion in fees from funds, but has not had any payouts.

Geithner boasted that the economy now was “back from the brink” of the free fall that it was in when the Obama administration took office in January even though recovery likely will be gradual at best.

Treasury intends to press ahead with so-called public-private investment funds to buy toxic assets. The senior Treasury official predicted that the first purchases should occur by early October.

The official said there was a “great deal of interest” in purchasing toxic assets among investors and money managers running the funds, but the appetite among banks to sell their toxic assets has been less than anticipated.

“We thought it would be necessary for banks to sell some of these assets in order to attract private capital. It turned out that they were able to raise the capital without selling the assets,” the official said.

Geithner said that by providing support for US automakers, the government avoided substantial job losses and that a specially assembled Auto Task Force had avoided intervening in day-to-day decisions by management of General Motors Corp and Chrysler Corp.

“Such intervention could seriously undermine the companies' long-term viability and, consequently, their ability to repay the taxpayer for its investment,” Geithner said.

He cited a litany of problems still facing the economy, including “unacceptably high” unemployment, a shaky mortgage market outside those covered by mortgage finance sources Fannie Mae and Freddie Mac, strained financing for commercial real estate enterprises and tight credit for small business.

Given those conditions, “it is realistic to assume recovery will be gradual, with more than the usual ups and downs,” Geithner warned. (Reuters)