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Treasury Secretary Talks TARP Before Congressional Oversight Panel

June 24, 2010 

 

In a hearing held Tuesday by the Congressional Oversight Panel, Treasury Secretary Timothy Geithner said he remained optimistic about taxpayers recovering their colossal investment in the Troubled Asset Relief Program (TARP), a major component of the economic stimulus package, but members of the Panel and outside reports continue to raise concerns about the ongoing potential for taxpayer losses.

This hearing came in the wake of the panel’s June 10 report, in which it lambasted the government for putting the burden of the AIG bailout on taxpayers rather than pressuring private entities to provide the funds. The report also criticized the government for failing to recognize blatant conflicts of interest in the AIG case, such as lawyers who simultaneously represented the Federal Reserve and banks that were supporting AIG.

In their opening statements, members of the panel raised several key questions: Has TARP been carried out with the highest degree of transparency and accountability? Have its programs actually helped families and small businesses, or have they simply bailed out Wall Street? How much will taxpayers lose as a result of TARP? Has TARP succeeded in fixing the systemic flaws in the financial system that contributed to economic collapse?

Not surprisingly, Secretary Geithner’s testimony presented an optimistic picture of TARP’s effects. He reminded the panel that, as a result of TARP and other financial rescue programs, the economy has grown, half a million jobs have been created, the cost of credit has fallen, and the American economy has been pulled back from the brink of complete failure. More than half of the money loaned out by the Treasury through TARP has already been repaid, and Geithner insists that more will be recovered as the programs phase out and ultimately end in October 2010.  

Meanwhile, estimates of the overall cost of TARP to the taxpayers are continuing to fall, from approximately $700 billion at the program’s conception to $105 billion at the present time. While $105 billion is still a major loss for taxpayers, Geithner insists that this estimate is too high and will continue to fall as more TARP loans are paid back. There is even a potential for taxpayers to make a profit from TARP, since many recipients are paying back their TARP capital with interest after recovering. In fact, the TARP investments paid back thus far have actually given the Treasury a $23 billion profit, a far cry from the catastrophic losses that many watchdogs and taxpayers were rightly concerned about. Thus, while programs that were never meant to be paid back, such as the home mortgage modification program, will most likely ensure that the TARP will impose an overall loss on taxpayers, this loss will not be nearly as large or as damaging as many had initially feared.

Geithner also argued that financial regulatory reform must include several key elements to ensure that a similar financial crisis does not happen again, including stricter restrictions on the amount of risk a financial institution can take and an expanded authority for the government to dismantle financial institutions at no cost to taxpayers. He also advocated creating a “small business lending fund” to help small businesses obtain credit, which is still difficult to come by since banks (particularly small banks) are focusing on other goals, such as increasing their capital and covering their exposure to losses from risky ventures such as commercial real estate, rather than giving loans.

Despite TARP’s many apparent successes and Geithner’s hope for a more secure, stabilized financial future, many members of the Congressional Oversight Panel did not paint such a rosy picture. Panel Chair Elizabeth Warren brought up the fact that, out of approximately 9,000 banks in the country, 3,000 have heavy concentrations in commercial real estate, a high-risk and unstable venture that could potentially cause them to collapse. When asked what Treasury could do about this instability, Geithner could only respond that banks would have to stabilize themselves by raising capital, and that banks that are not perceived as viable will not be able to access TARP capital.

Panel members also attacked TARP’s temporary loan modification programs, which initially helped 1.2 million families find homes but resulted in foreclosure for many of these families when they could not prove the stated income that allowed them to find a home in the first place. Finally, Panel member Damon Silvers expressed his concern that there has been a shift to foreclosures driven by unemployment, a charge which Geithner avoided responding to by veering into a discussion about other topics such as the lack of regulation that led to the financial crisis.

One important issue that was not brought up at the hearing is the behavior of the TARP recipients. Ninety-one banks and thrifts that received TARP capital failed to make their May dividend payment to the Treasury; for all but 23 of these, the missed payment was at least their second. This continues a rising trend in which more and more banks each quarter are failing to make their dividend payments—74 banks failed to make this payment in February, compared to 55 banks in November. In addition, one in every nine banks that received TARP capital has since been cited for violating banking laws and regulations or failing to meet operational or financial standards, contradicting the Treasury Department’s assurances that TARP funds are only going to support healthy, viable banks.

Of course, another crucial point of concern is the oversight and transparency of the new Small Business Lending Fund (SBLF), one of the programs Geithner touted at the hearing. The House recently passed legislation to create this $30 billion fund, but POGO and others are still insisting that the program needs vigilant oversight if it is to be effective. In a recent letter to Congress, we expressed concerns that creating the SBLF separately from the TARP will exempt it from many of the TARP oversight mechanisms, such as those limiting the influence of lobbyists and other outside parties. The decision to create the SBLF outside of TARP is also unusual given the program’s similarities to TARP’s Capital Purchase Program and Community Development Capital Initiative. POGO believes that, if the SBLF is to be created separately from TARP, it should be subjected to similar or greater oversight rules in order to ensure that taxpayer dollars are used to support small businesses and help the economy recover.

Overall, Tuesday’s hearing made us feel cautiously optimistic about TARP: although it seems to have helped the country avoid an economic disaster, many questions still remain unanswered, including what to do about the continuing unavailability of credit and the ongoing stream of foreclosures and unemployment. On that note, the House and Senate lawmakers finalizing the financial regulatory bill are set to take up debate today on one of the key problems that contributed to the bailout: the inadequate regulation of over-the-counter derivatives. Click here to watch the debate live.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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