While most news reports on Special Inspector General's Neil Barofsky focus on how the Treasury Department and the Fed lied about TARP being used to bail out "healthy" banks, we're spinning our wheels on trying to figure out who lied, and what they said. How will knowing who lied change what needs to be done today?
One of the key points of misinformation that damaged Americans' trust in government officials came when Fed and Treasury officials gave the unrealistic expectations that the bailout would help banks increase lending. Barofsky says in his report: "Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events -- the further assistance needed by Citigroup (C) and Bank of America (BAC) being the most significant examples -- demonstrated that at least some of those institutions were not in fact healthy."
So now that we have that confirmed, where does it get us? Is that really something we didn't already know?
What we need are actions to make sure the carnage of our banking system can never happen again. Federal Reserve Chairman Ben Bernanke stepped out of the way of progress last week by endorsing a separate consumer financial protection agency and telling Congress that he welcomed the proposed council of regulators to monitor risks to the entire financial system.
Now that Bernanke apparently supports the Obama administration's financial overhaul bill, maybe Congress can get something done to revamp our badly damaged regulatory system and fix the problems that led to the need for TARP. But in addition to revamping bank regulation, Congress can't overlook the issue upon which TARP was first created: troubled assets.
Banks hold more than $1 trillion in troubled assets that still prevent them from keeping cash flowing in the economy. No successful program has been created to truly answer that problem. While the Public-Private Investment Program may free up some assets in the smaller banks, what about the large banks that represent 75 percent of all banking assets? Most banks still hold these assets, and they're looking at creative ways to unwind them.
In fact, Barofsky's report details what happened to the original vision for TARP. "The original legislative proposal would have limited the Secretary's ability to use TARP funds to the purchase of mortgage-related assets, but [the Emergency Economic Stabilization Act] gave the Secretary of the Treasury broad latitude to determine both the type of financial instrument purchased and the institution from which it would be bought. As the financial and credit markets continued to rapidly deteriorate, Treasury's initial strategy evolved from purchasing toxic troubled assets to injecting capital directly into financial institutions to encourage them to build capital, increase the flow of financing to businesses and consumers, and support the economy. In explaining the change in strategy, which was implemented within two weeks of EESA's enactment, former Secretary Paulson said that, when market conditions had worsened considerably, it was clear that Treasury needed to act quickly and forcefully, and that purchasing troubled assets -- the initial focus -- would take time to implement and would not be sufficient given the severity of the problem."
The report also goes on to conclude, "It may be difficult in the near term to assess fully the impact of Treasury's initial injections of capital to the first nine institutions on preventing an economic collapse. What is clear, however, is that key federal officials and senior industry leaders believed that the risks to the financial stability and economic growth of the United States and the rest of the world were too great for inaction."
The report also adds: "Ultimately, the lesson is straightforward: accuracy and transparency will enhance the credibility of Government programs like TARP and restore taxpayer confidence in the policy makers who manage them; inaccurate statements, on the other hand, could have unintended long-term consequences that could damage the trust that the American people have in their Government."
What would truly help rebuild trust in this government would be a workable program to rid the banks of their toxic assets, so the credit markets can be unfrozen, and passing legislation to convince the public that the government truly can prevent this financial catastrophe from ever happening again.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.
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