Oversight Panel Notes Crucial TARP Shortcomings

This week, the five-member Congressional Oversight Panel established to monitor the government's bailout efforts released its most comprehensive assessment to date, Taking Stock: What Has the Troubled Asset Relief Program Achieved?  The report represents the panel's review of what TARP accomplished in its first year, and where the program has fallen short.

The report credits TARP with partially relieving the immediate panic that hit the financial markets 14 months ago, thereby helping to fend off "a more acute crisis." But it also points repeatedly to TARP's shortcomings and to the deep-rooted government guarantees entangling the nation's largest financial institutions, which may take years to unwind.

Although TARP is only a single part of a larger plan to revive the economy, some pressures it was intended to alleviate remain volatile. According to the report,credit is difficult to obtain and those with access are hesitant to procure it. Many larger banks seem to be holding onto the very troubled mortgage-related instruments that helped precipitate the crisis, in the hope that the market might soon rebound. The liquidity flowing from larger institutions is still choked and smaller banks, crushed by the downturn in the commercial and residential real estate market, are failing in record numbers.

The oversight panel concluded that drastic government actions to create jobs and curb joblessness have not done enough.  Indeed, October unemployment rates were at their highest levels since June 1983.  Both employed and unemployed workers continue to lose their homes.

Foreclosure rates are still on the rise, and the report cites projections that they will continue to do so until 8 to 13 million homeowners have been foreclosed upon.  The panel noted that TARP's foreclosure-mitigation programs could hardly begin to address that problem.

The report also states that much of the market stability that has emerged in the last year is dependent on government funding. That aid will need to be "scaled back relatively soon," though it is unclear whether the market will find its own footing.  The panel said the government's rush to save larger financial institutions also "signaled an implicit government guarantee" that there are financial institutions that are simply too big to fail. Major banks are thus taking large risks while pocketing the perceived assurance that they will again be bailed out should they face collapse.

Small to medium sized banks have no such assurance, as the 124 failures through the first 11 months of 2009 attest.  They have been clinging to their assets, to the detriment of small businesses that often rely on smaller banks for operating capital.

The report strongly criticized the Treasury Department for its refusal to cooperate with the Oversight Panel, for its "failure to articulate clear goals or to provide specific measures of success for the program," and for its reluctance to provide transparency and accountability for TARP as a whole. The panel noted that it called for more progress on the latter concern every month since December 2008.