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Congressional Oversight Panel Releases Final Report on the Troubled Asset Relief Program

March 16, 2011

TARP Provided Critical Support but Distorted Markets and Created Public Stigma

WASHINGTON, D.C. - The Congressional Oversight Panel, which was established by Congress in late 2008 to oversee the $700 billion Troubled Asset Relief Program (TARP), today released its 30th and final oversight report. The report describes the financial crisis, summarizes and updates the Panel's prior oversight reports, and evaluates federal financial stabilization initiatives.

Federal Reserve Chairman Ben Bernanke has said that, when the TARP was created in late 2008, the nation was on course for "a cataclysm that could have rivaled or surpassed the Great Depression." It is now clear that, although America has endured a wrenching recession, it has not experienced a second Great Depression. The TARP does not deserve full credit for this outcome, but it provided critical support to markets at a moment of profound uncertainty. Even so, the program leaves behind a troublesome legacy: continuing distortions in the market, public anger toward policymakers, and a lack of full transparency and accountability.

The TARP's estimated cost has fallen, but costs alone do not account for the program's risks and shortcomings. The Congressional Budget Office (CBO) today estimates that the TARP will cost taxpayers $25 billion - an enormous sum, but vastly less than the $356 billion that CBO initially estimated. However, not all of the reasons for the TARP's falling costs are encouraging. For example, Treasury's foreclosure prevention programs, which could have cost $50 billion, have largely failed to get off the ground. Non-TARP government programs have shifted some of the costs of the financial rescue away from the TARP's balance sheet. Further, accounting for the TARP from today's vantage point - when the financial system has made great strides toward recovery - obscures the risk to taxpayers that existed in the depths of the financial crisis.

The TARP distorted markets by exacerbating "too big to fail" and magnifying moral hazard. In light of the TARP's rescue of America's largest financial institutions, it is not surprising that markets have assumed that "too big to fail" banks are safer than their "small enough to fail" counterparts. As a result, small banks continue to pay more to borrow than very large banks - an ongoing distortion in the marketplace. By protecting very large banks from insolvency and collapse, the TARP also created moral hazard: Very large financial institutions may decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss. In addition, the TARP's rescue of domestic automotive manufacturers may appear to have extended the "too big to fail" guarantee to any company large enough to cause severe economic disruption if it collapsed.

The public backlash against the TARP has created stigma and constrained Treasury's options. Because the TARP was designed for an inherently unpopular purpose - rescuing Wall Street banks from the consequences of their own actions - stigmatization was likely inevitable. Treasury's implementation has, however, made this stigma worse. For example, many senior managers of TARP-recipient banks maintained their jobs and their high salaries, and although shareholders suffered dilution of their stock, they were not wiped out. To the public, this may appear to be evidence that Wall Street banks and bankers can retain their profits in boom years but shift their losses to taxpayers during a bust.

A lack of transparency and clear goals for the TARP has rendered the public unable to hold Treasury fully accountable for its actions. In perhaps the most profound violation of transparency, Treasury decided in the TARP's earliest days to push tens of billions of dollars out the door to very large financial institutions without requiring banks to reveal how the money was used. As a result, the public will never know to what purpose its money was put. A related problem is Treasury's failure to articulate or update clear goals for many of its TARP programs. For example, the Home Affordable Modification Program - which was originally intended to prevent 3 to 4 million foreclosures - now appears on track to help only 700,000 to 800,000 homeowners, yet Treasury has never formally announced a new target.

The full report is available at cop.senate.gov. By statute, the Panel will terminate on April 3, 2011.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008. The Panel members are former Senator Ted Kaufman; J. Mark McWatters; Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Kenneth Troske, William B. Sturgill Professor of Economics at the University of Kentucky.


Congressional Oversight Panel to Hold Hearing on the TARP's Impact on Financial Stability

February 28, 2011

WASHINGTON, D.C. - On Friday, March 4 at 10:00 a.m., the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) will convene in 538 Dirksen Senate Office Building to hold its final hearing. The Panel will hear expert testimony from the agencies who helped to coordinate the government's unprecedented response to the 2008 financial crisis, as well as from several of the nation's leading economists, who will offer their assessments of the TARP's impact on financial stability and the U.S. economy.

By statute, the Congressional Oversight Panel will dissolve on April 3, 2011. The Panel will issue a final report on the TARP in mid-March.

WHO:
Members of the TARP Congressional Oversight Panel

Witnesses

Panel One:

Timothy Massad, Acting Assistant Secretary for Office of Financial Stability, U.S. Department of Treasury

Panel Two:

Jason Cave, Deputy Director for Complex Financial Institutions Monitoring, Federal Deposit Insurance Corporation

Patrick Lawler, Chief Economist and Head of the Office of Policy Analysis and Research, Federal Housing Finance Agency

William R. Nelson, Deputy Director, Division of Monetary Affairs, Federal Reserve

Panel Three:

Joseph E. Stiglitz, Nobel Laureate and University Professor, Columbia Business School, Graduate School of Arts and Sciences (Department of Economics) and the School of International and Public Affairs

Allan H. Meltzer, the Allan H. Meltzer University Professor of Political Economy at Carnegie Mellon University

Simon H. Johnson, the Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan School of Management, and Senior Fellow, Peterson Institute for International Economics

Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow, University of Chicago Booth School of Business

WHAT:
Hearing on the TARP's Impact on Financial Stability

WHEN:
Friday, March 4, 2011; 10:00 a.m.

WHERE:
Room 538, Dirksen Senate Office Building

The hearing is open to press and public and will be webcast on the Panel's website at cop.senate.gov. Individuals with disabilities who require an auxiliary aid or service, including closed captioning service for webcast hearings, should contact the Panel's staff at 202-224-9925 at least two business days in advance of the hearing date.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 and to provide recommendations on regulatory reform. The Panel members are former Senator Ted Kaufman; J. Mark McWatters; Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Kenneth Troske, William B. Sturgill Professor of Economics at the University of Kentucky.


Congressional Oversight Panel Examines Executive Compensation Restrictions in the Troubled Asset Relief Program

February 10, 2011

WASHINGTON, D.C. - The Congressional Oversight Panel today released its February oversight report, "Executive Compensation Restrictions in the Troubled Asset Relief Program" (TARP). The Panel examined Treasury's efforts to implement restrictions on executive pay at TARP-recipient institutions and, in particular, examined the work of the Special Master for Executive Compensation, who was charged with setting executive pay at the recipients of exceptional taxpayer assistance: AIG, Bank of America, Chrysler, Chrysler Financial, Citigroup, General Motors, and GMAC/Ally Financial.

TARP compensation restrictions generally reflected the notion that, when a company accepts taxpayer money, its compensation practices must shift to take into account factors beyond the customary elements of executive pay. In particular, compensation should reflect the need for taxpayers to recover their investment, should recognize public frustration about taxpayer funds being paid to executives at bailed-out institutions, and should advance the public goal of stabilizing the financial system.

Amidst intense media scrutiny and in a time of deep public anger, the Special Master achieved significant changes at the institutions under his review. Overall compensation at the companies under the Special Master's jurisdiction fell by an average of 55%, and cash salaries were generally limited to $500,000. The Special Master also shifted compensation away from cash and toward stock. This was an important reform: it tied executives' own financial future to their firms' performance, encouraging them to think long and hard about the wisdom of their decisions. By requiring executives to hold their stock paid as salary for up to four years, the Special Master also encouraged executives to take a longer view of their companies' success.

Unfortunately, the Special Master has fallen short in his far broader goal of permanently changing Wall Street's pay practices. Because the Special Master released few details of his deliberations to the public, aspects of his decisions are essentially a "black box," and it would be impossible for a corporate compensation expert to duplicate his work. For example, the Special Master aimed to pay executives at rates similar to those at comparable companies -- but it is not clear which comparable companies he chose or why. Further, the Special Master did not always disclose to the public how he ranked different, conflicting goals when setting pay.

The Special Master's focus on stock-based compensation may have created new incentive problems. Stock-heavy compensation packages can, for instance, encourage executives to take excessive risks to drive up the value of their pay. The four-year timeframe for the redemption of stock payments may also be too short to determine whether an executive has truly created long-term value.

The Special Master was also charged with examining pre-crisis executive compensation at TARP-recipient firms. His decision not to seek to claw back any pay is questionable. Congress required the Special Master to seek to claw back any payments that were contrary to the public interest. Ultimately he found $1.7 billion in payments to be "disfavored" and "not necessarily appropriate" but not inconsistent with the public interest. By drawing such a fine distinction, the Special Master may have performed an end-run around his guidance from Congress. He may also have created the impression that the government condoned wrongful compensation to executives who contributed to the crisis.

The Special Master's "one size fits all" approach to executive compensation may not have adequately recognized the differences between the firms within his jurisdiction. The pay packages approved by the Special Master were quite uniform, even though his office was charged with overseeing institutions as diverse as the insurer AIG and the manufacturer General Motors. For example, his office generally limited cash salaries to $500,000 -- an amount that has very different ramifications for hiring and retention at an institution based in New York compared to one based in Michigan, given the widely varying costs of living.

The full report is available at cop.senate.gov.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform. The Panel members are former Senator Ted Kaufman; J. Mark McWatters; Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Kenneth Troske, William B. Sturgill Professor of Economics at the University of Kentucky.


Congressional Oversight Panel to Hold Hearing on Commercial Real Estate's Impact on Bank Stability

February 1, 2011

WASHINGTON, D.C. - On Friday, February 4, 2011, at 10:00 a.m., the Congressional Oversight Panel will hold a hearing in room 538 of the Dirksen Senate Office Building to examine the current state of the commercial real estate market and its implications for bank stability and returns to the Troubled Asset Relief Program.

The Panel has examined the impact of the troubled commercial real estate market in several of its oversight reports, including its February 2010 report, "Commercial Real Estate Losses and the Risk to Financial Stability."

WHO:
Members of the TARP Congressional Oversight Panel

Witnesses

Panel One:

Sandra Thompson, Director, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation

Patrick Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve

David Wilson, Deputy Comptroller for Credit and Market Risk, Office of the Comptroller of the Currency

Panel Two:

Matthew Anderson, Managing Director, Foresight Analytics

Richard Parkus, Executive Director, Morgan Stanley Research

Jamie Woodwell, Vice President of Commercial Real Estate Research, Mortgage Bankers Association

WHAT:
Hearing on Commercial Real Estate's Impact on Bank Stability

WHEN:
Friday, February 4, 2011; 10:00 a.m.

WHERE:
Room 538, Dirksen Senate Office Building

The hearing is open to press and public and will be webcast on the Panel's website at cop.senate.gov. Individuals with disabilities who require an auxiliary aid or service, including closed captioning service for webcast hearings, should contact the Panel's staff at 202-224-9925 at least two business days in advance of the hearing date.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 and to provide recommendations on regulatory reform. The Panel members are former Senator Ted Kaufman; J. Mark McWatters; Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO;and Kenneth Troske, William B. Sturgill Professor of Economics at the University of Kentucky.


Congressional Oversight Panel Examines TARP Support for the U.S. Auto Industry

January 13, 2011

Taxpayers Now Appear Likely to Recover Billions More Than First Expected, but Conflicting Goals Have Impaired Accountability and Moral Hazard Lingers

WASHINGTON, D.C. - The Congressional Oversight Panel today released its January oversight report, "An Update on TARP Support for the Domestic Automotive Industry." The Panel finds that, although it remains too early to tell whether Treasury's intervention in the U.S. automotive industry will prove successful, the government's ambitious actions appear to be on a promising course. Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury's efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Since the Panel last reviewed the bailout of the domestic auto industry, the financial state of taxpayers' investments has improved starkly. At the time of the Panel's last comprehensive report on TARP automotive programs in September 2009, the Congressional Budget Office (CBO) estimated that taxpayers would lose $40 billion in the automotive industry. Today, CBO has reduced its loss estimate to $19 billion, and the three largest recipients of automotive bailout funds -- General Motors (GM), Chrysler, and GMAC/Ally Financial -- all appear to be on the path to financial stability.

In each of its automotive bailouts, Treasury's goal of recovering taxpayer money has conflicted with its stance as a reluctant, "hands off" shareholder. With GM, Treasury sold 40% of its stake in the company very early, when the share price was 26% lower than needed to recover taxpayers' investment in full. With Chrysler, Treasury sold its position in Chrysler Financial so hastily that it may not have performed basic due diligence and may have left money on the table. With GMAC/Ally Financial, Treasury has maintained its position as a "hands off" shareholder even at the expense of profitability -- for example, by declining to urge GM to consider repurchasing GMAC/Ally Financial. In all of these cases, Treasury's decisions may well have been reasonable, but they illustrate the inherent conflicts in Treasury's stated goals for its automotive intervention. Virtually any action may be defended as either improving taxpayers' returns or maintaining a "hands off" approach, and as a result, it is difficult for any outside observer to judge whether Treasury's results in fact qualify as successful.

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer. Treasury's rescue suggested that any large American corporation -- even if it is not a bank -- may be considered "too big to fail" if its collapse would eliminate enough jobs and wreak enough economic damage. As a result, the automotive rescue creates a risk that moral hazard will infect areas of the economy far beyond the financial system. Further, the fact that the government helped absorb the consequences of GM's and Chrysler's failures has put more competently managed automotive companies at a disadvantage. For these reasons, the effects of Treasury's intervention will linger long after taxpayers have sold their last share of stock in the automotive industry.

The full report is available at cop.senate.gov.

The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform. The Panel members are former Senator Ted Kaufman; J. Mark McWatters; Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Kenneth Troske, William B. Sturgill Professor of Economics at the University of Kentucky.