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  • 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 .

  • Pew Project for Excellence in Journalism Audit on Economic Reporting Shows Reactive Press

    The Obama Administration has been writing the narrative for economic news coverage since Inauguration Day, according to the Pew Project for Excellence in Journalism . The PEJ analyzed coverage from February 1 through July 3 and found that government action was the impetus for nearly half the stories--49% to be exact. The media "triggered" 23% of stories themselves through investigative pieces, interviews, or other types of stories. Businesses drove the story line almost as often as the media themselves--triggering 21% of the stories. The government led the way even more during February and March, with all the stimulus package and TARP stories dominating the news. The report shows a media that was responding to events more than seeking out root causes and leading investigations. From the report: The study also sheds some light on the question of how aggressive and proactive the press itself was in covering the economy story. Overall, about one-fifth of the economic stories were triggered primarily by the initiative of journalists. But the degree of media enterprise varied notably depending on the topic—and the bigger topics tended to have less press enterprise while the smaller ones had more. When it came to the biggest economic storylines, the media were more reactive. In coverage of the banking sector problems, for instance, press enterprise and investigations triggered only 14% of stories, and on stimulus coverage, 15%. The media were more pro-active in monitoring the housing crisis (23%) and quite aggressive when it came to covering the unemployment picture, with press enterprise and investigation accounting for 35% of the triggers. And in one significant storyline, the crisis’ impact on ordinary citizens, press enterprise proved to be the trigger for more than half (54%) of the stories. Among the other findings by the PEJ report: -Three storylines have dominated: efforts to help revive the banking sector, the battle over the stimulus package and the struggles of the U.S. auto industry. Together they accounted for nearly 40% of the economic coverage from February 1 through August 31. Other topics related to the crisis have been covered much less. As an example, all the reporting of retail sales, food prices, the impact of the crisis on Social Security and Medicare, its effect on education and the implications for health care combined accounted for just over 2% of all the economic coverage -Fully 76% of the datelines on economic stories studied during the first five months of the Obama presidency were New York (44%) or metro Washington D.C. (32%). Only about one-fifth (21%) of the stories originated in any other city in the U.S., and about a quarter of those emanated from two other major media centers: Atlanta and Los Angeles. -Once the economic situation showed some signs of improvement—and the political fights over legislative action subsided—media coverage began to diminish. After accounting for 46% of the overall news coverage in February and March, for instance, coverage of the economic crisis dropped by more than half (to 21% of the newshole studied) from April through June. And in July and August, it fell even further (to 16%). The clearest example came in cable news. Once the political battles subsided, coverage fell by about two-thirds from March to April. 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 .

  • 12 Months of TARP Funds

    This weekend marked 12 months since the Treasury Department launched the Troubled Assets Relief Program. In that time, nearly $450 billion of the $700 billion in TARP funds have been distributed. Here's a look at how much money has flowed to whom: (H/T CNN Money's David Goldman and his article TARP: Taxpayers on the hook for $200 billion .)

  • Bernanke: 'Recession is very likely over'

    Add Fed Chair Ben Bernanke's voice to the growing chorus that the recession appears to be over and a long slow recovery is beginning. Bernanke spoke at the Brookings Insititution yesterday about the events of the last year, and during his speech he noted that he was well aware that forecasters were announcing the end of the recession. Here is a key excerpt from the speech. But the general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession, because of ongoing headwinds, including still ongoing financial and credit problems, you know, deleveraging by households, the needs for adjustments in the economy, sectoral adjustments in the economy, the need for a fiscal exit at some point, many, many factors that will likely, at least based on current information, make the 2010 recovery moderate, and in particular, not much faster than sort of the underlying potential growth rate of the economy. And the arithmetic is that unless the economy grows, you know, significantly faster than its longer term growth rate, it’ll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force, and therefore, the unemployment rate would tend to come down quite slowly. So that’s a risk, that’s a possibility. Of course, there is on both sides of that forecast; we could have a stronger recovery, we could have a weaker recovery, but if we do, in fact, see moderate growth, but not growth much more than the underlying potential growth rate, then, unfortunately, unemployment will be slow to come down. It will come down, but it may take some time. Obviously, that’s a very serious concern, and that’s one reason why, even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time as many people will still find that their job security and their employment status is not what they wish it was, and so that’s a challenge for us and all policy-makers going forward. You can read a full transcript of the speech, and watch the full session by clicking 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 .

  • New Push to Control Executive Pay; Grading Past Efforts

    According to the New York Times , the Obama Administration is going to require banks and corporations that receieved federal bailout money to clear any changes in its pay for top management with Kenneth Feinberg --the administration's new "pay czar." The proposal is part of a broad set of regulations on executive compensation expected to be announced by the administration as early as this week. Some of the rules are required by legislation enacted in the wake of the worst financial crisis since the Great Depression , and they would apply only to companies that received taxpayer money. Others, which are being described as broad principles, would set standards that the government would like the entire financial industry to observe as banks and other companies compensate their highest-paid executives, though it is not clear how stringent regulators will make them. This is not the first time the federal government has tried to regulate executive pay. Joann Lublin , management news editor for the Wall Street Journal , recounts some past efforts, and says "the record is not a very good one":

  • Stress Test Results: 10 of 19 Banks Need to Raise More Capital

    The Fed has released results of the government's stress tests for 19 of the nation's largest banks, and almost half the banks need to go and raise capital. 10 of the banks will need to raise a total of $74.6, according to the Fed. Bank of America leads the way, needing to raise $33.9 billion. The remaining 9 banks are now in the position of rehabbing their public image and working to pay back TARP funds. While the markets responded favorably to the stress test results, the Wall Street Journal points out that there is a potential downside: Experts warn that the tests could have a serious unintended consequence: Loans could be harder to come by for consumers and businesses. That's because the government's intense focus on thicker capital cushions might prompt banks to hoard cash and further curtail lending, said Jim Eckenrode, banking research executive at TowerGroup, a financial consulting firm. He said banks will have less room to offer consumers low interest rates, while corporate customers may have a tougher time getting financing for commercial real-estate and property development. There also remains the question of whether these stress tests were stressful enough. Nouriel Roubini argues it was not. You can watch him make his argument here . Read the Fed's full report here .

  • Where the Returned TARP Money Goes

    There has been much discussion of the bank bailout funds this week--and some of it is good news for those who want financial insitutions to start giving back. Goldman Sachs and JP Morgan want to repay their TARP money. And earlier this week Treasury Secretary Geithner says he expects $25 billion of the TARP funds to be repaid by the end of the year. So where does that money go? According to The Explainer -- Slate 's Christopher Beam --the money goes back into the program: If a bank wants to return its TARP money, it gets siphoned back—by wire, usually—into the original pool. In his testimony, Geithner said there's $110 billion left of the original $700 billion allocated by the TARP program. So once the expected $25 billion is returned, the remaining stash should reach $135 billion. The return of the money seems like a good thing all around. But The Explainer points out there is a downside: Of course, there are risks to letting the banks return money. One is that they'll need it again, which would create a public relations snafu. Then there's a systemic risk problem: If one bank appears stronger than others, the weaker ones might get hurt as investors yank their money, and short sellers bet against them. That's why Geithner is insisting on completing the stress test—which measures the banks' strength—before deciding which big companies get to return their money. Read The Explainer's full explanation here . And track the returned money at Slate's Tarp-O-Meter 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.
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