TARP Oversight Chairperson Elizabeth Warren Assesses The Program
Tuesday, August 11, 2009SUSIE GHARIB: toxic bank assets can be hazardous to the economy's health. That was the warning today from the congressional watchdog monitoring the government's bailout of the nation's banks. According to a report from the congressional oversight panel, banks still have plenty of problem loans on the books and that could threaten the economic recovery. How bad is this situation? Stephanie Dhue talked today with the panel's Chairwoman Elizabeth Warren.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: How vulnerable is the financial system to these toxic assets?
ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL FOR TARP: It's vulnerable in two ways. The first is that most of those toxic assets that were there last October are still there, with all of the implications in terms of as they don't pay off, they run the risk of bringing the banks down. The second is so long as these assets remain on the banks' books, every time they get capital in, they use it as sort of a hedge against those assets rather than turning around and lending that capital. So it gets in the way of small business lending and other things that we need to get the economy restarted.
DHUE: So how far will the Treasury's public private investment program go towards cleaning up this mess?
WARREN: The bottom line is we really don't know. It's got two problems with it again. The first is whether or not sort of the incentives that the Treasury is offering to try to get people to buy the assets will be enough to bridge the gap between the amount that the banks are carrying these assets on their books and what most buyers think is the true value. The second big problem with the Treasury's program is it looks only to securitized mortgages. Those are mostly the way that mortgages are held in large financial institutions but in the mid-sized and smaller financial institutions, they're held as whole loans, that is the institution, the bank, holds the whole mortgage and the Treasury's program doesn't do anything for those. So Treasury once again is focused on the very big guys, but not on the rest of the banking system.
DHUE: How risky is it for those small banks? Your reports suggests they're going to need a lot more money.
WARREN: We're really trying to see. We need to take a look throughout the banking system, not just at the two dozen big, big banks. And the reason for that is we have to remember that these small banks, not only do they hold mortgages which will not be touched by the Treasury's program, in addition, they carry a disproportionate share of commercial mortgages that will start maturing next year or the year after or the year after that and that are predicted to have terrible default rates. Also keep in mind, the small banks have not had the stress test that the bigger banks had and small financial institutions from more trouble raising capital. So all of these mean that the just down from big, the medium- sized and smaller financial institutions, there are a lot of risks there and we're really suggesting Treasury needs to take a very close look. Remember, these are the financial institutions that do most of the small business lending in America.
DHUE: Most of the folks on the oversight panel you chair agreed but Congressman Jeb Hensarling said that perhaps the toxic asset problem is taking care of itself and that further government intervention might be counterproductive. Does the government need to be pumping more money into the banking system?
WARREN: I want to start by saying I think maybe he should reread this report carefully. The report doesn't call for spending more money in this area. What the report says is that the way Treasury plans to spend its money may not accomplish the ends that we have identified as needed. And so what we're really trying to get a focus on in the report is to point out the danger areas and to say once again, we started this problem with toxic assets. We spent $700 billion and we stabilized the banks, but we didn't yet deal with the toxic assets problem and we've got to do that to save our banks and to get our economy back on track.
DHUE: There's a lot of concern about the TARP program, that it's become a $700 billion slush fund for the Treasury. When the banks repay the money, it's not getting drawn down. Is that the way this program should be handled?
WARREN: I think this is a serious problem and the best I can say is Congress gets what Congress wrote in this statute. The statute speaks about a ceiling of $700 billion above which Treasury cannot go. Treasury takes the position that that means when money comes back to pay down, that that gives Treasury as they describe it more headroom to be able to use that money in other places where it's needed. Quite frankly, if that's not what Congress wants, then Congress has to be more specific in the legislation.
DHUE: My guest today, Elizabeth Warren. Thank you so much.
WARREN: Thank you.
