Mar 17 2011

Shelby: TARP is No Success

U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing on oversight of the Troubled Assets Relief Program (TARP). 

Excerpts of Shelby’s statement are immediately below in bold, followed by the full text of his prepared remarks:

“I voted against TARP.  I believed then, as I do today, that TARP was a serious policy mistake.  While many will try to claim it was a success, a thorough examination of TARP’s record tells a very different story…

…I fear that the long-term damage caused by TARP will be even more damaging to our financial system.  TARP turned our already severe too-big-too fail problem into official policy…

…TARP has also created moral hazard with respect to financial regulation.  By using TARP to bail out banks, our financial regulators were able to hide their regulatory failures leading up to the crisis…

…Moreover, TARP set a new standard for government intervention in our markets to achieve political ends…

…Some say that TARP is a success because TARP may yield a so-called “profit”.  I am not persuaded…

…First, claims of TARP’s profitability are pre-mature…

…Second, what matters most is TARP’s negative long-term impact on the overall economy, which will dwarf any profit generated…

…In light of the vast authority granted to the Treasury Department under TARP, I believed that this Committee had a responsibility to conduct extensive oversight of the program.  Unfortunately, the majority once again decided to out-source the work of this Committee to outside parties…

…Hopefully, today’s hearing will help us better understand what actually happened in this very controversial program.”

 

STATEMENT OF SENATOR RICHARD C. SHELBY

Committee on Banking, Housing and Urban Affairs

March 17, 2011 

“Thank you, Mr. Chairman.

“In late 2008, Treasury Secretary Paulson and Federal Reserve Chairman Bernanke came to Congress demanding $700 billion to buy so-called toxic assets from banks.  They insisted, at the time, that we were on the verge of a world-wide financial meltdown. 

“Their scare tactics worked.  Congress passed legislation creating the Troubled Asset Relief Program, or TARP.   Although TARP was proposed by President Bush, his successor was a supporter of the program.

“I voted against TARP.  I believed then, as I do today, that TARP was a serious policy mistake.  While many will try to claim it was a success, a thorough examination of TARP’s record tells a very different story.

“The design of TARP was so flawed that just weeks after the bill was passed, Treasury had to abandon its plans to purchase toxic assets.  Purchasing assets proved to be a very difficult plan to implement.  It was also a very risky way to stabilize the financial system.    

“If Treasury purchased assets at too low a price, it could have threatened the solvency of financial institutions by forcing them to mark-down the value of their assets to reflect the prices paid.  And, if Treasury paid too much, it would have given banks a taxpayer-funded windfall.

“Due to these inherent problems, right after TARP was passed, Treasury had to switch to direct equity injections for banks.  Accordingly, a vote for the original TARP was a vote for a flawed plan.

“And what price did we pay?  Our credit markets froze and our equity markets tanked as they saw our policy leaders panicking and recognized that TARP would not solve our problems.  I would like to submit for the record, written testimony by former Under     Secretary of the Treasury and distinguished economist John Taylor, which lays out in detail how the process of enacting TARP worsened our economic downturn. 

“I fear that the long-term damage caused by TARP will be even more damaging to our financial system.  TARP turned our already severe too-big-too fail problem into official policy.  Even TARP’s Special Inspector General has said that “perhaps TARP’s most significant legacy is the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’” 

“Perhaps as concerning, was the fact that our regulators used TARP to keep even insolvent banks afloat.  After TARP, creditors and investors in big banks have every reason to expect that the U.S. government will never allow these banks to fail.  Even worse, this  implicit government guarantee will make big banks careless about the risks they take and will make the next financial crisis more likely and even more severe.

“TARP has also created moral hazard with respect to financial regulation.  By using TARP to bail out banks, our financial regulators were able to hide their regulatory failures leading up to the crisis.  Going forward, our regulators will have reduced incentives to be tough with the big banks if they know that their work has little bearing on whether or not a bank fails.

“Moreover, TARP set a new standard for government intervention in our markets to achieve political ends.  The sloppy drafting of the TARP legislation gave the Treasury Secretary unfettered discretion on how he spent the $700 billion.  As a result, it was used to bail out politically powerful auto-makers and to pour billions into a series of largely ineffective homeowner assistance programs.   

“Some say that TARP is a success because TARP may yield a so-called “profit”.  I am not persuaded. 

“First, claims of TARP’s profitability are pre-mature.  The taxpayer will still likely take losses on TARP’s housing programs and many financial institutions have yet to fully repay their TARP funds.  Moreover, TARP used taxpayer dollars for very risky investments.  A proper evaluation of the returns on any investment must appropriately adjust for risk.  I believe such an evaluation would show that taxpayers were not adequately compensated for incurring these large risks. 

“Second, what matters most is TARP’s negative long-term impact on the overall economy, which will dwarf any profit generated.  On that basis, TARP’s record has not been good for American families.  Since TARP was enacted, the unemployment rate has reached and stayed at record levels.  Lending remains stagnant.  And, millions of Americans are facing foreclosure. 

“In light of the vast authority granted to the Treasury Department under TARP, I believed that this Committee had a responsibility to conduct extensive oversight of the program.  Unfortunately, the majority once again decided to out-source the work of this Committee to outside parties.

“Today, we will hear from the three bodies charged by Congress with overseeing TARP.  It is especially important for us to hear from Special Inspector General Barofsky before he leaves his post at the end of the month. 

“Today we hope to learn how Treasury has managed TARP and how effective each oversight body was at supervising Treasury.  Were they able to obtain the information they needed from Treasury and our financial regulators to do their jobs?  What problems did they identify?  How receptive were Treasury and our financial regulators to their recommendations? 

“Hopefully, today’s hearing will help us better understand what actually happened in this very controversial program.

“Thank you, Mr. Chairman.”