• COP March Oversight Report Finds Flaws with GMAC Bailout

    In its March report, the Congressional Oversight Panel takes the Treasury Department to task for a "missed opportunities to to increase accountability and better protect taxpayers money," as it "rescued" GMAC. Treasury did not, for example, condition access to TARP money on the same sweeping changes that it required from GM and Chrysler: it did not wipe out GMAC’s equity holders; nor did it require GMAC to create a viable plan for returning to profitability; nor did it require a detailed, public explanation of how the company would use taxpayer funds to increase consumer lending. Moreover, the Panel remains unconvinced that bankruptcy was not a viable option in 2008. In connection with the Chrysler and GM bankruptcies, Treasury might have been able to orchestrate a strategic bankruptcy for GMAC. This bankruptcy could have preserved GMAC’s automotive lending functions while winding down its other, less significant operations, dealing with the ongoing liabilities of the mortgage lending operations, and putting the company on sounder economic footing. The Panel is also concerned that Treasury has not given due consideration to the possibility of merging GMAC back into GM, a step which would restore GM’s financing operations to the model generally shared by other automotive manufacturers, thus strengthening GM and eliminating other money-losing operations. COP Chair Elizabeth Warren dsicusses the report's findings: You can read the full report here .

  • COP February Report: Commercial Real Estate Losses

    In its February report, the Congressional Oversight Panel looks at the threat commercial real estate losses pose to financial stability. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present ―"underwater"– that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties. The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses. The report goes on to point out that the larger danger comes if there are widespread defaults and we see hotels, stores, and office complexes closing. All of that would have a direct negative impact on jobs. COP Chair Elizabeth Warren discusses the dangers in her monthly report: Read the full February COP report here .

  • COP January Report: Time For a Clear Plan to Unwind TARP

    In December, Treasury Secretary Timothy Geithner announced that his department is extending the Troubled Assets Relief Program through October 3, 2010. So with less than ten months to go, part of the Treasury's responsibility will be to manage the end of TARP. But as the Congressional Oversight Panel's January report points out, the impact of TARP will be felt for long after October. And in their January report, the COP members call on Treasury to be more transparent in the department's effort to "unwind its stake in the financial markets": As Treasury enters the next stage of its administration of the TARP, it must learn from the mistakes it has made in the past – in particular, its failure to follow the money used to bail out large financial institutions. Because Treasury never required the institutions that received the first infusions of TARP funding to account for their use of these funds, taxpayers have not had a clear understanding of how their money has been used. As Treasury embarks on new programs, it must require that future recipients provide much greater disclosure of their use of TARP dollars. Finally, and perhaps most significantly, the TARP has raised the long-term challenge of how best to eliminate implicit guarantees. Belief remains widespread in the marketplace that, if the economy once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed too big to fail. This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks – those not too big to fail – do not enjoy. These implicit guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens, taxpayers will not allow their failure. So long as markets continue to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation’s economy, even after the last TARP program has been closed and the last TARP dollar has been repaid. Here is COP Chair Elizabeth Warren discussing the January report: Read the full report here .

  • COP November Report: Government Guarantees in TARP and the Costs and Benefits to American Taxpayers

    When the Treasury introduced the Troubled Assets Relief Program late last year, the government guaranteed the values of hundreds of billions of dollars in bank assets. The move was made, to put it very simply, to prevent a panic and protect the assets of millions of American taxpayers. The Congressional Oversight Panel , in its November report, concludes that the federal guarantees did that successfully. But the report also shows that the guarantees now account for the "single largest element of the government's response to the financial crisis," and that raises some timely questions for Treasury: These guarantee programs also created significant moral hazard. Guarantees create price distortions and can lead market participants to engage in riskier behavior than they otherwise would. In addition to the explicit guarantees analyzed in the Panel's report, the government's broader economic stabilization effort may have signaled an implicit guarantee to the marketplace: the American taxpayer stands ready to provide a financial backstop for certain markets and large market players to avert possible economic collapse. To the degree that investors, lenders and borrowers believe that such an implicit guarantee remains in effect, moral hazard will continue to distort the market. The extraordinary scale of these guarantees, the significant risk to taxpayers, and the corresponding moral hazard leads the Panel to conclude that these programs should be subject to extraordinary transparency. The Panel specifically identified the guarantee of Citigroup assets under AGP -- the largest single guarantee offered to date -- and strongly urges Treasury to provide regular, detailed disclosures about the status of the assets backing up this guarantee. Treasury should disclose greater detail about the rationale behind guarantee programs, the alternatives that may have been available and why they were not chosen, and whether these programs have achieved their objectives. This should include an analysis of why Citigroup and Bank of America were selected for AGP and not others. Here is COP Chair Elizabeth Warren introducing the November report: You can read the full report here .

  • Congressional Oversight Panel October Report: Assessing Foreclosure Mitigation Efforts

    The Congressional Oversight Panel addressed the problem of foreclosures in its March report , and is now revisiting the issue in its October report. Since March, the Treasury Department has initiated the Making Home Affordable (MHA) program. And COP has concerns over the scope, scale, and permanence of the MHA's programs: While Treasury must consider programmatic changes to meet these challenges, so too must it adapt and improve the existing programs in several key ways. Given the issues facing MHA, Treasury must be fully transparent about the effectiveness of its programs, as well as the manner in which they operate. Although Treasury‟s data collection has improved significantly since the Panel‟s March report, it should be expanded, and the information should be made public. Treasury should release its Net Present Value (NPV) model, which is used to determine a homeowner‟s eligibility for HAMP. The new denial codes should be implemented to provide borrowers with a specific reason for denying a modification and a clear path for appeal. Denial information should also be aggregated and reported to the public. Here is COP chair Elizabeth Warren discussing the October report: You can read the full report here . And a dissenting view from COP member Rep. Jeb Hensarling (R-TX) here .

  • COP September Report: US Automakers, Government Ownership, and Potential Conflicts

    In its September report, the Congressional Oversight Panel (COP) looks into the impact of the use of TARP funds to keep US automakers Chrysler and GM from going under. The panel looked first at whether Treasury broke any rules in bailing out the companies, and found that the government's behavior was "largely in line with the practices of other large bankruptcies," and that no bankruptcy laws were broken. But there are now added concerns about how the intersection of politics and business puts the government in a tricky situation as part owner of the automakers. And COP, predictably, is calling for more transparency: American taxpayers now own 10 percent and 61 percent of the new Chrysler and GM companies respectively. Treasury's support for the automotive industry differed significantly from its assistance to the banking industry. The bulk of the funds were available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management. The government's role raises serious oversight issues, particularly Treasury's conflict between competing objectives. The Panel recommends that, to mitigate the potential conflicts and political issues inherent in owning Chrysler and GM shares, Treasury should take exceptional care to explain its decision making and provide a full, transparent picture of its actions. The Panel also recommends that Treasury consider placing its GM and Chrysler shares in an independent trust that would be insulated from political pressure and government interference. You can read the full report here . Also, COP chair Elizabeth Warren speaks about the September report in this video:

  • COP August Report Focuses on Troubled Assets

    In its August report, the Congressional Oversight Panel (COP) looks at toxic assets and the risks they pose for US banks and the economy. As the report points out, the Treasury 's Public Private Investment Program (PPIP) was designed to root out both "troubled securities" and "troubled loans." COP members appear to be concerned that the trouble loans portion of the program--administered by the FDIC --was postponed as the FDIC stated "that the banks' recently demonstrated ability to access the capital markets has made a program to deal with troubled whole loans unnecessary at this time." That becomes a problem if the economy worsens, and, the COP report states, small banks are especially at risk: The problem of troubled assets is especially serious for the balance sheets of small banks. Small banks‟ troubled assets are generally whole loans, but Treasury‟s main program for removing troubled assets from banks‟ balance sheets, the PPIP will at present address only troubled mortgage securities and not whole loans. The problem is compounded by the fact that banks smaller than those subjected to stress tests also hold greater concentrations of commercial real estate loans, which pose a potential threat of high defaults. Moreover, small banks have more difficulty accessing the capital markets than larger banks. Despite these difficulties, the adequacy of small banks‟ capital buffers has not been evaluated under the stress tests. The below graph shows how much capital banks would need under two different scenarios for loan loss rates. In each scenario, banks in the $1-100 billion (in assets) range suffer much greater capital shortfalls than the 18 large banks that went through the Treasury's stress tests. Read the full report here . Here is COP chair Elizabeth Warren explaining the report:

  • COP Examines Early TARP Repayment

    The Treasury Department has allowed 10 banks to exit the Troubled Assets Relief Program (TARP), by paying back the funds they received last year. Some have looked at this as a strong sign that the US banking system is well on its way toward recovery. But the Congressional Oversight Panel (COP)--established to evaluate the effectiveness of TARP--wants to be sure that the American taxpayer is not losing out in the process. After all, taxpayers put up the money for TARP, and assumed significant risk in the process. Theoretically, taxpayers are entitled to a return on their investment. From the COP July Report: When Congress authorized the commitment of $700 billion to rescue the financial system, it decided that taxpayers should have the opportunity to share in a potential upside if the banks returned to profitability. The opportunity to profit from TARP investments comes through special securities called warrants. Banks that received financial assistance were required to give the government warrants for the future purchase of some of their common shares. Simply put, warrants are the right to buy shares of a company at a set price at some point in the future. For example, a warrant might allow Treasury to buy shares of a bank for ten dollars at any time in the next ten years. If the share price rises above ten dollars, Treasury could pay less than market value for the shares, then sell them and turn a profit. In this way, the banks were repaying the taxpayers for their investment by sharing some of their future profitability. Now some members of the panel are concerned that the early repayment might cut taxpayers out. COP Chair Elizabeth Warren explains: Read the full COP July Report here .

  • Warren to Geithner: 'Why Different Standards for Automakers and Banks?'

    Treaury Secretary Timothy Geithner went befor the Congressional Oversight Panel yesterday, where COP chair Elizabeth Warren asked the question on a lot of people's minds these days: "Why are the US automakers that took bailout money under TARP being treated so differently from US banks that took federal funds?"

  • Special Inspector General for TARP Calls for More Transparency, Opens Investigations

    SIGTARP Neil Barofsky Treasury Secretary Timothy Geithner will appear before the Congressional Oversight Panel --the five member group set up by Congress to evaluate the Treasury's implementation of TARP funds--later today. Geithner will not only be answering questions raised in COP's latest report , but will also have to address the findings of one Neil Barofsky . Barofsky is better known as SIGTARP: the special inspector general for the Troubled Asset Relief Program. This morning Barofsky released a 250-page report full of concerns over the federal government's bailout actions to date. In the report, he calls for more transparency fromt he government on where the money is going, and pushes for recipients to report clearly how they are using the funds: SIGTARP continues to recommend that Treasury require all TARP recipients to report on the actual use of TARP funds in the manner previously suggested. This recommendation is particularly important with respect to the potential expansion of the Capital Purchase Program (“CPP”) to include large insurance companies. The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution’s core business and may be little more than a way to gain access to the low-cost capital provided under TARP. Similarly, in light of the controversy surrounding AIG’s use of Government assistance, both through the paying of bonuses and in its dealings with counterparties, failure to impose this requirement with respect to the injection of yet another $30 billion into AIG would not only be a failure of oversight, but could call into further question the credibility of the Government’s efforts with respect to the assistance provided to AIG. This recommendation applies not only to capital investment and lending programs involving banks and other financial institutions, but also to programs in which TARP funds are used to purchase troubled assets, including details of each transaction in the Public-Private Investment Program (“PPIP”) as well as all transactions concerning the surrender of collateral (including the identity of the surrendering borrowers) in the Term Asset-Backed Securities Loan Facility (“TALF”). Barofsky also reports that he has opened 20 criminal investigations and six audits into the potentially wasteful spending (misdirected funds) of TARP dollars. The New York Times provides the full report here .

  • COP Asseses Six Months of TARP

    Six months ago, Congress passed the Emergency Economic Stabilization Act of 2008 , allocating $700 billion to the Treasury Department. The Treasury then instituted the Troubled Assets Relief Program , or TARP, through which it distributed bailout funds to financial institutions. The Congressional Oversight Panel (COP) was established to evaluate the effectiveness of Treasury's actions. In its April report, the Panel assesses six months of TARP. A 3-2 majority of the panel approves of the Treasury's general actions so far: If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. Current prices may, in fact, prove not to be explainable without the liquidity factor. Even in areas of the country where home prices have declined precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even under-collateralized assets should not be trading at pennies on the dollar. Prices are being partially subjected to a downward self-reinforcing cycle. It is this notion of a liquidity discount that supports the potential of future gain for taxpayers and makes transactions under the CAP and the PPIP viable mechanisms for recovery of asset values while recouping a gain for taxpayers. Here is COP Chair Elizabeth Warren discussing the April report: You can read the full report here . The panel's two dissenting members, Richard Neiman and former NH Senator John Sununu , offer an alternative view here .

  • Bad Moments in Banking: Congressional Oversight Panel Gets a History Lesson

    The Congressional Oversight Panel was set up to oversee the Treasury Department's implementation of TARP and the effectiveness of distributing federal bailout money. Chair Elizabeth Warren and the panel have kept their process highly transparent-- something they've called on the Treasury Department to do as well . Earlier this month they brought in experts on notable banking crises of the last 100 years, and had them share lessons on goverment responses to those crises. The Savings and Loan collapse of the 1980s, Japan's banking crisis and its monetary policy reaction in the 1990s, Sweden's nationalization of banks --also in the 1990s, and of course the Great Depression , were the lead topics. The experts were Bo Lundgren , Director General, Swedish National Debt Office and Former Swedish Minister of Financial and Fiscal Affairs; Richard Katz , Editor-in-Chief, The Oriental Economist and author of Japan: The System That Soured—The Rise and Fall of the Japanese Economic Miracle and Japanese Phoenix ; David C. Cooke , former executive director of Resolution Trust Corporation; and Eugene White, p rofessor of economics, Rutgers University, and research associate at the National Bureau of Economic Research.

  • COP Chair Calls for More Transparency From Treasury

    Last week the Congressional Oversight Panel, created last fall to oversee the Treasury Department's implementation of the Troubled Assets Relief Program (TARP), released its third report on how and where TARP money has been spent. You may have missed the report amid all the stimulus bill negotiations and debates, but you probably caught the headline that the Treasury got back a lot less in assets than it paid in: The Panel’s analysis revealed that in the ten largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66. This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent. The panel's chair Elizabeth Warren, says the Treasury should have been clearer with the American people in explaining the report's findings in the below video. You can find the full report here .