HIGHLIGHTS: Geithner testifies on TARP

(Adds comments on compensation rules, gov't equity stakes, AIG

WASHINGTON (Reuters) - The following are highlights from the Congressional Oversight Panel hearing on Tuesday with U.S. Treasury Secretary Timothy Geithner on Troubled Asset Relief Program.

OVERSIGHT PANEL MEMBER FORMER SENATOR JOHN SUNUNU:

"What is the administration and the Treasury Department's position on applying rules for compensation or other rules to the public private investment partnerships?"

GEITHNER: "We're in the process now of completing the draft of a rule for applying those conditions. We're going to apply the law. We're going to put out in the public domain for comment a draft rule. That will give everyone the chance -- "

SUNUNU: "When will that be put out?"

GEITHNER: "Hopefully written in the next couple of weeks, relatively quickly."

SUNUNU: "What's the Treasury's position on application of the executive compensation limits that are in law today to those partnerships?"

GEITHNER: "You'll see in the rule how we propose to strike that balance. But it's my judgment that those compensation restrictions do not need to apply to the programs that you referred to."

GEITHNER ON COMMON EQUITY SWAPS, DIRECT GOVERNMENT STAKES

"At the conclusion of this process that the Fed is undertaking to assess the potential capital needs of banks going forward, where there is a need for additional capital, total capital and common capital, those banks will have a suite of options of how they meet that need. They will work out with their...supervisors what's the best mix of those options.

"They'll make different choices. I suspect different firms will make different choices and they'll have different judgments about what they want to do about the composition of capital."

GEITHNER ON LACK OF AUTHORITY TO PUT AIG INTO RECEIVERSHIP

"The United States government came into this crisis without a legal framework that allowed it to intervene and manage more effectively the risks caused by institutions like AIG. It was a tragic failure of the country. We still do not have that authority today. We do not now have the ability nor the tools that were designed in the wake of the financial crisis of last decades that were given to the FDIC, for individual banks and thrifts, that allowed the government to intervene more quickly, more effectively to protect the damage caused by weakness of these institutions. But even with that authority, we will face very difficult judgments again."

GEITHNER ON MORTGAGE HELP CHANGES

"As you know the President has supported and we are supportive of carefully designed changes to the bankruptcy plan... It's a difficult balance to get right, as you know, but the President is supportive of this and we'd like to work to see if we can find a good balance."

GEITHNER ON UNDERWATER MORTGAGES

"Our program is not going to solve all these problems. It is designed to target those homeowners who were relatively responsible in the amount of debt they took on. But you have to look at them in the context of the full range of other programs the Congress has authorized and the President is proposing to mitigate the damage caused by the recession across the American economy."

GEITHNER, HENSARLING ON BANK REPAYMENTS OF TARP FUNDS

REP. JEB HENSARLING: "If there are firms that wish to repay their taxpayer money, if the taxpayer money is at risk, if their relevant regulator certifies that commensurate with safety and soundness of the financial institution, they can return that capital, if this is an accurate assessment of your position, why wouldn't you take the money back?"

GEITHNER: "In those conditions, we would welcome it. It would be very helpful, it helps differentiate, it helps to show progress, it helps to underscore the basic point that the institutions of our financial system are in very different circumstances. But I just want to underscore what's really important...My basic obligation and our responsibility is to make sure that the system as a whole -- as a whole -- has the ability to provide the credit that recovery requires. And so we need to make a careful judgment about what policies are going to best promote that objective.

"Ultimately we have to look at two things -- one, do the institutions themselves have enough capital to be able to lend and the system as a whole, is it working for the American people for recovery, and that's the standard we're going to look at. But of course, nothing would make me happier..."

HENSARLING: "Just to understand you, there will be other considerations besides the individual institutions' financial stability?"

GEITHNER: "This is a judgment that I don't make. This is a judgment that the federal banking agencies make under the conditions established under the Recovery Act; they are in the process now of trying to make these judgments. The critical thing we care about is whether the system as a whole is in a position where it has the capacity to support the credit that recovery requires. That's the ultimate test."

GEITHNER ON IMPORTANCE OF RELEASING STRESS TEST RESULTS

"I do believe it's valuable and this is at the core of the objectives of this process that we worked out with the Fed, to bring more transparency, more disclosure to potential losses on banks' balance sheets. Without that, it's harder for banks to raise capital. Without that, they are going to live with a deeper cloud of uncertainty over their financial health than they need to. Transparency will be helpful in resolving that and they are in the process of working through what will be sensible."

GEITHNER ON CONDITIONALITY FOR BANKS RECEIVING GOV'T FUNDS

"In assessing what was necessary going forward to solve the problems we inherited, we made it clear that, where we're going to provide capital in the future, we want to target it to where it's necessary, we want to do it on a differentiated basis, we want to do it with conditions -- not unconditionally, but with conditions -- not just to help protect the taxpayer, but to try to help ensure that the system emerges stronger, not weaker. That's a very important principle. And we've said, the president has said publicly, that where we provide exceptional assistance, because that's necessary to make sure there's capital in the system, it will come with conditions to make sure there's restructuring, accountability to make sure these firms emerge stronger in the future."