Pulling The TARP Over Your Eyes

(e-mail from Center for American Progress?)

When Treasury Secretary Henry Paulson initially presented his plan for the $700 billion Troubled Assets Relief Program (TARP) to Congress, it was three pages long and included no oversight mechanism, stating that decisions by the Secretary are "committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Emphatically rejecting that approach, Congress crafted a series of supposed checks on Paulson's power to use the TARP -- including an independent inspector general and an oversight board appointed by both parties -- and required Paulson to ask Congress if he wanted to access further installments of the money, after the first $350 billion was exhausted. However, it has become clear that Paulson and the Treasury are increasingly operating without oversight of any kind. Despite repeated promises from lawmakers and Paulson himself, the allocation of the TARP funds do not appear to be receiving much scrutiny.
NOT WHAT CONGRESS INTENDED: Initially, Paulson said that "the single most effective thing we can do to help homeowners, the American people, and stimulate our economy" was to buy troubled assets from financial institutions.

However, Paulson abruptly changed course, deciding to recapitalize banks instead. While this was likely a wise policy decision, it was made with seemingly no input from Congress. Furthermore, Paulson has never used the TARP to address the root cause of the financial meltdown -- the mortgage market -- much to the chagrin of Congressional members, who claimed Paulson was ignoring the intent of the legislation. Rep. Gary Ackerman (D-NY) expressed his dismay with Paulson, telling him, "ou seem to be flying a $700 billion plane by the seat of your pants." Furthermore, while the TARP debate was raging in September, Treasury slipped through a tax change giving a $140 billion tax break to the very banks being bailed out. "This is part of our overall effort to provide relief," a Treasury spokesman said, defending the change. "Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation.

OVERSIGHT FAILURE: Paulson was able to change course with the TARP because of a breakdown in oversight and because the overall TARP structure decilnes to hold banks accountable. Elizabeth Warren, the chairwoman of the congressional oversight panel, said in an interview that the Treasury seems "to be lurching from one tactic to the next" but admits that the panel is "still in the early stages" of its research. The Government Accountability Office (GAO), meanwhile, said in a report released yesterday that "the Treasury Department has failed to address a number of critical issues while implementing the $700 billion financial rescue plan, including how to ensure its efforts are successful." The GAO report says that the Treasury "has no policies or procedures in place for ensuring the institutions...are using the capital investments in a manner that helps meet the purposes of the act," as banks have been using the funds to bolster their balance sheets and to make acquisitions, rather than lending. Treasury, meanwhile, "has not yet determined if it will impose reporting requirements on the participating financial institutions." Not all of the oversight failures are the Treasury's fault, however. The TARP legislation calls for a special inspector general to be appointed by the White House, which has nominated assistant U.S. attorney Neil Barofsky. However, his nomination is currently being blocked by an unknown Republican senator.

OTHERS LEAD THE WAY: While Paulson has been continually resistant to using TARP funds to buy and restructure troubled mortgages -- saying that the TARP "is not a panacea for all our economic difficulties" -- others have been less hesitant. Sheila Bair, Chairman of the Federal Deposit Insurance Corp., has put forth a plan that would prevent 1.5 million foreclosures for $24.4 billion dollars, modeled on a successful plan implemented after the takeover of IndyMac. "We think it's essential that we actually strike at the underlying cause of the problems in the financial markets," said Michael Krimminger, special adviser for policy at the FDIC. "We think it's time to make a decisive difference in the housing markets on foreclosures." Federal Reserve Chairman Ben Bernanke, meanwhile, issued a plan last week to revive the U.S. housing market by spending $100 billion to buy the debt of Fannie Mae and Freddie Mac and another $500 billion to buy mortgage-backed securities that are guaranteed by Fannie, Freddie, and Ginnie Mae.In the otherwise badly orchestrated bailout of Citigroup, a caveat was included that mandates Citigroup use the "mortgage modification procedures" adopted by the FDIC. As Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund wrote, "These and other measures to help stabilize the housing market and then address the root cause of our economy's present ills is what Congress envisioned when it passed its $700 billion financial rescue package. ... Paulson should get with the program."

...Mr. Hankey the Christmas Treasury Poo is going to be replaced in January when Obama comes to town.