all the problems that plague TARP -- including its lack of transparency
and disclosure, shifting goalposts, and an unclear purpose -- there's
one that has government auditors most concerned: the administration's
failure to articulate how it's going to eliminate the implicit
taxpayer-funded guarantees backstopping the nation's biggest financial
That's one of the conclusions raised in a new report released Thursday by the Congressional Oversight Panel,
detailing the challenges faced by the administration as it attempts to
shut down the unpopular bailout program. Though slated to end in
October, the government will likely continue to hold hundreds of
billions of dollars in private assets beyond then. Unwinding those
positions will be tricky. The panel wonders if the Treasury is up to
Led by Harvard Law Professor Elizabeth Warren, the Congressional
Oversight Panel was created by Congress to keep tabs on the bailout.
Its monthly reports over the past year have kept an uncompromising
critical light shined on the bailout. Its latest report was no
The panel again pointed out that it's having difficulty getting the
Treasury Department to maintain basic levels of transparency. Both its
decision-making and various metrics used for those decisions are still
hidden from auditors and the public. The lack of disclosure,
particularly considering that up to $700 billion of taxpayer money is
at stake, is troubling, the report notes.
Also of concern are the ways in which the Treasury defines when and
how it will sell the toxic assets on its books. The administration has
detailed three broad principles: "maintaining the stability of the
financial system, preserving the stability of individual financial
institutions, and maximizing the return on the taxpayers' investment."
The problem, the panel notes, is that "the principles as announced
are so broad that they provide Treasury with a means of justifying
almost any decision."
This means that there is effectively no metric to determine
whether Treasury's actions met its stated goals. Because any approach
may alternatively be justified as maximizing profit, or maintaining the
stability of significant institutions, or promoting systemic stability,
almost any decision can be defended. Measuring Treasury's success
against these metrics is problematic.
Then there is the issue of the public subsidy enjoyed by large
financial firms thanks to their status as "too big to fail," according
to the report.
In the aftermath of the government's extraordinary economic
stabilization efforts, markets may believe that too big to fail
financial institutions operate under an implicit guarantee: that the
American taxpayer would bear any price, and absorb any loss, to avert a
financial meltdown. To the degree that lenders and borrowers believe
that such an implicit guarantee remains in effect, moral hazard will
continue to distort the market in the future, even after TARP programs
wind down. As Treasury contemplates an exit strategy for the TARP and
similar financial stability efforts, addressing the implicit guarantee
of government support is critical.
In its first attempt to address that problem, the Obama administration will announce
this morning a Financial Crisis Responsibility Fee -- a tax designed to
recoup taxpayers' losses from TARP (estimated to reach up to $117
billion) as well as some of the cost of the implicit government
guarantee. Economists and financial experts contacted by the Huffington
Post agree that the fee is a good first step.
The House of Representatives passed a bill last month mandating new
fees on the nation's biggest banks to fund a mechanism that would help
regulators unwind large, systemically-important institutions. Its
potential effectiveness continues to be debated. A Senate version is
But as long as some firms are so big that their collapse would bring
down the economy ---- and there is no practical way for the government
to seize control and restructure them. As the Congressional Oversight
Panel put it:
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.