Feb 12 2009

Oversight of the Financial Rescue Program


“Thank you, Mr. Chairman.

“Since the Troubled Asset Relief Program was established by Congress last October, the program has failed to mend our ailing financial system despite having spent nearly $350 billion in taxpayer dollars.  TARP has been marred by a lack of initial planning, ad hoc implementation, and a flawed premise.  Most troubling has been the lack of candor about the administration of TARP. 

“When TARP was under consideration by Congress, the Bush Administration and the Fed, where Secretary Geithner was then President of the New York Fed, told us that the best way to fix the financial crisis was to use TARP funds to buy illiquid assets from banks.  Only a few weeks after Congress created TARP, however, the Treasury Department abandoned this plan because it suddenly decided that such purchases would not be ‘the most effective use’ of TARP funds.  Instead, Treasury decided to use TARP to inject capital directly into banks.  Although Treasury said that only ‘healthy’ banks would receive funds under TARP’s Capital Purchase Program, we now know that a substantial amount of that money went to propping up faltering institutions.  Just weeks after Treasury purchased shares in Citigroup and Bank of America, Treasury and the New York Fed had to inject more than $40 billion more into these institutions to rescue them from mounting losses on mortgage-backed securities.  And what have taxpayers received for their money?

“The financial system remains badly damaged and the economy has deteriorated sharply as it has become clear that TARP is not the magic bullet its supporters claimed it would be.  Today the Committee will hear Treasury Secretary Geithner’s plans for reforming TARP.   As we examine Secretary Geithner’s plan, I believe we need to make sure that it is thoroughly thought through, focused on details, and seeks to anticipate unintended consequences.  It should provide a clear, comprehensive solution for restoring the health of our financial system without insulating market participants from the consequences of their actions.  It should also be coordinated with other ongoing efforts to resurrect the economy.  In particular, Secretary Geithner should explain how his plan for reviving the financial system relates to the stimulus bill now moving through Congress.

“In light of the recent tendency for Treasury and our regulators to say one thing and then do another when it comes to administering TARP, I expect Secretary Geithner’s statements to this Committee about his plans for TARP to match his future actions.  If circumstances change, he should come back before the Committee to explain the reasons for any needed changes to his plan.  Because Secretary Geithner was President of the New York Fed during the past five years and reportedly took an active role in the creation and implementation of TARP, I also hope to hear his explanations for both the failures of TARP to date and the oversight lapses that helped create the financial crisis in the first place.  It is unfortunate that we did not have Secretary Geithner before the Committee while he was New York Fed President to discuss these issues.

“In our consideration of this latest effort to address the financial crisis, I believe the Committee should be careful not to repeat our mistakes with TARP.  The original TARP legislation was not well thought out and was not properly considered by Congress.  The initial TARP legislation was a ridiculous 2 ½ pages long.  Although Congress eventually tacked on several hundred additional pages, it did not alter in the least the core of the plan crafted by the Bush Administration and the Fed.  Instead, Congress hastily passed TARP without taking the time to consider the alternatives.  This Committee never even held a hearing to give critics of the plan a chance to share their views.

“While supporters of the plan claim that our financial markets would have collapsed had Congress not quickly passed TARP, recent research suggests that the financial crisis dramatically worsened as Congress panicked and market participants began to realize that the plan was not thought through.  I believe that this Committee has a responsibility to take the time to fully consider Secretary Geithner’s plan, including hearing alternative views.  We should not stifle debate on a matter of this importance.  Given the complexity of the issues involved, we need to hear from experts with diverse viewpoints – on the record –  so that we can learn the strengths and weaknesses of the plan.  We should not bless Secretary Geithner’s plan unless we are sure it is the right plan.

“Since the financial crisis started a year and a half ago, Congress has largely been on the side-lines.  It has deferred to the Executive and the Fed to solve the crisis.  As I have said before, Congress and this Committee have important roles to play in addressing this crisis, starting with building a consensus on what caused it and how we should fix it.  I believe the absence of meaningful Congressional involvement in crafting the original TARP plan will be viewed historically as a critical error that helped produce a flawed program and undermined public confidence in Washington’s ability to tackle the economic challenges facing the country.Our economy and markets would have been better served had we taken the time to make sure that the TARP legislation effectively addressed the problems created by the financial crisis. As we consider Secretary Geithner’s plan, I hope we can learn from our past mistakes with respect to TARP so that we can finally craft a solution that will help bring an end to this financial crisis.  

“Thank you, Mr. Chairman.”