Oversight Panel Reports On TARP

nths after its creation, the Troubled Asset Relief Program is demonstrating mixed results, according to the Congressional Oversight Panel tasked with reviewing and reporting on the $700 billion plan. The [u][link=http://cop.senate.gov/documents/cop-040709-report.pdf]April Oversight Report[/link][/u] notes the key assumption underlying the Treasury's approach to fixing the financial system is that the system-wide deleveraging is largely due to temporary liquidity problems that stem from nonfunctioning markets for troubled assets. ‘The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two,’ the report says. If the Treasury's assumption is on target, then initiatives such as the Capital Assistance Program and the Public Private Investment Program may be appropriate responses. However, if it turns out the Treasury did not accurately take into account the depth of the current downturn and relationship between low asset valuation and true asset worth, the responses by the Treasury, as well as the Federal Reserve and the Federal Deposit Insurance Corp., may be flawed. To frame the discussion, the oversight panel looked at six historical events, including the savings and loan crisis, Sweden's financial crisis in the early 1990s and Japan's "Lost Decade" of the 1990s. The panel notes three possible ways of handling a financial crisis on the scale of the one currently facing the U.S. – liquidation, receivership and subsidization – and says a recovery depends on transparency, assertiveness, accountability and clarity. The report says that liquidation – if performed in a "structured manner supervised by appropriate regulators" – can be a favorable approach over allowing institutions to "drift into government control piecemeal." New York State Superintendent of Banks Richard H. Neiman and former New Hampshire Sen. John E. Sununu, issued [u][link=http://cop.senate.gov/documents/cop-040709-report-neimanandsununu.pdf]separate filings[/link][/u], expressing concerns that the prominence of alternative solutions – namely, nationalization – "could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan. The stakes for the American people are too high to permit any such misapprehensions to develop and intrude on successful outcomes that affect our national financial security." SOURCE: Congressional Oversigh


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