Lawmakers expressed concerns today about oversight of the Treasury Department’s $700 billion Troubled Asset Relief Program, questioning whether the money spent so far has done much to stabilize credit markets or reduce foreclosures.
The Treasury Department has already doled out $195 billion through TARP without a system in place to measure whether the money is actually helping relieve the credit crunch, or whether banks and other companies that receive the money are complying with restrictions on its use, according to a Government Accountability Office report to Congress.
Instead of purchasing troubled assets as originally proposed, the Treasury Department has purchased $155 billion in preferred shares in 87 banks and financial institutions — with no requirements that the banks track or report how they use the money — Acting Comptroller General Gene Dodaro told members of the House Financial Services Committee at a hearing today .
Some critics have complained that instead of boosting lending or helping troubled homeowners avoid foreclosure, banks may use the money to acquire competitors or prop up their own share price through stock repurchases.
While the Treasury Department and bank regulators say they expect the banks to expand lending and modify the terms of troubled borrowers’ mortgages, "it is unclear how (Treasury) and the banking regulators will monitor how participating institutions are using the capital investments and whether these goals are being met," Dodaro said.
Treasury’s new approach — purchasing stakes in financial institutions, rather than troubled assets like mortgages and mortgage-backed securities — heightened the need for the department to provide information to Congress and the public about the change in strategy and the rationale for the new focus, Dodaro said.
In addition to taking a stake in banks, Treasury also announced in November that it would purchase $40 billion in senior preferred stock from AIG under TARP as part of a plan to restructure federal assistance to the troubled insurer.
Rep. Paul Kanjorski, D-Pa., said the GAO report made clear "the dire need for improvement" in oversight of the program. The report was "full of examples of failed supervisions" and highlighted the fact that beneficiaries of the program are not required to boost lending or engage in loan modifications, he said.
Briefing lawmakers on its implementation and oversight, the Treasury Department official overseeing the TARP program, Neel Kashkari, pointed to signs that it’s having a beneficial impact.
The average credit default swap spread for the eight largest U.S. banks — which were the beneficiaries of $115 billion in TARP investments — has declined more than 200 basis points since before Congress authorized the program, he noted.
Kashkari also cited declines in LIBOR-OIS spreads — the difference between the London Interbank Offer Rate (LIBOR) and the overnight index swap rate (OIS) — as further evidence that fears about the financial stability of banks are easing.
Dodaro said other indicators to monitor for signs that TARP is working include interest-rate spreads, mortgage rates and mortgage originations.
Kashkari acknowledged that he’s often asked when banks will begin making new loans. He said that just over half of the money allocated to the Treasury’s "capital repurchase program" has been received by banks, and that it will take a few months to process remaining applications.
"The money needs to get into the system before it can have the desired effect," Kashkari said.
Confidence remains low because of the financial crisis and economic downturn, and as long as that’s the case, he said, "banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans."
Kashkari and Dodaro agreed that given all the other steps being taken by the Federal Reserve and other government institutions worldwide to tame the credit crunch, it will be difficult to measure any one program’s effects.
"Any improvement in capital markets cannot be attributed solely to TARP, nor will a slow recovery necessarily reflect its failure, because of the effects of market forces and economic conditions outside of the control of TARP," Dodaro said.
Kashkari said oversight of the TARP program includes a Financial Stability Oversight Board that includes the secretary of the Treasury, the chairman of the Federal Reserve Board, the chairman of the Securities and Exchange Commission, the secretary of Housing and Urban Development, and the director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
The law board has met five times in the past two months — it’s required to meet only once a month — and on Monday the Senate confirmed Neil Barofsky as special inspector general to oversee the TARP program.
Given the number and variety of actions being taken by the many players in the financial crisis, it will be hard to asses the effectiveness of the TARP program, Kashkari said. "Nonetheless, we are working with the banking regulators to develop appropriate measurements and we are focused on determining the extent to which the (investments are having the) desired effect," he said.
More help for housing?
Some lawmakers want to see TARP money used directly to boost mortgage lending and help prevent foreclosures. If the Treasury Department doesn’t go along, Congress has the power to cap the program at $350 billion — all but $15 billion of which has already been allocated.
Signed into law Oct. 3, the legislation creating the TARP program — the Emergency Economic Stabilization Act — required Treasury to "maximize assistance to homeowners" when it bought mortgages and mortgage-backed securities.
At the time, lawmakers said they expected the government to step up efforts to modify troubled borrowers’ loans, instead of foreclosing on them. But that hasn’t happened to the extent some had hoped because the Treasury switched course and has not purchased any mortgages or mortgage-backed securities.
Last month, the Bush administration announced Fannie Mae, Freddie Mac and the HOPE NOW Alliance of loan servicers were adopting a streamlined process for loan modifications. The $20 billion TARP investment in Citigroup the Treasury Department announced on Nov. 23, however, included an agreement that Citigroup use loan modification procedures developed by the Federal Deposit Insurance Corp. to manage loans and securities the government is providing guarantees for.
FDIC chair Sheila Bair says Treasury could also use TARP money to fund a government guarantee program, partially insuring lenders who engage in loan modifications. Assuming one out of three loans ends up redefaulting, the government could prevent 1.5 million foreclosures at a cost to taxpayers of $24.4 billion, the FDIC estimates.
In a separate report analyzing how TARP could be used to tackle the problem of defaults and foreclosures, the GAO said it had not independently analyzed FDIC’s assumptions, which are based on a program put in place by the government after the failure of IndyMac Bank.
The GAO said Treasury is considering a number of factors in its review of possible loan modification options, including cost, the potential for borrowers to redefault, and the number of homeowners the programs could help.
Data collected by the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) shows 58 percent of borrowers who were able to negotiate loan modifications during the first quarter had redefaulted after eight months (see story).
Dodaro said Treasury has taken "initial steps" to gather comments on ways it could use the authority it was given under TARP to insure troubled assets, and is "exploring approaches to supporting loan-modification efforts."
On Oct. 16, the Treasury published a notice in the Federal Register seeking comments on a possible guarantee program for troubled assets, and has received dozens of comments.
Another idea put forward is for the Treasury to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac to push rates down on conforming loans to 4.5 percent (see story).
On Nov. 25, the Federal Reserve announced that it would purchase up to $600 billion in debt and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae — a move that quickly brought fixed-rate mortgage rates down by 1 percent.
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