The Congressional Oversight Panel‘s final report on the Troubled Asset Relief Program was, in many areas, its most deeply critical.
Citing such faults as a lack of transparency, an absence of clear goals, conflicting interests, and the elevation of the “too big to fail” philosophy to the level of official policy, the COP ended its run by assigning very low marks to the Treasury Departments’s handling of TARP.
The 233-page report acknowledges that America has found its way through a “wrenching recession” and managed to avoid a second Great Depression, with the country on its way to economic recovery (page 182). Yet the report goes to great lengths to avoid the impression that this turnaround was solely, or even primarily the product of the Treasury or TARP.
“Indeed,” the passage continues, “the TARP in isolation may have been insufficient to make much of a difference to the broader economy.”
One of the more striking subsections of the report (pages 141-142) casts the American International Group Inc. fiasco as the model for “the tangled nature of relationships on Wall Street” that eroded both investor confidence and the general public’s perception of a game played with few if any, rules.
As the saga unfolded, investment bankers, regulators, and various law firms shifted allegiances and roles, sometimes in a matter of moments.
Many government regulators and TARP officials, for example, were former employees of the private entities they were now charged to oversee.
The Treasury defended its actions and hiring policies at the time by claiming that only Wall Street insiders would have the acumen to extricate the deeply ingrained relationships between and among fellow insiders.
The report faults regulators for failing to recognize “that at a time when the American taxpayer was being asked to bear extraordinary burdens, [government entities] had a special responsibility to ensure that their actions did not undermine public trust by failing to address all potential conflicts and the appearance of conflicts that could arise” (page 141).
COP noted that the lack of transparency inherent in TARP had its roots in the earliest injections of capital into “very large financial institutions without requiring banks to reveal how the money was used” (page 187).
Such opaque operations ensured that taxpayers would never be able “to hold the Treasury fully accountable for its actions” from the incipient phases of the bailout. It is unlikely that the public will ever know how its investments were utilized, the panel said, and it is all but certain that popular opinion of TARP will always be tinged with anger due to the secrecy surrounding Treasury’s efforts.
The report at one point attributes what it characterized as the Treasury’s lack of clear goals more to the agency’s failure to collect sufficient data initially and to update relevant information as programs have run their course. In the case of the Home Affordable Modification Program (HAMP), for example, the COP claims that the Treasury has “flown blind,” resulting in the inability to spot trends affecting the behavior of lenders and mortgage servicers (page 11).
When the president unveiled HAMP in early 2009, it was announced that it would avert 3 million to 4 million foreclosures. The program is now targeted to prevent closer to 700,000 to 800,000 foreclosures, although the “Treasury has never formally announced a new target.”
The oversight panel noted that the wider economy is perhaps most seriously threatened by the TARP’s near canonization of the “too big to fail” approach, which has the effect of distorting markets.
Bailoutsleuth noted in a February 15th, 2011 story that the COP had been expressing growing official concern about that policy when members Kenneth R. Troske and Mark McWatters claimed that the strategy was courting disaster. As long as the Treasury would bail out companies deemed “too big to fail,” they opined, such institutions would be encouraged to take excessive risks, since they can “reap the benefits, but will not suffer the consequences if the gambles are unsuccessful.”
The latest report claims that the moral hazard of such approaches is especially harmful to banks that are “small enough to fail.” Markets have assumed that it is safer to do business with large institutions and that, “as a result, small banks continue to pay more to borrow than very large banks–an ongoing distortion in the marketplace” (page 10). “Credit rating agencies continue to adjust the credit ratings of very large banks to reflect their implicit government guarantee.”
The report is COP’s 30th. The panel will terminate, by statute, on April 3.