January 14, 2010 |
|WASHINGTON (MarketWatch) -- The Treasury Department can use its broad principles to justify almost any decision it makes when unwinding the government's stake in the $700 billion bank bailout package, according to a congressional oversight panel for the Troubled Asset Relief Program.|
"The panel is concerned that, although Treasury has been consistent in articulating its principles, the principles as announced are so broad that they provide Treasury with a means of justifying almost any decision," the Congressional Oversight Panel wrote in its latest report entitled "Exiting TARP and unwinding its impact on the Financial Markets."
The statute creating TARP lists three principles that guide its determination of when to sell assets: maintaining the stability of the financial system, preserving the stability of individual financial institutions, and maximizing the return on the taxpayers' investment.
However, the panel argued that these principles may sometimes be at odds with each other.
"The most profitable moment to sell a TARP asset may not be the moment that best promotes systemic stability or the moment that best serves a particular institution," it reported. "This means that there is effectively no metric to determine whether Treasury's actions met its stated goals. Because any approach may alternatively be justified as maximizing profit, or maintaining the stability of significant institutions, or promoting systemic stability, almost any decision can be defended."
According to the COP, Treasury's largest TARP assets as of Dec. 31 include $58 billion in preferred securities issued by banks, a $25 billion stake in Citigroup Inc.'s common stock, $46.98 billion in preferred stock of American International Group Inc. and $61 billion in General Motors Corp. and Chrysler shares and debt.
The report also raised concerns about implicit guarantees associated with so-called "too-big to-fail" financial institutions that were bailed out.
"Belief remains widespread in the marketplace that, if the economy once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed too big to fail," the report said. "This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks -- those not too big to fail -- do not enjoy."
Panel members added that the guarantees also encourage financial institutions to take "unreasonable risks" with the belief that if they fail, taxpayers will be there to prop them up.
"So long as markets continue to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation's economy, even after the last TARP program has been closed and the last TARP dollar has been repaid," they said.
However, lawmakers on Capitol Hill are working on legislation that they believe will limit moral hazard while protecting the financial markets. Legislation approved in the House in December would have big banks pay fees to create a $150 billion fund that could be used to dismantle a large Lehman-like failing financial institution, so that its collapse doesn't cause collateral damage to the markets.
The goal of the insurance fund would be to have funds available to make payouts to creditors and counterparties of the failing institution so that they don't collapse as well, driving the market into a financial crisis. Its creation would also mean taxpayer dollars won't be needed to avert another financial crisis.
By Ronald D. Orol, MarketWatch