Mounting losses from commercial real estate loans will continue to be a problem for the U.S. and especially smaller banks, but it can be managed, Treasury Secretary Timothy Geithner said.
"Commercial real estate's still going to be a problem for the country," Geithner said Monday in an interview with CNBC. "But we can manage through this process."
Geithner also said the Treasury Department's announcement that it will begin selling the stake it owns in Citigroup Inc., which could net about $7.5 billion to the government, shows "how far we've come" in exiting from the financial bailout program.
The government received 7.7 billion shares of No. 3 U.S. bank Citigroup in exchange for $25 billion of the total $45 billion it gave the financial behemoth during the 2008 credit crisis. The Treasury Department said Monday it will sell the shares over the course of this year, depending on market conditions.
Like any investor, the government will likely hold on to its shares if prices fall steeply. However, Citi shares have been steadily rising with the broader market in recent months, which means the government is likely to pocket a hefty profit.
The government has been trying to unwind the investments it made in banks under the $700 billion Troubled Asset Relief Program, or TARP, that came in at the height of the financial crisis.
Geithner said in the interview the government doesn't want to keep an ownership stake in the financial companies "a day longer than necessary."
The government will use a "careful process" to balance two objectives, he said: ensuring maximum return on the taxpayers' investment while also getting the U.S. out of the business of owning private companies.
Geithner also affirmed the Obama administration's recent optimism that an agreement can be reached with Republicans on legislation to bring sweeping new regulations to the U.S. financial system, opening the way to enactment possibly within months. "We're getting close," he said.
On another topic, he said the financial system "is in a much, much stronger position today" than it was three years ago in the run-up to the financial crisis and the U.S. economy has recovered from the crisis faster than those of other countries.
Major U.S. financial institutions have far stronger capital positions than they did three years ago, though many of them still face daunting challenges, he said.
While losses on mortgage loans socked banks at the beginning of the 2008 financial crisis, it is commercial and development loans that have brought dramatic losses for banks in recent months.
Losses have mounted on loans for commercial projects like stores and office complexes, as buildings sit vacant and builders default. Many midsize and regional banks hold large concentrations of those loans.
U.S. banks face as much as $300 billion in losses on loans made for commercial property and development, according to the Congressional Oversight Panel, which monitors the government's efforts to stabilize the financial system.
Sheila Bair, the head of the Federal Deposit Insurance Corp., has said that losses on commercial real estate loans are expected to be the primary cause of bank failures this year, which are likely to exceed the 140 collapses in 2009.
One way to help manage the commercial loan distress, Geithner said, is through the $30 billion fund proposed by President Barack Obama to provide money to midsize and community banks if they boost lending to small businesses.
The program, which must be approved by Congress, would use Tarp money repaid by banks, which now has reached about $176 billion.
Many lawmakers, however, want the $30 billion sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.
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