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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 .
  • Andrew Ross Sorkin on Lehman's Fuld, and 'Too Big to Fail'

    New York Times writer Andrew Ross Sorkin 's Too Big to Fail: Wall Street's Near-Death Experience is t he too-important-to-ignore book of the moment. The details about Hank Paulson's interactions with executives from his old firm, Goldman Sachs, when he was Secretary of the Treasury are getting a lot of attention ( from Felix Salmon, for example ). And Sorkin's detailed account of the government's efforts to broker a deal to merge Goldman Sachs and Wachovia after Lehman Brothers failed last September is another highlight (you can read an excerpt of the book that covers this at Vanity Fair ). Sorkin spoke about these and other hot topics from the book with Charlie Ros e. Here's an excerpt in which Sorkin talks about former Lehman CEO Richard Fuld: Watch the full interview 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 .)
  • Marketplace Whiteboard: Understanding the Difference Between Treasury Bonds, Notes, and Bills

    The US Treasury is set to auction off a record amount of debt this week, according to the Wall Street Journal 's Tom Lauricella . Defying conventional wisdom, the market for U.S. government debt is rallying thanks to an unusual combination of buyers including American households, banks and the Federal Reserve. The rally has taken Treasury yields -- which move opposite the bonds' price -- to their lowest levels since spring, and have helped push mortgage rates to their lowest levels in three months. The Fed's active presence has also raised questions of whether the rally is sustainable. The appetite for Treasurys, generally considered safe, points to an undercurrent of wariness about the health of the economy long term, even as investors have lately loaded up on riskier investments, like stocks and junk bonds. Typically, stocks and other risky investments move in the opposite direction of Treasurys in the short term. News of this "unlikely rally ," as Lauricella calls it, provides a good opportunity to step back and help people understand the difference between the Treasury bonds, notes, and bills. And Paddy Hirsch provides a nice primer on the latest Marketplace Whiteboard . Take a look:
  • Economists Continue Optimistic Streak in WSJ Forecasting Survey; Also Think the Government Should Not Have Let Lehman Collapse

    Most economists surveyed for the Wall Street Journal 's monthly forecast see a net job increase coming over the course of the next 12 months. The Journal's Phil Izzo points out that this is the first time in over a year that they have projected job growth. As a group, the economists still expect unemployment to top 10%--so that job growth is going to take a little while and things are going to get worse in the labor market before they get better. The survey shows relative optimism for growth in the coming months, with a prediction of 3% growth in the current quarter. Here's a look at the GDP projections over the course of the recession: Click here for interactive versions of the Journal's helpful graphics and charts associated with the forecasting survey. Given that we are at the one-year anniversary of the collapse of Lehman Brothers, one of the more interesting questions on the latest forecasting survey was whether the government should have saved the investment banking giant. Most of the economists who responded to that question thought the government made a mistake. Kelly Evans and Phil Izzo discuss that and other aspects of the survey in this video: Read the accompanying article on the survey 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 .
  • 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":
  • Geithner on Derivative Regulation and Executive Pay

    Treasury Secretary Timothy Geithner spoke with Newsweek's Jon Meacham at the National Press Club yesterday. While he said "things have clearly stabilized" with the economy, Geithner is not ready to say the economy has bottomed out. And he told Meacham that he expects recovery to be slow and painful. He also calrified his views on a few key issues: -The nature of this financial crisis: Geithner says, like all economic crises, we have gone from "excessive confidence" to excessive fear. But this recession is much more damaging...as Americans haven't seen anything like it in two generations." And he says the Obama Administration response is "the most aggressive approach to solving a financial crisis than we've seen from any serious country in a very long period of time." -Derivatives: The new regulations the federal government placed on derivatives last week would "have helped" lessen the crisis, "but they would not have been decisive" -Executive pay: Geithner says the government has no plans to cap pay, and he opposes such caps. Instead, he supports setting compensation "standards" to minimize risks. Here is a segment of the interview from Bloomberg : You can watch the full interview at the National Press Club's website .
  • Richard Clarida: 'US Will Not Be Leading Global Growth'

    Richard Clarida was Assistant Treasury Secretary during the George W. Bush Administration. Now he is a professor of economics at Columbia University , and strategic advisor for the global investment management firm PIMCO . Clarida says, while there have been some good signs in the economy of late, any talk of an end to the recession is premature. In this interview with Bloomberg, he stresses that recovery is gloing to be slow, and Americans need to "get used to a world where the US is the caboose on global growth, not the engine":
  • James Baker's Advice on Fixing the Banks

    James Baker was Treasury Secretary in the Reagan Administration, and Chief of Staff and Secretary of State for George H.W. Bush. And when he looks at the trouble in the US banking sector, he says we are "in danger of making the same mistakes the Japanese made" in the late 1980s. In this interview with Judy Woodruff , he says the federal government, and current Treasury Secretary Timothy Geithner, need to be thinking not just of "liquidity," but of "solvency."
  • Treasury Department White Paper and Fact Sheet on Public-Private Investment Program

    This morning Treasury Sec. Geithner briefed reporters on the Obama Administration's plan to deal with banks' toxic assets: The Public-Private Investment Program . And the Treasury Department has released a white paper on the plan. Here's the overview: Troubled real estate-related assets, comprised of legacy loans and securities, are at the center of the problems currently impacting the U.S. financial system. The Financial Stability Plan, announced on February 10th, outlined a broad approach to address this issue via the formation of Public-Private Investment Funds (“PPIFs”). Today Treasury is announcing the Public-Private Investment Program under which it will make targeted investments in multiple PPIFs that will purchase legacy real estate-related assets. Addressing the problems created by legacy assets should help to improve the health of the financial institutions where they are held, leading to an increased flow of credit throughout the economy, and helping improve market functioning in the near-term. Investments made by Treasury under the Public-Private Investment Program are intended to complement the other components of the Financial Stability Plan that have been announced, including the Capital Assistance Program, the Homeowner Affordability and Stability Plan, and the Consumer and Business Lending Initiative, continuing the Obama Administration’s efforts to improve the stability and functioning of the financial system. You can read the full white pape r here . The Treasury has also put out a helpful fact sheet here .
  • Toxic Cars: Mark Thoma Explains the Geithner Plan

    This morning Treasury Secretary Geithner will hold a briefing to lay out the details of the government's plan to deal with the toxic assets problem of American banks. He provided an overview of the plan in the Wall Street Journal . He writes that the new Public-Private Investment Program is designed to "increase the flow of credit and expand liquidity ." The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government. The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate. Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. Mark Thoma provides a useful way of understanding Geithner's plan. In Thoma's explanation, the toxic assets are cars, and he uses the toxic car problem to demonstrate three possible goverment responses: 1) The government purchases the toxic cars; 2) Subsidies and private partnerships (the Geithner plan); and 3) Nationalization. Read Government Intervention in the Market for Toxic Cars here .
  • The Obama Housing Plan

    President Obama announced his administration's plan for helping some 9 million homeowners avoid foreclosures through refinancing or modifying mortgages. The price tag for the plan could reach $275 billion. Here's an excerpt from the President's announcement in Phoenix: The Treasury Department provides a summary of the plan here . Treasury also has some interesting case studies to demonstrate how the plan works for three fictional families. Get the examples here . And the New York Times neatly lays out who qualifies for help in the plan here . A lot of economists have shared their reaction to the plan since yesterday afternoon. Mark Thoma of the University of Oregon has pulled together some of the best responses at Economist's View. Read them here .
  • 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 .