TARP: One Big Success but Many More Failures

The Congressional Oversight Panel monitoring the Troubled Asset Relief Program concluded in its December report that TARP "proved decisive enough to stop the panic and restore market confidence," but failed to address many of the "ongoing problems" in the financial markets and the broader economy. Even in light of its failures, the panel stopped short of calling for the end of TARP. Indeed, only one member of the panel did that: U.S. Rep. Jeb Hensarling (R-Texas), the top Republican on the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

In its December report, "Taking Stock: What has Trouble Asset Relief Program Achieved?," the oversight panel summarized all the failures of TARP:

  • The availability of credit, the lifeblood of the economy, remains low. Banks remain reluctant to lend, and many small businesses and consumers are reluctant to borrow. Banks do have new capital, but are they using it to lend or just repairing damaged balance sheets?
  • Bank failures continue at a nearly unprecedented rate. There were 149 bank failures between Jan. 1, 2008, and Nov. 30, 2009. The FDIC faces red ink for the first time in 17 years, and has had to step in to repay depositors at a growing number of failed banks. This problem could worsen as commercial real estate failures inflict further damage on small and midsize banks.
  • Toxic assets remain on the balance sheets of many large banks. Some major financial institutions continue to hold the toxic mortgage-related securities that contributed to the crisis, waiting for a rebound in asset values that may be years away. While these banks may be considered "too big to fail," they may be too weak to play a meaningful role in keeping credit flowing throughout the economy.
  • The foreclosure crisis continues to grow. More than 2 million families have lost their homes to foreclosure since the start of this crisis, and countless more have lost their homes in short-sales or have turned their keys over to their lenders. Foreclosure starts over the next five years are projected to range from 8 million to 13 million, and TARP's foreclosure mitigation programs have not yet achieved the scope, scale and permanence necessary to address the crisis.
  • Job losses continue. The unprecedented government actions taken since last September to bolster the faltering economy have not been enough to stem the rise of unemployment, which in October was at its highest level since June 1983.
  • Markets remain dependent on government support. While the market stability attained since last fall's crisis has been in part the result of an extraordinary mix of government actions, some of these programs will likely be scaled back soon, and few will continue indefinitely. It is unclear how the market will react when these programs are removed.
With all these failures, I expected the panel to call for the end of TARP, but only Rep. Hensarling did that in his executive summary. "In order to end the abuses of TARP as evidenced by Chrysler, General Motors (GM) and GMAC bailouts, misguided foreclosure mitigation programs and the reanimation of reckless behavior and moral hazard risks, [Treasury] Secretary [Timothy] Geithner should not extend the TARP but permit it to end on Dec. 31, 2009," he wrote.

Clearly, Geithner expected this report to stay silent on the topic of extension because he formally triggered the near-automatic extension of TARP on Dec. 9 without much fanfare. Officially, Dec. 9 was the release date for this report, but press notification wasn't received until Dec. 15.

Flexibility to Address Ongoing Problems


In a letter to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner told Congress the administration was winding down its use of TARP but wanted the continued flexibility to use the leftover money. Based on information in the COP report, $297.2 billion of net funding is available. The legislation that authorized TARP gives the administration that flexibility and Congress does not have to approve the request as long as the administration formally requests an extension.

TARP will now continue until October 2010. Geithner told Congress in his letter that "the recovery of the financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date." Geithner laid out these goals for TARP in 2010:

  • The government will continue to mitigate foreclosure for responsible American homeowners as it takes the steps necessary to stabilize our housing market.
  • Initiatives were recently launched to provide capital to small and community banks, which are important sources of credit for small businesses. Funds are also being reserved for additional efforts to facilitate small business lending.
  • Finally, the government may increase its commitment to the Term Asset-Backed Securities Loan Facility (TALF), which is improving securitization markets that facilitate consumer and small business loans, as well as commercial mortgage loans. It is expected that increasing the commitment to TALF would not result in additional cost to taxpayers.

The oversight panel did renew its call for more transparency in TARP, as it has done in every monthly report on the program, saying: "Transparency and accountability may be painful in the short run, but in the long run they will help restore market functions and earn the confidence of the American people." Since the administration continues to ignore this call and Congress has taken no steps to change that, it's purely a hollow call.

The panel also concluded that the country still needs to "consider how to respond legislatively to the financial crisis. It is clear that a failure to address the moral hazard issue will only lead to more severe crises in the future." But, there is "no consensus among experts and policymakers about how to prevent financial institutions from taking risks that are so large as to threaten the functioning of the nation's economy."

So even though TARP has proven to have failed in most of its goals, the program will continue to limp along, with Congress having little to say about it.


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