Northern Country

How globalization changes capitalism, the economy and politics

Wall Street – Washington Connection, Part II

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The Troubled Asset Relief Program (TARP) was enacted by Congress and signed into law by the president of the U.S. in October 2008. The Obama administration had asked the American people to commit a staggering $700 billion of taxpayer money to bailout Wall Street.

In order to insure appropriate oversight the president appointed and the senate confirmed a Special Inspector General (SIG) shortly after the establishment of the TARP. Neil Barofsky, head of SIGTARP, endowed with special powers is not required to report and to be supervised by the secretary of the Treasury. Moreover only the president can remove the SIG, which would be somewhat embarrassing since he appointed him in the first place.

The Inspector General’s special rights make sure that he remains independent in his oversight from the secretary of the Treasury, who is ultimately responsible for the TARP. It was therefore surprising to learn that the Treasury department refused to provide Barofsky with documents about a financial institution receiving tens of billions in bailout dollars. Barofsky received support from lawmakers on that issue who are sympathetic to SIGTARP’s work and also complained about the lack of transparency in major recipients of TARP funds.

In its most recent audit SIG surveyed 360 banks participating in the TARP and found that they misused the funds. 110 banks had invested some of the funds, 52 banks had used the money to repay existing debt and 15 used it to buy other banks. About 83percent used at least some funds to support new lending.

SIG goes on to encourage the Treasury to require regular, more detailed information about the use of TARP money by participating banks. This would help to achieve the goal of transparency and satisfy the taxpayer. Treasury responded by saying it is impossible to track the money because it’s fungible, much like water running through fingers: "…paying an expense from one source frees up cash to be used for other purposes”.

Barofsky did not buy it and argued Treasury was ignoring the common sense view. His latest audit found that banks could give at least a general indication of how they were using the money. It is not feasible why financial institutions using billions of dollars of taxpayer money to fund their operations are not required by the Treasury to maintain at least a documentation of the original disbursement of these funds. Treasury even admits that most banks don’t manage their TARP money separately from other funds.

A paper trail would help to hold banks accountable but the Treasury seems to think that it is best not to interfere with the financial industry’s business at all in order to achieve results. Why government officials would think that, is not clear under circumstances that rendered proponents of financial deregulation to be dead wrong. This epochal mistake grudgingly coerced taxpayers to fund bailouts in the form of TARP in the first place.

Back in March a Government Accountability Office (GAO) review found that regulators blatantly failed to do their job by ignoring the risks that had piled up in the financial industry. According to GAO, regulators like the Federal Reserve and the SEC relied too much on promises given to them by Wall Street’s representatives. They assumed according to SEC chairwoman Schapiro the industry would not take foolish risks and jeopardize their business model. Given the current dispute is it possible that we are going to make the same mistake again?

Treasury has only one problem with their laissez-faire approach, it is not showing results. Even after injecting massive amounts of liquidity lending to businesses and consumers has not resumed to pre-crisis levels. Some see this as a necessary adjustment, but others are calling for more forceful actions from the government.

Under pressure to revive lending the U.S. Treasury began to demand monthly reports on lending activities from banks participating in TARP. It took them until January to implement most basic reporting, when this should have been mandated immediately with the commencement of the funds. I strongly feel this shortcoming is indicative of a culture that has pervaded Washington to dismiss common sense when it comes to Wall Street. The perpetual lobbying of Wall Street’s executives in Washington is certainly not helpful in this regard (see WW Part I).

Results from Treasury’s latest monthly bank lending survey showed that total outstanding consumer loans, including first lien mortgages, home equity lines of credit, credit card loans, and other consumer loans, were flat in May, 2009. Commercial and Industrial loans (C&I) were also flat with demand well below normal. Commercial real estate loans (CRE) even fell with demand again lower than normal in May, 2009. Small business lending showed some growth but outstanding loan balance grew only by a meager one percent.

These results were based only on data from the top 21 recipients of TARP funds. SIGTARP’s audit on the other hand was based on results from 360 participating institutions. There is really no feasible reason why oversight should be limited to 21 when according to the Treasury 651 banks have received government funds so far.

The argument that banks don’t have enough capital to lend does not ring through. The Capital Assistance Program (CAP) was designed to make sure that financial institutions are sound and have sufficient capital to support businesses and consumers. The results of a financial stress test on banks published in May, 2009, speak for themselves and even sparked a stock market rally on Wall Street that nobody thought would be possible just a couple of months ago. Treasury secretary Geithner also confirmed that the vast majority of U.S. banks have more capital than needed.

Yet the evidence is indisputable. Lending to consumers and business while not at a halt remains strongly subdued and remarkably insufficient to support potential economic growth. Every day that passes makes it harder for the Obama administration to explain to the public why consumers and small businesses are being asked to be frugal and patient all the while Wall Street is celebrating. The mice are not dancing because the cat has left the house, they are celebrating because all cats have been stymied once and for all to never hurt them again ever. The public wants to know when Washington will stop working for Wall Street and start to work for the people again.

Treasurylendingloanoriginations TARP loan originations from BofA, C, JPM, and WF

TreasuryMay09growthinloanoriginations growth of TARP loan originations in 21 largest recipients

fredgraphCIloansweeklyJuly09 C&I loans weekly reporting by large commercial banks

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