You see, New Mexico’s financial institutions were not too big to fail. They were never invited to meetings and told to accept financing from the Troubled Asset Relief Program. As a result, banks and residents of Santa Fe, like those in towns all over Middle America, have struggled mightily through this recession. It was clear that, like politics, the effects of financial crises are mostly local.

Just to comment quickly on the -- on the TARP money. There were two objectives of the TARP money. One was to stabilize the banks and the second was to give them capital on which to base their lending.

Unfortunately, the politics was very bad, as you know, and the public and the Congress have stigmatized that money, and the banks, therefore, have done the best they can to pay it back as quickly as possible.

And so, basically all the big banks have paid back their TARP money now, and so it's no longer available to provide support for credit.

So that's -- that's unfortunate.

From the Q&A session

LANCE: Was the Federal Reserve consulted before the administration announced its proposal about a hundred billion dollars in taxes on banks across the country?

BERNANKE: I think there were some technical discussions. You're talking about the financial responsibility fee?

LANCE: Yes. And what are your views, Mr. Chairman, on the imposition of that amount of money on -- on banks across America?

BERNANKE: Well, I think in terms of whether or not to impose a tax on the banks, that's obviously a fiscal matter and Congress has to decide about that. I do think it's important that it be imposed in a way that not have unintended consequences.

LANCE: Yes.

BERNANKE: And one issue which has arisen is that imposing the tax on nondeposit liabilities could have some negative consequences for the repo market. That's an example.
So if you want to impose the tax -- and many do -- you just want to be sure to do it in a way that doesn't create unintended consequences.

From the Q&A session

Without going into great detail about the {Resolution Finance Company}, I will note the four principles that Jesse Jones, the head of the RFC, employed in restructuring banks. The first step was to write down a bank’s gad assets to realistic economic values. Next, the RFC would judge the character and capacity of bank management and make any needed an appropriate changes. The third step was to inject equity in the form of preferred stock, but this step did not occur until realistic asset values and capable management were in place. The final step was receiving the dividends and eventually recovering the par value of the stock as a bank returned to profitability and full private ownership.

{The budget} acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more. It establishes a placeholder to help ensure we can cover any additional financial stability costs.

I should note here that the existence of the $250 billion placeholder for financial stability in the President's Budget does not represent a specific request. Rather, as events warrant, the President will work with Congress to determine the appropriate size and shape of such efforts, and as more information becomes available the Administration will estimate potential cost.

[T]he Treasury recently announced plans for further steps to ensure the strength and soundness of the financial system and to promote a more smooth flow of credit to households and businesses. The plan would use the remaining resources appropriated to the Treasury under the Emergency Economic Stabilization Act--approximately $350 billion--and also involve additional spending to support the activities of Fannie Mae and Freddie Mac. Whether further funds will be needed depends on the results of the current supervisory assessment of banks, the evolution of the economy, and other factors. The Administration has included a placeholder in its budget for more funding for financial stabilization, should it be necessary.

Senator, the Treasury's plan has I think the three key elements for stabilizing the banks... The third is taking bad assets off the balance sheets. And there are various ways of doing that. The Treasury's talked about some kind of public-private partnership where the private sector would help determine the prices.  A question is:   how do you leverage up the TARP money?

From the Q&A session

QUESTION:  Mr. Bernanke, did you or are you aware of former Secretary Paulson forcing some banks to take TARP money?

BERNANKE: Well, there was some implicit pressure put on the very large banks, whose stability is really critical to the economy, but I'm not aware of any medium or small banks that were forced in any way to take -- to take TARP money, no.

Many people believe the program has allowed too much upside for financial institutions, while doing too little for small business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners. We have to fundamentally reform this program to ensure that there is enough credit available to support recovery. We will do this with tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.

In his confirmation hearing as Treasury Secretary.

Richmond Federal Reserve President Jeffrey Lacker on Friday called arguments to remove toxic assets from bank balance sheets "compelling."

"As long as you have some material risk that remains on the bank's books, any new equity investor is going to be subsidizing existing debt holders, and that's going to impose an impediment to raising new equity and recapitalizing the banking system from the private sector," he said, taking questions from reporters after a speech to the Richmond chapter of the Risk Management Association.

Lacker, a 2009 voting member of the Federal Open Market Committee, said he supports an idea floated earlier in the day by U.S. Treasury Secretary Henry Paulson to create some type of aggregator bank. "That general idea is a very good one," he said. "It has a lot of promise for the way forward."

In comments to reporters after his speech, as reported by Dow Jones News

The U.S. government should set up a bank designed to remove toxic assets from private lenders' balance sheets so they could make urgently needed loans, the head of the Federal Deposit Insurance Corp. said Friday.

Establishing an "aggregator bank" with money from the Treasury Department's Troubled Assets Relief Program, or TARP, would return the program to its original goal, FDIC Chairman Sheila Bair told CNBC.

...

"People on (Wall Street) tell me that private-equity investment is holding back now because they don't know what the tail risk is on some of these higher-risk assets," she said. "If we address that problem and perhaps even couple it with a requirement that banks selling into this facility raise some proportion of equity capital, that might be the way to go."

As reported by Dow Jones News

"We've worked on different ways of expanding the TALF," Paulson said. "There's a lot of work (that) has been done on an aggregator bank (and) other ways of leveraging TARP funding to let it go further when it comes to dealing with illiquid assets."

In a surprise visit to the Treasury news room, as reported by Dow Jones

A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets  The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit private investment and new lending. 

Chairman Bernanke used the same wording earlier in the day.

Finally, I would expect the bulk of the remaining TARP funding to be devoted to strengthening financial institutions, thereby supporting the normalization of credit markets and the flow of new credit. Some of this support might take the form of additional capital injections, both to offset additional credit losses and to further expand lending capacity.  Consideration should be given to whether it is feasible for some capital injections to be made on a matching basis with private capital raises, thereby providing a market test for those injections.  In addition, prudence requires that funds be held in reserve as needed to address urgent contingencies, such as averting the disorderly failure of a systemically important financial institution.

[F]iscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.  History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively...

...Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.  A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets.  The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.  Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered.  Public purchases of troubled assets are one possibility.  Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks.  Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.  These methods are similar from an economic perspective, though they would have somewhat different operational and accounting implications.