Of 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 firms.
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 the task.
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 different.
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 under consideration.
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.