Early on the afternoon of Dec. 31, just as many Americans were beginning to tune out and focus on New Year's Eve celebrations, the Treasury Dept. issued its response to a blistering Dec. 10 report from the congressional panel established to oversee the agency's actions.
The 13-page Treasury report broke no new ground, strongly echoing recent comments and testimony from Treasury Secretary Henry Paulson and Neel Kashkari, his deputy managing the crisis response. At the same time, it sidestepped some of the most pointed questions and observations raised by the Congressional Oversight Panel in its initial report. In that report, the COP criticized the Treasury for failing to monitor what the banks and others actually did with billions of dollars in federal funds they had received, and questioned whether the Treasury had an overarching strategy or could show concrete results.
In its response, the Treasury effectively responded that it knows what it's doing, things could have been a lot worse, its efforts should improve matters in time, and the programs are working even if results are difficult to measure.
Throughout its report, the Treasury offers summary for explanation, recapitulating the events of late September and early October to account for its abrupt changes of course—injecting capital instead of buying toxic assets, then abandoning toxic-asset purchases altogether; ignoring the automakers only to aid them later—and describing why its programs ought to work instead of providing the evidence of results the COP members clearly sought. (Or most of them, anyway: The lone Republican on the panel at the time, Texas Representative Jeb Hensarling, declined to sign the report.)
The report also left unclear how aggressively the Treasury is seeking to determine how banks are using federal funds—a central criticism of both congressional leaders and the COP's initial report. In Dec. 10 testimony before the House Financial Services Committee, Kashkari said his team was "working with the banking regulators to develop appropriate measurements" to track the flow of federal funds through financial institutions, "and we are focused on determining the extent to which the [federal investment] is having its desired effect." No further detail emerged in the Treasury's report Wednesday, which echoed Kashkari's testimony in nearly identical language.
Central to many of the agency's answers in the report—and echoing Paulson and Kashkari in recent weeks—is the argument that, without Treasury's actions, worse could have happened: "The most important evidence that our strategy is working is that Treasury's actions, in combination with other actions, stemmed a series of financial institution failures," the report says. In other words, Treasury seems to be saying, Citigroup (C) teetered on the brink even after receiving an initial $25 billion capital infusion from the Treasury; but after a second bailout, it survived.
The Treasury said it also continues to "monitor lending"—responding at least in part to criticisms by Democrats and others that it never actually required banks to lend the government funds they received. Again echoing Paulson and Kashkari, the agency notes that it hasn't distributed much of the $250 billion allocated to shoring up bank capital. (As of Dec. 29, $172 billion was out the door.) "Clearly this capital needs to get into the system before it can have the desired effect," the report says.
But if lending is in fact not measuring up, the Treasury report continues, Congress should blame "low confidence" rather than the agency's strategy. "As long as confidence remains low," the report says, "banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended."
Overall, some of the more challenging questions asked by the COP remain unanswered, including whether increasing consumer lending will really have a concrete effect on the financial crisis. "Efforts to increase the availability of credit assume that the fundamental problem is a lack of liquidity," the oversight panel wrote on Dec. 10. "But if Americans are more worried about their own economic security—their employment prospects, their current expenses, and their debt levels—then increasing liquidity will have little impact on consumer spending."
And, while the Treasury outlines why it thinks its efforts have worked—a tough task, given how interwoven its actions have been with those of the Fed, the FDIC, and other bodies, and how many outside factors influence the financial markets—it doesn't address a fundamental suggestion by the COP, echoing an earlier Government Accountability Office report: Treasury should "define what the Department itself [believes] constitutes success."
Instead, the Treasury mostly addresses concerns about its effectiveness by recounting its actions:
"Is the [Treasury's] strategy helping to reduce foreclosures?" the COP asked.
"Yes," the Treasury responds. "Treasury has moved aggressively to keep mortgage financing available and develop new tools to help homeowners."
Foreclosures on Hold
Specifically, the agency adds, it prevented Fannie Mae and Freddie Mac from failing, it established a voluntary coalition of mortgage servicers and others in October 2007 to modify some homeowners' loans, it set up a protocol to make loan modifications under Fannie and Freddie's control simpler, and Fannie and Freddie are putting foreclosures on hold for 90 days. But just one statistic is offered on the actual effects of these moves: The housing-industry coalition, HOPE NOW, "estimates that roughly 2.9 million homeowners have been helped by the industry since July 2007," and an estimated 200,000 homeowners a month more are being aided. It remains unclear from the report how many of the assisted homeowners were facing foreclosure but avoided it with industry help, or how much of that help was the result of the Treasury's actions.
"What have financial institutions done with the taxpayers' money received so far?" asked the COP.
It's hard to say, the Treasury responds. Much of the money hasn't been handed out. What has been handed out over the last two-plus months "must work its way into the system before it can have its desired effect." Confidence remains low. Injecting capital into banks should make them stronger and less likely to tighten credit further—and things could have been a lot worse. The Treasury report says lending "won't materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks."
The exchange between COP and the Treasury isn't over; panel chairwoman Elizabeth Warren is likely to thank the Treasury politely for its yearend report. But chances are good that she and her fellow panel members will get the last word. In its earlier report, they made clear that they see their job as evaluating the Treasury's performance themselves, and won't rely on information from the agency alone to evaluate its success. And within a few weeks, Paulson and his deputies will be replaced by an Obama Administration more closely aligned with the COP's congressional sponsors.