01/22/2009 07:38 pm ET Updated May 25, 2011

Pressing Accountability for TARP: Who Should We Trust?

Last week, the Senate released the second $350 billion in TARP funds provisionally authorized in the Emergency Economic Stabilization Act. Won over by a letter from Lawrence Summers pledging to increase foreclosure prevention efforts, encourage lending, and strengthen oversight, congressional leaders backed down from initial efforts to codify these pledges in legislation. Though the House debated and passed a TARP reform bill sponsored by Barney Frank that would have increased assistance for homeowners and improved federal oversight of TARP, votes on the bill - and the companion "resolution of disapproval" rejecting the bailout funds pro forma - were mere theater, occurring as the Senate effectively released the money.

No matter that the Congressional Oversight Panel and the Government Accountability Office released scathing reports criticizing Treasury for its lack of "strategy" in spending $251 billion of taxpayer loot. No matter that the limitations on executive compensation included in the original financial bailout are now universally regarded as, well, limited. No matter that action on the housing crisis is subsumed by the immediate need for action on the financial crisis whenever another $350 billion might be available to shore up banks' capital reserves and plot takeovers. The New York Times caught the chairman of Whitney National Bank, recipient of $300 million of bailout funds, scoffing at the idea of making more loans, presumably the way banks used to make money: "Make more loans?...We're not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans."

So we're left with a symbolic vote in the House and a "trust us" letter from Larry Summers as the housing crisis rages on. This is, of course, the same Summers whose meeting with Democratic Senators about the forthcoming stimulus package left Iowa's Tom Harkin fearing a "trickle-down" approach characterized by tax breaks (Obama has since scaled back his tax cut plans). Middle-class homeowners have enjoyed no benefit from the original expenditure of taxpayer dollars sold to them with a promise to pursue foreclosure mitigation efforts. The Center for Responsible Lending sums up the numbers: 1.5 million homes lost to subprime foreclosures between 2005 and 2007, another 2 million loans currently more than 60 days delinquent, and, in the next five years, 8.1 million homes of all mortgage types likely lost to foreclosure.

Even if, for the sake of argument, the first $350 billion in TARP funds have created financial stability, this stability is purely symbolic, a result of nothing more than avoiding a worse crisis of confidence. While the Financial Stability Oversight Board (Ben S. Bernanke, Chairperson) pointed out LIBOR-OIS spreads and CDS rates to demonstrate TARP's "stabilizing influence", the Congressional Oversight Panel (Elizabeth Warren, Chair) was mystified:

It is not enough to say that the goal [of TARP] is the stabilization of the financial markets and the broader economy. That goal is widely accepted. The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards.

As the former Treasury Secretary noted in his letter to Congress requesting the second $350 billion authorized by the Emergency Economic Stabilization Act, one of the three goals of the original Troubled Assets Relief Program created by EESA was to protect taxpayers. But congressional oversight of TARP I was superficial, primarily because financial institutions refused - with Treasury's approval - to provide detailed accounts of how they used the bailout money.

Some bailout critics would like to see electronic tags track how banks spend bailout funds. Wishful thinking, surely, but also of limited value. It's great to know that Whitney National Bank has decided not to originate new loans with its bailout money, just as it's great to know that companies receiving bailout money are using offshore accounts as tax shelters. But what can be done to ensure that Whitney lends, that tax shelters are closed, and that executive salaries aren't based on inflated values even if "bailout dollars" aren't being used to pay them? Is this too much to ask when $178 billion of the $251 billion dollars currently funded for TARP have been funded through the Capital Purchase Program for "healthy, viable financial institutions"?

The transparency and accountability for TARP pledged by President Obama and National Economic Council head Summers are desirable objectives. They are so desirable, in fact, that they should be codified in legislation that holds the financial institutions receiving TARP funds, along with Congress and the President, accountable for their achievement. Accountability, in this case, means more than disclosure of data, as contemplated in the Frank TARP reform bill (and, quite harshly indeed, in the auto bailout legislation that failed late last year). If financial institutions use TARP money to make acquisitions that do not benefit taxpayers or to pad executive compensation or even to strengthen capital positions without meeting benchmarks for loan origination, Treasury should be authorized to revoke the loan and contemplate further punitive measures.

TARP provides, along with the stimulus package, an opportunity for the public - and critical lawmakers - to test Obama's commitment to non-ideological, ideas-based challenges. If the Republican Study Committee can propose elimination of the tax code as economic stimulus and be taken seriously, then surely President Obama should be willing to consider legislation that would hold his administration accountable for the successes and failures of TARP.

But after rejecting an era of irresponsibility in an inaugural speech pledging that "those of us who manage the public's dollars will be held to account", President Obama and his economic team have just neutralized an attempt to do just that. "Trust us" might mean something different coming from President Obama than from President Bush, but a promise is just as unenforceable now before January 20th. Accountability - both for the banks receiving TARP funds and for the new administration - means sanctions for nonperformance and acceptance of responsibility when obligations are not met.

President Obama spoke throughout his campaign about the importance of helping homeowners. Larry Summers promised in his letter to Congress to use $50 to $100 billion of the newly released TARP funds to address the foreclosure crisis. But none of the original TARP funds were used for foreclosure mitigation, despite homeownership preservation figuring as one of the primary objectives of TARP. Instead, nearly eight in ten seriously delinquent homeowners are not on track for any loss mitigation, a figure that has worsened over time, and one in five loan modifications made in the past year is currently delinquent. Thus, not only are government efforts to prevent initial foreclosures falling short, but loan modification programs are failing to keep homeowners in their homes over the long term. How does the Obama team plan to assure the public that their promise to address the foreclosure crisis with TARP funds will be met? And by what measures will we be able to judge their success?

Release of the second tranche of TARP funds provided Congress and the new president a first opportunity to demonstrate that accountability relies not on the promises of lawmakers or on the self-regulation of the private sector but on laws themselves. Debate about how the next $350 billion will be used is already proving lively, but how much better to have had the force of law behind advocates for corporate governance reform, foreclosure prevention, and government efficiency.