TARP – WE HATE TO SEE YOU GO

On September 16, the Congressional Oversight Panel (COP) released its “September Oversight Report Assessing the TARP on the Eve of Its Expiration.” In the report, much is made of public perception and “stigma” of the TARP programs following a failure to meet its lofty goals.

Initially established under the Emergency Economic Stabilization Act of 2008 (EESA) to provide up to $700 billion in financial commitments, TARP was designed to purchase toxic assets of financial institutions. But soon after its roll-out, the TARP checkbook was used to plug any leak, or potential leak, in the financial dike. Banks, even relatively healthy ones, were forced to eat TARP money. AIG got more than its share of TARP cash (that then went circuitously to Goldman Sachs) as did two of the domestic auto makers. Then, in December 2009, under the authority to extend TARP, the Treasury recommitted to focus on the three areas it was initially established for: (i) mortgage foreclosure relief; (ii) small business lending, including funding to small and community banks; and (iii) support for securitization markets through TALF, the Term Asset-Backed Securities Loan Facility. But time is running out for the government program that couldn’t, with a drop dead date of October 3, 2010.

One problem stated in the report is that the wolves guarding the hen-house, namely Treasury and other government agencies, have either failed to issue any meaningful empirical studies to support any analytical assessment of the program or are unable to quantify the effects of TARP because of so much “noise” in the data necessary to analyze its effect. COP noted that due to the nature of the various financial rescue programs implemented by different agencies that were designed to interact with each other, it is difficult to isolating the effects of TARP. Lastly, the large amounts of data needed to conduct the research of the impact of TARP was either not publicly available or not even collected by the Treasury, making any analysis difficult.

While the report cites the various economists that COP consulted with regard to its report, with as many different views as a group of rabbinical students discussing a single point in the Torah, of interest is the general consensus by these economists that while TARP was necessary to stabilize the financial system at its time of crisis, it was mismanaged in its execution. This mismanagement, together with ineffective communication of actions taken, raised public confusion and undermined public trust in the programs rolled out under TARP. In summing up its effectiveness, COP stated that “although the TARP provided critical government support when the financial system was in a severe crisis, its effectiveness at pursuing its broader statutory goals has been far more limited.” And anyone that watches the market knows, it is public perception that makes the Bulls Run and the Bears Attack.

Another point of contention in the report addresses the legacy that the program will leave after expiration, namely Treasury holding billions of private-company securities and the government’s guarantee of “to-big-to-fail” financial institutions, which the commission acknowledges that even after the provisions in the Dodd-Frank Act, will be difficult to unwind.

What will be interesting to see are the last minute, race to the finish line, programs that Treasury will pump out before TARP expires. Its enacting legislation, specifically section 106(e) of EESA, provides that Treasury can continue to fund its commitments after October 3, so long as those commitments were made prior to such date. Of all the programs instituted under TARP, the ever so questionably effective HAMP (Homeowners Assistance Modification Program) is the largest commitment. While certain aspects of HAMP will be limited following October 3, including cutting off any new servicers to HAMP, Treasury has indicated that it will be changing the purchase price calculation under HAMP from a fixed dollar amount to a formula. Expect that to be established before October 3. Other than re-giggering HAMP, the COP report states that while less than $5 billion has been disbursed on housing programs, Treasury has the ability to disburse up to $45.6 billion that are not intended to be recovered under HAMP or the other housing programs.

To conclude, while there will be a number of readings of the COP’s report, and the depth of the impact of TARP will be felt for years forward, the following are some of the more salient statements made by the Panel in the report:

• Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises.

• The fact that the government chose not to impose such stringent costs upon TARP recipients [putting distressed banks into liquidation or receivership] meant that the program’s moral hazard costs were much greater than necessary.

• Treasury did not monitor lending at the individual TARP recipient level, however, nor require CPP [Capital Purchase Program for Banks] recipients to report on their use of funds, so these results can not be independently verified.

• HAMP remains the cornerstone of Treasury’s foreclosure mitigation efforts. . . Unfortunately, despite Treasury’s efforts to collect meaningful data in this area, there remains important questions about why such a large number of trial modifications have failed to convert to permanent modifications.

• These differences [between the assistance given to the financial sector and the auto industry] have raised questions about whether the government inappropriately blurred the line between its role as a policy-maker and its role as an investor.

• Treasury therefore used the TARP’s extension more to extend the government’s implicit guarantee of the financial system than to address the specific economic problems that the Secretary cited as justification for the extension.

I guess, in the end, it will just be interesting to see where the players behind TARP in Washington end up after October (or November 2012). Let’s see, Goldman Sachs' inside man Henry Paulson is now at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, and his trusty side-kick, Neel Kashkari, is now at PIMCO.