- The Washington Times - Thursday, December 10, 2009

An independent government watchdog gave the Treasury Department’s bank bailout mixed reviews in its year-end report, saying that the program was key in “stopping the panic” on Wall Street last year but that it failed in many of its goals.

The Congressional Oversight Panel for Troubled Asset Relief Program, or TARP, said that 14 months after the $700 billion program’s creation, it is still too early to declare success or failure.

The panel’s 178-page report, released Wednesday, came the same day that Treasury Secretary Timothy F. Geithner announced he was extending his financial bailout authority to October 2010. TARP was set to expire at the end of the month, but the law allowed for a nine-month extension if Treasury provided a justification to Congress.

While the oversight panel said it was impossible to disentangle TARP from other financial rescue efforts, the program - the federal government’s centerpiece response to the economic crisis - “played a critical role in renewing the flow of credit and preventing a more acute crisis.”

“Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence,” the report said.

Yet despite significant improvement in the financial markets, the broader economy is only beginning to recover from a deep recession. And TARP’s impact on the underlying weaknesses in the financial system that led to last falls crisis, the report said, is far from clear.

Bank failures continue at a nearly unprecedented rate, with 149 shutting down between Jan. 1, 2008, and Nov. 30, 2009. The situation may worsen, the panel said, as deep-seated problems in the commercial real estate sector inflict further damage on small and mid-sized banks.

At least 2 million families also have lost their homes to foreclosure since the start of the crisis.

“It appears that the TARP’s foreclosure mitigation programs have not yet achieved the scope, scale and permanence necessary to address the crisis,” the report said.

The panel also found that TARP created “an implicit guarantee for major financial institutions that distorts pricing for capital and encourages excessive risk-taking.”

“Unwinding this guarantee poses a difficult long-term challenge,” said the report, which was completed under direction of panel Chairman Elizabeth Warren, a Harvard law professor.

The panel during the past year has not shied from criticizing Treasury’s handling of TARP, particularly the controversial loans made to Detroit automakers General Motors and Chrysler.

TARP, proposed by the administration of George W. Bush and passed by Congress last fall, was designed to help avoid a catastrophic meltdown of the economy by offering financial institutions taxpayer-funded loans.

While the program was a key element of the federal government’s response to the financial crisis, it was only one part of a multipronged approach. The Federal Deposit Insurance Corp. and the Federal Reserve undertook major initiatives aimed at bolstering financial stability, as did many foreign governments.

Congress last winter enacted a $787 billion economic stimulus package also credited with helping ease a shaky economy.

Mr. Geithner, who is scheduled to testify Thursday on Capitol Hill before the panel, said extending TARP for nine months would enable the Treasury Department to continue programs to address the slumping housing market and the needs of small businesses. The action also would allow Treasury to respond to unforeseen threats to the financial markets.

About half the initial TARP funds are still not allocated.

“Although the economy is recovering, foreclosures are increasing and unemployment is unacceptably high,” said Mr. Geithner in letters addressed to House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada, both Democrats. “Businesses are still cautious in the face of uncertainty about the strength of the recovery, and many small businesses face very difficult credit conditions.”

House Minority Leader John A. Boehner rebuked Mr. Geithner for extending TARP, saying that “taxpayers have had enough of open-ended bailout.”

“This generational theft must end,” the Ohio Republican said. “We can’t keep borrowing money from the Chinese and the Middle East and passing the tab to our kids and grandkids.”

But the nation’s biggest labor group, the AFL-CIO, praised the secretary for his decision, as well as the administration’s announcement this week to use TARP money for job-creation programs.

The administration has said the cost of the taxpayer-financed bank bailout will be about $200 billion less than projected, thanks to Wall Street paying back the loans at a faster rate than expected on the heels of a gradually improving economy.

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