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Analysis

TARP Turns One Year Old, but Still Experiencing Growing Pains

The one-year anniversaries of the collapse of Lehman Brothers and the passage of the Emergency Economic Stabilization Act have provoked a good deal of soul-searching and reflection on the state of the economy and the effectiveness of the government’s massive bailout programs. At a hearing held yesterday by the Senate Committee on Banking, Housing, and Urban Affairs, Assistant Secretary for Financial Stability Herbert Allison, Jr. acknowledged that “the financial system remains fragile,” although he tried to make the case that the Treasury Department has made significant progress stabilizing the system, restarting the credit market, and extending relief to distressed homeowners.

Subsequent testimony by a trio of TARP watchdogs—Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Neil Barofsky, Chair of the Congressional Oversight Panel Elizabeth Warren, and Comptroller General Gene Dodaro—provided additional encouraging signs that the bailout has helped bring the economy back from the brink. But the watchdogs also reported that Treasury is continuing to ignore some fairly basic recommendations that would make the bailout programs more transparent and accountable (Barofsky testified that “Treasury’s basic attitude towards transparency...remains a significant frustration”). By refusing to implement these recommendations, Treasury has made it exceedingly difficult for outside stakeholders to evaluate whether or not the bailout has been successful.

POGO hasn’t taken a stand on the strategic merits of the TARP. But based on yesterday’s hearing and previous reports issued by the TARP watchdogs, here are some of the best recommendations we’ve heard to make Treasury’s bailout programs more transparent and accountable in year two:

  • Require TARP recipients to report on their use of funds. Ever since Treasury abandoned its original plan to purchase troubled assets and decided instead to inject capital directly into banks and other financial firms, there has been almost no attempt to require TARP recipients to disclose what they did with the government’s aid. Treasury officials have claimed that it would be unrealistic to impose this requirement because money is inherently fungible. But a recent SIGTARP audit to over 360 TARP recipients received a 100 percent response rate, with many recipients offering detailed information on how the injection of capital allowed them to avoid reduced lending, maintain capital cushions, pay off outstanding loans, and acquire other banks. Treasury has taken an important first step by releasing monthly lending reports for recipients of funds under the Capital Purchase Program. But in order to improve the program’s transparency, Treasury should also require reporting from the firms themselves, many of which appear to be ready and willing to explain how the government’s assistance has strengthened their position.
  • Disclose the valuation of the TARP portfolio. The public has received conflicting news in recent weeks on the status of the taxpayer’s investment in the bailed out firms. Some news reports have announced that taxpayers are actually making a tidy profit when banks repay their obligations to the government. But a July report by the Congressional Oversight Panel found that eleven banks repurchased their warrants from the government at only 66 percent of a best estimate of their value, and other reports have cast serious doubt on the likelihood that taxpayers will fully recover their investments in AIG and the auto industry. The SIGTARP and others have recommended that Treasury disclose more information on the valuation of its portfolio of assets received in exchange for the disbursement of TARP funds. Treasury should also explain in greater detail its process for allowing banks and other firms to repay their obligations to the government.
  • Disclose the holdings of the Public-Private Investment Funds and the prices paid for legacy loans and securities, and implement stronger policies to protect against conflicts of interest in the PPIP. Although the Public Private Investment Program (PPIP) has been delayed and scaled down since it was originally announced earlier this year, Allison assured the committee that the program will be fully launched sometime in the next few weeks. POGO has raised numerous concerns about the PPIP, including the potential for major taxpayer losses, the appearance of conflicts of interest involving the privateasset managers that are partnering with the government, and the possibility that the FDIC is overstepping its statutory boundaries by participating in the program. The SIGTARP has recommended that the trading activity, holdings, and valuations of the public-private investment funds be disclosed on a regular basis. We’d also like to see Treasury disclose the prices paid for legacy loans and securities, since uncertainty over the value of toxic assets on banks’ balance sheets continues to pose a major risk to the financial system. In addition, POGO hopes Treasury will take additional steps to protect against conflicts of interest involving the PPIP asset managers, many of which have a direct financial interest in the same types of toxic assets they will be purchasing and managing on behalf of the government. At the very least, Treasury should require the private asset managers to institute ethical firewalls to separate the employees working on the PPIP from the employees managing the firms’ private investments (we actually think these firewalls don’t go far enough given the strong potential for conflicts of interest, but they’re a necessary first step, and we can’t understand why Treasury is refusing to make them a requirement).
  • Post more information about TARP on FinancialStability.gov in a centralized, real-time database. Even when Treasury does put information online, there can be significant delays in making the information available, and the data is often displayed in an unwieldy format. POGO and other groups are supporting legislation introduced by Rep. Carolyn Maloney (D-NY) to create a centralized database with real-time updates on the disbursement of TARP funds. The bill would compile regulatory filings, internal agency models, and other types of information from public and private sources in order to provide a more complete picture of the government’s assistance to the bailed out firms. We’re also recommending that the non-proprietary portions of this database be made available to the public in a machine-readable format that will enable outside stakeholders to analyze the effectiveness of Treasury’s bailout programs.

Finally, it’s important to reiterate a point made by several of the witnesses: Treasury’s disbursement of TARP funds only represents a small portion of the total actions taken by the federal government to address the financial crisis. Even with some bailout programs winding down, the government has still lent, spent, or guaranteed over $11 trillion in assistance to banks and other firms, according to data recently compiled by Bloomberg. And while Treasury has admittedly taken important steps over the past year to adopt the watchdogs’ transparency recommendations, there’s still a long way to go at the Federal Reserve, which is refusing to disclose some fairly basic information such as the names of the firms that have received funding under the Fed’s emergency lending facilities. This morning, the House Financial Services Committee held a hearing to consider legislation introduced by Rep. Ron Paul (R-TX)—and supported by POGO and other groups across the political spectrum—that would enable the GAO to audit some of the Fed’s most important activities. Allowing the GAO to audit the Fed will hopefully give taxpayers a much better understanding of the extraordinary actions the government has taken to stabilize the financial system.