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  • Congressional Oversight Panel's Final Report

    When Congress created the Troubled Asset Relief Program in the fall of 2008, it also established the Congressional Oversight Panel to keep an eye on the Treasury 's actions, and effectiveness, in meting out TARP dollars. On April 3, COP will close up shop, as mandated in the legislation that created TARP. From October 2008 on, COP has released a monthly report on TARP actions. The 30 reports provide a compelling historical record of TARP, and of the federal government's response to the Global Economic Crisis. This final report is a comprehensive one--a summary of Treasury's efforts. And it reads as a tough-but-fair report: In order to evaluate the TARP‘s impact, one must first recall the extreme fear and uncertainty that infected the financial system in late 2008. The stock market had endured triple digit swings. Major financial institutions, including Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers, had collapsed, sowing panic throughout the financial markets. The economy was hemorrhaging jobs, and foreclosures were escalating with no end in sight. Federal Reserve Chairman Ben Bernanke has said that the nation was on course for "a cataclysm that could have rivaled or surpassed the Great Depression." It is now clear that, although America has endured a wrenching recession, it has not experienced a second Great Depression. The TARP does not deserve full credit for this outcome, but it provided critical support to markets at a moment of profound uncertainty. It achieved this effect in part by providing capital to banks but, more significantly, by demonstrating that the United States would take any action necessary to prevent the collapse of its financial system. Some of the more interesting themes of the report include the public stigma that COP says "burdened" the Treasury Department: Because the TARP was designed for an inherently unpopular purpose - rescuing Wall Street banks from the consequences of their own actions - stigmatization was likely inevitable. Treasury's implementation of the program has, however, made this stigma worse. For example, Treasury initially insisted that only healthy banks would be eligible for capital infusions under the CPP. When it later became clear that some TARP-recipient banks were in fact on the brink of failure, all participating banks, even those in comparatively strong condition, became tainted in the public eye. Further, many senior managers of TARP-recipient institutions maintained their jobs and their substantial salaries, and although shareholders often suffered meaningful dilution, they were not wiped out. To the public, this may appear to be evidence that Wall Street banks and bankers can retain their profits in boom years and shift their losses to taxpayers during a bust - an arrangement that is anathema to market discipline in a free economy. And transparency (or lack thereof): Beginning with its very first report, the Panel has repeatedly expressed concerns about the lack of transparency in the TARP. In too many cases, especially in late 2008 and early 2009, Treasury either declined to release information that it possessed about the program or declined to require TARP-recipient institutions to reveal information about their use of taxpayer funds. In perhaps the most profound violation of the principle of transparency, Treasury decided in the TARP's earliest days to push tens of billions of dollars out the door to very large financial institutions without requiring banks to use the funds in any particular way or even reveal how the money was used. As a result, the public will never know to what purpose its money was put. Other transparency problems include Treasury's refusal to explain how it valued the stock warrants it received in exchange for its TARP investments and the joint failure of Treasury and the Federal Reserve to disclose enough details of the 2009 stress tests to permit the results to be duplicated or challenged by outside parties. Read the full report here . Here is COP Chair Ted Kaufman introducing and summarizing the final report:

  • COP November Report: "Robo-Signed" Foreclosures and Mortgage Irregularities

    The Congressional Oversight Panel has released its November report. This month the panel explores the potential impact of "mortgage irregularities" and "foreclosure mitigation" on the mortgage market and the economy. The panel took a close look at some of the foreclosure practices of banks, especialy the practice of "robo-signing" foreclosure related affidavits. From the release: If documentation problems prove to be pervasive and throw into doubt the ownership of pooled mortgages, the consequences could be severe. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home. Further wide-scale disruptions in the housing market, if they arose, could cause significant harm to financial institutions. For example, if a Wall Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought it sold off years ago, it could face billions of dollars in unexpected losses. To put in perspective the potential problem, the mortgage-backed securities market totals approximately $7.6 trillion, so irregularities that affect even a small percentage of this market could have dramatic effects on bank balance sheets - potentially posing risks to the very financial stability that the Troubled Asset Relief Program was designed to protect. The Panel urges Treasury and bank regulators to undertake new "stress tests" to gauge the ability of major financial institutions to cope with a potential documentation-related crisis. COP chair Sen. Ted Kaufman discusses the report in this video: Read the full report here.

  • Congressional Oversight Panel on the Global Impact of TARP

    In its latest study of the impact of the federal government's bailout efforts the Congressional Oversight Panel looks beyond US borders. The COP August report focuses on the international impact of TARP, and finds that US rescue efforts provided some significant benefits overseas. From the report: Faced with the possible collapse of their most important financial institutions, many national governments intervened. One of the main components of the U.S. response was the $700 billion Troubled Assets Relief Program (TARP), which pumped capital into financial institutions, guaranteed billions of dollars in debt and troubled assets, and directly purchased assets. The U.S. Treasury and Federal Reserve offered further support by allowing banks to borrow cheaply from the government and by guaranteeing selected pools of assets. Other nations‟ interventions used the same basic set of policy tools, but with a key difference: While the United States attempted to stabilize the system by flooding money into as many banks as possible – including those that had significant overseas operations – most other nations targeted their efforts more narrowly toward institutions that in many cases had no major U.S. operations. As a result, it appears likely that America‟s financial rescue had a much greater impact internationally than other nations‟ programs had on the United States. This outcome was likely inevitable given the structure of the TARP, but if the U.S. government had gathered more information about which countries‟ institutions would most benefit from some of its actions, it might have been able to ask those countries to share the pain of rescue. For example, banks in France and Germany were among the greatest beneficiaries of AIG‟s rescue, yet the U.S. government bore the entire $70 billion risk of the AIG capital injection program. The U.S. share of this single rescue exceeded the size of France‟s entire $35 billion capital injection program and was nearly half the size of Germany‟s $133 billion program. COP Chair Elizabeth Warren discusses the report's key findings: Read the full report here .

  • COP June Report: The AIG Rescue

    The Congressional Oversight Panel 's June Report is now out, and in it the members of the panel are critical of the federal government's rescue of AIG in September, 2008. First, the panel argues that the Hank Paulson led Treasury Department did not do its due diligence in examining all the options it had before it committed $85 billion of taxpayer funds to keep the insurance giant from collapsing. But their bigger criticism comes with the actual rescue plan, which COP members say shifted the burden of AIG's failings from its creditors to all taxpayers and "distorted the marketplace by transforming highly risky derivative bets into fully guaranteed payment obligations." From the report: In the ordinary course of business, the costs of AIG‟s inability to meet its derivative obligations would have been borne entirely by AIG‟s shareholders and creditors under the well-established rules of bankruptcy. But rather than sharing the pain among AIG‟s creditors – an outcome that would have maintained the market discipline associated with credit risks – the government instead shifted those costs in full onto taxpayers out of a belief that demanding sacrifice from creditors would have destabilized the markets. The result was that the government backed up the entire derivatives market, as if these trades deserved the same taxpayer backstop as savings deposits and checking accounts. One consequence of this approach was that every counterparty received exactly the same deal: a complete rescue at taxpayer expense. Among the beneficiaries of this rescue were parties whom taxpayers might have been willing to support, such as pension funds for retired workers and individual insurance policy holders. But the across-the-board rescue also benefitted far less sympathetic players, such as sophisticated investors who had profited handsomely from playing a risky game and who had no reason to expect that they would be paid in full in the event of AIG‟s failure. Other beneficiaries included foreign banks that were dependent on contracts with AIG to maintain required regulatory capital reserves. Some of those same banks were also counterparties to other AIG CDSs. Here is COP chair Elizabeth Warren discussing the key findings of the June report: 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 December Report Gives Treasury and TARP Mixed Grade

    The Troubled Asset Relief Program (TARP) has an extension. Treasury Secretary Timothy Geithner announced yesterday that Treasury is extending the bailout program through next October. TARP was slated to end on December 31 if Geithner didn't trigger the extension. This decision is sure to spur a new round of debates between those who believe TARP helped stave off economic calamity, those who think it is a waste of federal dollars, and those who believe it worked but now funds should go elsewhere. When TARP was launched 14 months ago, Congress tasked the Congressional Oversight Panel with closely watching the use of TARP funds. And in the latest COP monthly report, the panels' members weigh in on the effectiveness of the program. And the panel concluded that the data they studied shows that, in the end, the Treasury's actions were "decisive enough to stop the panic and restore confidence among key financial institutions and actors." But they find it hard to give TARP much credit for fixing any core structural problems in the financial system that may have been responsible for the crisis: While strong government action helped prevent a worse crisis, it may have done so at a significant long run cost to the performance of our market economy. Implicit government guarantees pose the most difficult long-term problem to emerge from the crisis. Looking ahead, there is no consensus among experts or policymakers as to how to prevent financial institutions from taking risks that are so large as to threaten the functioning of the nation‘s economy. Congress is currently grappling with this issue as it considers 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. Since its inception, the TARP has gone through several different incarnations. It began as a program designed to purchase toxic assets from troubled banks but quickly morphed into a means of bolstering bank capital levels. It was later put to use as a source of funds to restart the securitization markets, rescue domestic automakers, and modify home mortgages. The evolving nature of the TARP, as well as Treasury‘s relative lack of fixed goals and measures of success for the program, make it hard to provide an overall evaluation. But the Panel remains convinced, as it has been since its inception, that Treasury should make both its decision-making and its actions more transparent. Despite the difficult circumstances under which many decisions have been made, those decisions must be explained to the American people, and the officials who make them must be held accountable for their actions. 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. COP Chair Elizabeth Warren explains some of the key findings in the December report in this short video: Read the full report here . Go to page 120 for a dissenting view from panel member Rep. Jeb Hensarling (R-TX).

  • 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 .

  • 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 .

  • COP's June Report: Stress Tests Were 'Reasonable,' May Need to be Repeated

    In its June report, the Congressional Oversight Panel (COP) gives the Treasury Department's "stress tests" a passing grade, though not exactly high marks. And the panel warns that "serious concerns remain," and offers these recommendations: highlights the importance of America’s small businesses to the country’s overall economic well being: -The unemployment rate climbed to 9.4% in May, bringing the average unemployment rate for 2009 to 8.5%. If the monthly rate continues to increase, the 2009 average may exceed the 8.9% assumed under the more adverse scenario, suggesting that the stress tests should be repeated if that occurs. -Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books. -Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators. -Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system. COP chair Elizabeth Warren explains the panel's approach to evaluating the stress tests by comparing them to the types of questions American families are asking with regard to their own financial standing during the recession: Read the full report here .