“Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency”.

I'm planning a closer reading ( not my usual line by line, because it's too tedious and repetitive ) of the GAO report on TARP, which I've read, but here's a first taste from my response to Stacy-Marie Ishmael on Alphaville:

"Government Accountablity Office has just published its take on the Tarp, which can be summed up in ten of the GAO’s own words: “Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency”.

The GAO report is a multi-pronged review, covering:

the activities that have been undertaken through TARP as of November 25, 2008; the structure of OFS, its use of contractors, and its system of internal controls; and preliminary indicators of TARP’s performance.

In other words, it’s a long, dense document (running to 72 pages). We’ve read it, so you don’t have to.

Methodology:

GAO reviewed documents related to TARP, including contracts, agreements, guidance, and rules. GAO also met with OFS, contractors, federal agencies, and officials from some participating institutions.

The Treasury must:

work with the bank regulators to establish a systematic means of determining and reporting in a timely manner whether financial institutions’ activities are generally consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency

develop a means to ensure that institutions participating in CPP comply with key program requirements (e.g., executive compensation, dividend payments, and the repurchase of stock)

formalize the existing communication strategy to ensure that external stakeholders, including Congress, are informed about the program’s current strategy and activities and understand the rationale for changes in this strategy to avoid information gaps and surprises

facilitate a smooth transition to the new administration by building on and formalizing ongoing activities, including ensuring that key OFS leadership positions are filled during and after the transition

expedite OFS’s hiring efforts to ensure that Treasury has the personnel needed to carry out and oversee TARP

ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for Contracts priced on a time and materials basis, and move toward fixed-price arrangements whenever possible

continue to develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance that are robust enough to protect taxpayers interests and ensure that the program objectives are being met

issue final regulations on conflicts of interest quickly and review and renegotiate mitigation plans to enhance specificity and compliance

institute a system to effectively manage and monitor the mitigation of conflicts of interest

That is quite a list, and reviewing it does little to inspire confidence in the Treasury’s initial plan. The GAO is saying, in effect, that Paulson, Kashkari et al need to sit down and seriously think through some quite fundamental issues.

An assessment with which the Treasury largely agrees:

In written comments, Treasury generally agreed with the report and eight of the nine recommendations

The point of dissension? Per Neel Kashkari’s response via letter, included in the GAO report, the Treasury has a “different perspective on what is needed to evaluate how individual institutions participating in the CPP are spending the funds they receive under the program.”

The GAO, for its part, “believes that monitoring aggregate information across the participants would help ensure an appropriate level of transparency and accountability.”

At least interim assistant secretary Kashkari is open to suggestions, noting that the Treasury “

welcomes further discussion on general metrics for evaluating the overall success of the capital purchase program.”

“We believe that Treasury has made significant efforts to ensure transparency and good communication with our external stakeholders, but more can and will be done in these areas,” he added.

Which is helpful, since:

GAO plans to continue to monitor these and other issues including future and ongoing capital purchases, other transactions undertaken as part of TARP (e.g., capital purchases in Citigroup and American International Group), and the status of other aspects of TARP.

Actually, we take it back. You should read the report in full, because it provides a wealth of detail on the various acronyms currently deployed to save the financial world, as well as lots of useful numbers (like table 1: “Amount of Capital Investment and Characteristics of the Qualified Financial Institutions Participating in the Capital Purchase Program, as of November 25, 2008″)."

Good job.

Here's my take, on first reading:

Dec 03 03:22Posted by Don the libertarian Democrat [report]

1. "We spoke with representatives of the eight large institutions that initially received funds under CPP, and they told us that their institutions intended to use the funds in a manner consistent with the goals of CPP. Generally, the institutions stated that CPP capital would not be viewed any differently from their other capital—that is, the additional capital would be used to strengthen their capital bases, make business investments and acquisitions, and lend to individuals and businesses. With the exception of two institutions, institution officials noted that money is fungible and that they did not intend to track or report CPP capital separately. We will continue to monitor the activities of these institutions as well as the plans of others in future reports as well as any oversight provided by Treasury and its agents or the regulators. The banking regulators indicated that they had not yet developed any additional supervisory steps, such as requiring more frequent provision of certain call report data for participating institutions, to monitor participating institutions’ activities.26 For example, it is unclear whether Treasury plans to leverage bank regulators, which in the case of the largest institutions have bank examiners on site, to conduct any oversight or monitoring related to CPP requirements. However, unless Treasury does additional monitoring and regular reporting, Treasury’s ability to help ensure an appropriate level of accountability and transparency will be limited."

   CPP=Capital Purchase Program

   How could you do anything other than an aggregate monitoring given that you don't know exactly what the money was used for?

   Let's be real: The money has been given to the banks to use as they see fit. The government has no real control over it, and aggregate monitoring, presumably, will just tell you if someone is lagging in lending in certain areas, etc. But so what? There's no going back.

   The only real question is how well these banks do for themselves. We sure don't want them losing a lot of money. That's why this program doesn't work. On the one hand,the bank's interests ( solvency and profits ) and the government's interests ( please loan now ) aren't necessarily the same. On the other hand, since we've loaned them a bunch of cash, we want them focusing on their bottom line so we don't lose money on the deal. There is no one set of agreed upon standards to judge the program on. Given that, the next report won't be much clearer, if at all.

"The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending"

James Suroweicki with two good posts:

"Tyler Cowen, I assume, opposes any bailout. But he articulated perhaps the best argument for it a couple weeks ago in The New York Times, when he wrote:

Rebuilding confidence might seem a small matter, but it is not. The truth is this: America is a wonderful and magnanimous nation when it is a winner, but Americans are not used to losing and Americans are not used to panic.

Often we respond to negative events badly, so we need to be especially careful when we are in a losing or risky position.

Very bad events can cause a panic among the citizenry or its leaders, which translates into subsequent bad decisions.

It’s important that policymakers and pundits not fool themselves. Americans are not prepared for G.M. and Ford to go bankrupt. At this point, their failures would be “very bad events,” and they would cause people to panic. If you’re ideologically opposed to the very idea of bailing out private corporations, then opposing this bailout makes sense. But if you’re making a risk-reward calculation, then it doesn’t."

I agree, and consider this an argument based on Politics and Political Economy. It's a good one. Nevertheless, I have articulated conditions for this loan.

Another post:

"Testifying before Congress on Friday, Assistant Treasury Secretary Neel Kashkari, the man in charge of the TARP, said of the $700 billion plan: "It's not a stimulus, it's not an economic growth plan. It's an economic stabilization plan." Unlike Felix Salmon, I think Kashkari's distinction between stabilization and stimulus is actually a useful, and accurate, one. The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending. The hope was, and is, that doing the first would help with the second, but the real problem that had to be dealt with was bolstering the markets' confidence in the health of the country's major financial institutions. (As I've said before, I'm the only person who still thinks that the original TARP plan to buy toxic assets would have helped do this, if it had been done in combination with recapitalization.)

But in arguing that the goal of the TARP is stabilization rather than stimulus, Kashakari actually inadvertently helped explain why it would be reasonable to use TARP funds to bail out G.M., as Democrats advocate. The Bush administration opposes doing so, because, it argues, Congress intended the bill solely "deal with what is an ongoing credit crisis in our financial sector." If the administration thinks that a G.M. bankruptcy would not significantly exacerbate the credit crisis, it's simply not paying attention to what people in the equity and credit markets are saying. In fact, from the point of view of stabilizing the markets and reducing people's risk aversion, giving G.M. and Ford $50 billion is probably the best investment the government could make right now."

So, why don't I support TARP, even as described? Because I believe that a credit stimulus plan would have been a better use of the money and, quite frankly, be a better economic stabilization plan. The Swedish Plan would have been even better, for reasons I've argued elsewhere. So, one can agree that TARP has had some success, and yet still be an awful plan. In the case of the Big 3, I want the conditions earlier enunciated to be met, or no deal. I believe that Suroweicki has a much lower standard of acceptance than I do.

"basically breaking with the rest of the administration and hoping the Congressional Democrats can make it happen."

Baseline Scenario on the FDIC proposal for mortgage relief:

"This plan (which we’ve heard about in some form or another for weeks) would apply to all owner-occupied homes that are at least 60 days past due; mortgages would be reduced so monthly payments are no more than 31% of the borrower’s income. Based on FDIC experience at IndyMac, most of those reductions would be made by reducing the interest rate as low as 3% and extending the term; principal would only be reduced in a small number of cases. (From a net present value perspective, of course, lowering the interest rate and lowering the principal are two ways to get at the same thing.)

Because the government does not have the power to force loan servicers to modify loans, the incentives would be a $1,000 fee per restructured mortgage and, more importantly, a government guarantee for up to 50% of the loan value in the case of a re-default. Participating servicers would also have to systematically review their entire portfolios for loans eligible for modifications, to prevent them from picking and choosing. The FDIC’s high-level estimates are that 4.4 million loans will become sufficiently past due by the end of 2009, 2.2 million could be modified, and 1/3 of those will re-default; the total cost to the taxpayer would be $24 billion, mainly for paying off the guarantee on defaults.

The basic principle of the plan is sound: providing a government incentive to get servicers to do something that will help borrowers and the communities they live in. However, I don’t see anything in it that will get around the securitization problem - servicers are legally bound only to act in the interests of the investors who own the bits and pieces of the loan, and some of them may sue if loans are modified in ways they don’t like. Solving that problem will almost certainly take new legislation."

So:

1) 60 days since payment

2) Payment reduced to 31% of income

3) Reduce interest rate on loan

4) Extend term of loan

5) Lower amount of loan ( Rare )

6) $1000 per mortgage to loan servicers

7) FDIC guarantee of loan value if borrower defaults again

8) Servicers must disclose who's eligible

Problem:

1) Servicers can still be sued by the lenders

Okay. This plan gives an incentive to the servicer by paying them a fee. However, the lender can object if they don't like the terms.

Since the government can't force anyone into this plan, it will be up to the servicers and lenders to accept these terms or not.

The FDIC is linked by me in the other sites area.

But get this, as reported by Baseline Scenario whose analysis I liked:

"By the way, this is Treasury’s response, according to the AP:

[FDIC] officials want to use part of the $700 billion bailout of the financial industry to pay for it. But the Treasury Department is opposed to that idea.

Testifying on Capitol Hill Friday, Neel Kashkari, the Treasury Department’s assistant secretary for financial stability, said the intent of the $700 billion plan was to make investments with the hope of getting the money back. That, he said, was “fundamentally different from just having a government spending program” that would disburse money with no chance of ever seeing any returns.

Is there really a fundamental difference between (a) making investments that theoretically could get a positive return but are really bad investments you are consciously making to shore up the financial system and (b) extending loan guarantees that you know will cost you some money, but will help stabilize the housing market, increase state and local tax revenues, and keep people in their homes?"

There is a difference. The question is whether either is a wise use of taxpayer's money. I'll be honest. I don't like either plan, because there are too many variables that can add cost and lessen effectiveness. However, if they do this, I hope that it works.

"There are also widespread concerns banks may refuse to lend out the funds granted by the Treasury’s capital injections"

Neel Kashkari boasts about TARP on the WSJ:

"Protections for the taxpayer and incentives for banks to resume lending are built carefully into the Treasury’s multi-billion dollar financial-sector bailout package, according to its chief administrator.

And though it’s only weeks into its implementation, with most of its funds yet to be dispersed — and many details of that dispersal yet to be finalized — the Troubled Asset Relief Program has already started to yield results, Neel Kashkari said."

Here's my comment:

“we had to strike the right balance to protect taxpayers .. and get banks to participate.”

In order to get them to loan. It was a credit crisis.

“Kashkari insisted the Treasury wasn’t interested in “micromanaging” the banks taking the funds, and was confident the “right economic incentives” are there for banks to use the funds wisely.

“If they take no action and they don’t put [the money] to use, their return on capital will decrease,” he said.

“We don’t think loan targets are appropriate,” he added. Indeed, “prudent mergers and acquisitions are reasonable and could be a good thing for our financial system,” Kashkari said.’

Are those the same incentives that got them into this mess?

Comment by Don the libertarian Democrat - November 7, 2008 at 4:13 pm