Close Close

Regulation and Compliance > Federal Regulation

TARP Watchdogs Question Infusions

Your article was successfully shared with the contacts you provided.


The congressional panel overseeing the Troubled Asset Relief Program is asking the government to justify its decision to bail out American International Group Inc.

A TARP Congressional Oversight Panel majority today has released a report that questions why the government is infusing capital into AIG and other financial institutions rather than using the normal liquidation and receivership process already in place.

“Six months into the existence of TARP, evidence of success or failure is mixed,” the panel majority writes.

In addition to drawing on the $700 billion allocated to Treasury under the Emergency Economic Stabilization Act, economic stabilization efforts have depended heavily on the use of the Federal Reserve Board’s balance sheet, the panel majority warns.

“The total value of all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion,” the panel majority writes.

The panel majority is highly critical of the government decision not to disclose promptly and in detail payments made to AIG counterparties through government funds.

This decision, the majority says, “has substantially hampered oversight of the TARP program by Congress and, equally important, has impaired the understanding of that program by the American people.”

Meanwhile, TARP subsidies “carry a risk of obscuring true valuations,” the panel majority writes. “They involve the added danger of distorting both specific markets and the larger economy. Subsidization also carries a risk that it will be open-ended, propping up insolvent banks for an extended period and delaying economic recovery.”

The panel majority does not come to conclusions about whether the current approach is appropriate.

“The actions undertaken by Treasury, the Federal Reserve Board and the Federal Deposit Insurance Corporation are unprecedented,” the panel majority writes. “But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.”

By assessing the Treasury Department’s current approach and discussing alternatives, “the Panel hopes to assist Congress and Treasury officials in weighing the available options as the nation grapples with the worst financial crisis it has faced since the Great Depression,” the panel majority writes.

Two members of the panel, former Sen. John Sununu, R-N.H., and Richard Nieman, New York banking superintendent, question in a minority report whether the majority’s decision to outline alternative approaches to dealing with the current economic downturn is appropriate.

They say the “current Treasury strategy aligns with Congressional intent,” and is “reasonable and viable.”

They also argue that, “Restoring financial stability during an emergency takes precedence over other policy goals.”

Sununu and Nieman say they are “concerned that the prominence of alternate approaches presented in the report, particularly reorganization through 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,” Sununu and Nieman write.

In a March 24 letter sent to Treasury Secretary Timothy Geithner, Elizabeth Warren, a Harvard professor who is serving as chairman of the Oversight Panel, asks for information from Treasury and the Federal Reserve Board about “a number of points related to AIG.”

These include how the assistance was requested and need was analyzed, the assessment of risk to the national and international financial system, any conditions placed on the assistance, and information about counterparties and credit default swaps.

“The panel is particularly concerned that the opaque nature of the relationship among AIG, its counterparties, Treasury, and the Federal Reserve Banks, particularly the Federal Reserve Bank of New York, has substantially hampered oversight of the TARP program by Congress and, equally important, has impaired the understanding of that program by the American people,” Warren adds.

In related news, the TARP special inspector general says he is conducting an audit of the decision by federal regulators to allow AIG officials last fall to pay off counterparties to its derivatives in full, instead of negotiating a settlement that involved the counterparties receiving less than full payment.

Neil Barofsky, the special inspector general, discloses the plans in an April 2 letter to Rep. Elijah Cummings, D-Md. Barofsky says the audit was being launched at the request of Cummings and 26 other members of Congress.

A copy of the Oversight Panel report is available here.