Treasury Secretary Timothy Geithner assured the Congressional Oversight Panel Tuesday that there is enough money left in the Troubled Asset Relief Program, the $700 billion financial rescue program, to stabilize the financial system. There is at least $134.4 billion in TARP funds left, Geithner said, while over $590 billion has already been committed.
When President Obama took office, Treasury had already committed over half of the funds allocated for the Troubled Assets Relief Program, Geithner said in prepared remarks to the committee overseeing the TARP. Today, Treasury estimates that there is at least $134.6 billion in resources authorized under EESA still available.
The figure assumes that $25 billion will be paid back over the next year. Without that $25 billion, there is around $109.6 billion left.
Geithner added that the vast majority of U.S. banks have enough capital, and hinted that the credit markets may be thawing following their deep freeze.
Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets, Geithner said.
The Treasury Secretary also addressed compensation systems, which he said played a material role in creating this financial crisis.
Going forward, it is important that everyone in financial institutions - from traders to executives - have compensation that is closely and tightly aligned with sound risk management and long-term value for their financial institution and the economy as a whole, Geithner said. We have to be careful, however, not to destroy beneficial forms of incentive compensation or to restrict financial firm compensation packages so severely as to drive the most talented people out of the U.S. financial sector.
Geithner's testimony comes on the heels of a 250-page quarterly report on TARP, delivered to Congress on Monday by Inspector General Neil Barofsky. The report warns that the public-private partnership proposed by Geithner to rid banks of their toxic assets favors private investors, not taxpayers.
The partnership that brings in funds from the Treasury, Federal Reserve, and private investors to buy up bad mortgage assets, supposedly stabilizing the banking system, could reach $2 trillion. That size itself opens the door for potential fraud, and Barofsky warned against using Fed loans.
The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives, the report read.
In order to minimize the potential negative effects, Barofsky recommended that the Treasury establish tough rules for the public-private fund managers, specifically to avoid a possible conflict of interest that could leave taxpayers out in the cold.
He also suggested increased transparency, asking that the Treasury make public all owners of the private equity stakes in a fund.
In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients, the report stated.
However, the Treasury countered by noting the increased transparency in the program. Treasury spokesman Andrew Williams stated that over the last two months, we've significantly increased the amount of transparency into the programs, including actively measuring lending and requiring banks under the new capital program to report on how every dollar of government resources goes toward increasing lending to consumers and businesses.
In his testimony Geithner also discussed how the Treasury is working to increasing transparency, although he did not address the publication of private investments.
In mid-March, the Obama administration revealed its plan to solve the massive, debilitating banking crisis that continues to hold the financial system in its crushing grip. The plan to buy up toxic assets through a combination of $100 billion in TARP funds and private investment initially sparked a positive reaction from Wall Street.
The Public Private Partnership Investment Program is designed to boost the current efforts that have been largely unsuccessful in unfreezing the credit markets and promoting consumer lending.
The Treasury's response involves using up to $100 billion in funds from the $700 billion financial rescue plan passed in 2008 in addition to capital from private investors to generate an estimated $500 billion to purchase the toxic assets, a number that could double to $1 trillion over time.
The official title of the program is the Legacy Loans program, the process through which the Treasury and private investment will purchase the toxic assets. Banks will determine which loans they would like to sell, and the Federal Deposit Insurance Corp. (FDIC) will subsequently determine the amount of funding that it can guarantee for the loans.
The pools of loans will then be auctioned to the highest bidder, who will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
The buyer will then receive financing through issuing the FDIC-guaranteed debt, and the FDIC will receive a payment in return for its guarantee.
The Treasury will manage its investment and will provide 50 percent of the equity capital for each fund. However, private managers will remain in control of the asset management, albeit subject to oversight from the FDIC.
The approach is a three-front process. By combining public financing in partnership with the FDIC and Federal Reserve, along with the private investment, substantial purchasing power will be created, the Treasury predicted.
The second area includes the sharing of risks and profits with the private sector participants, so taxpayers are not left holding the bulk of the risk.
The Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns, the Treasury explained.
Third, adding the free-market power of the private investors reduces the likelihood that the government will once-again overpay for the toxic assets, as it did in the first round of TARP spending. Allowing private investors to compete for purchase of the loans and securities will help to set a fair price, the Treasury said.
Combining public and private efforts is superior to pursuing either route individually, the Treasury noted.
Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience, it said. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases - along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
Previous efforts to solve the problem of toxic mortgage-related assets have been unsuccessful. The assets have been impossible to price due to the housing crisis and the staggering rate of foreclosure.
These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending, the Treasury said.
The result has been an adverse feedback loop, where declining asset prices have triggered further deleveraging, which has in turn led to further price declines.
In addition, the murkiness surrounding the toxic assets has made it exceedingly difficult for financial institutions to raise new private capital, forcing many institutions to look to the government for assistance.
The FDIC will provide oversight for the new funds to purchase assets from the banks.
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