The Joint Resolution of Disapproval prevents the release of $350 billion to the Treasury Department, as authorized by the Emergency Economic Stabilization Act (EESA). Under EESA, the Treasury Secretary would automatically be granted access to the second half of the $700 billion unless Congress specifically acted to refuse the request.
By failing to pass the Joint Resolution of Disapproval, the Senate effectively releases the second $350 billion of funds.
The Middle-Class Position:
Middle-Class supports the Joint Resolution of Disapproval and opposes the release of TARP funds without additional conditions. $350 billion have been distributed to the nation’s largest financial institutions so far. Yet, struggling middle-class homeowners have enjoyed no apparent benefit from an expenditure of taxpayer dollars sold to them with a promise to pursue foreclosure mitigation efforts. 1.5 million homes were lost to subprime foreclosures between 2005 and 2007 and another 2 million loans are currently more than 60 days delinquent. In the next five years, 8.1 million homes of all mortgage types will be lost to foreclosure. Worse, there has been little accountability for the spending of the original $350 billion in taxpayer funds.
As the former Treasury Secretary notes in his report to Congress requesting the second $350 billion authorized by the Emergency Economic Stabilization Act, the original Troubled Assets Relief Program created by EESA was designed to stabilize the financial system, increase the availability of mortgage finance and avoid preventable foreclosures, and protect taxpayers. While the Treasury Department argues that the first objective has been achieved, the Congressional Oversight Panel charged with monitoring TARP’s implementation has expressed doubt that financial stability has been accomplished as a result of TARP. Treasury has all but ignored the second and third objectives. In congressional testimony, the head of the Center for Responsible Lending pointed out that foreclosure mitigation efforts have largely failed: seriously delinquent loans are at a record level and the redefault rate on modified loans is high. Nearly eight in ten seriously delinquent homeowners are not on track for any loss mitigation, a figure that has worsened over time. One in five loan modifications made in the past year is currently delinquent. Thus, not only are government efforts to prevent initial foreclosures falling short, but loan modification programs are failing to keep homeowners in their homes in the long term. Congressional oversight of the first $350 billion in TARP funds was meager, primarily because financial institutions refused – with Treasury’s approval – to provide detailed accounts of how the bailout money was used. The Treasury Department has not explained why funds were dispensed in the manner they were, while news reports suggest that few banks have used TARP money to increase lending, choosing instead to shore up their capital positions in case of further economic decline and to plot takeovers of rival institutions.
In short, taxpayers have spent several hundred billion dollars to shoulder the risk of the nation’s largest banks and it is unclear what we have received in return. The Senate Joint Resolution of Disapproval provided an opportunity to delay authorization of the second half of TARP funds until a coherent strategy for distribution and oversight that benefited middle-class Americans could be developed. While assurances from President Obama that he will improve TARP administration are welcome, the force of law is necessary to ensure true accountability.
From the Experts:
It is not enough to say that the goal [of the TARP] is the stabilization of the financial markets and the broader economy. That goal is widely accepted. The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards. It would be constructive for Treasury to clearly identify the types of institutions it believes fall under the purview of EESA and which do not and the appropriate uses of TARP funds. The need for Treasury to address these fundamental issues of strategy has only intensified since our last report. – Second Report of the Congressional Oversight Panel for Economic Stabilization, 1/9/2009
Make more loans? We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans. – John C. Hope III, Chairman of Whitney National Bank, speaking about how his bank intended to use its $300 million in federal bailout money, 11/2009
Beyond this Bill:
President Obama has promised, through a letter sent to Congress by the Director of the National Economic Council Lawrence Summers, that he will increase foreclosure prevention efforts, provide a “clear and transparent” explanation for TARP investments, encourage programs that increase lending, and place additional conditions on firms receiving TARP support such as limits on executive compensation and dividends. These are all desirable objectives. Indeed, they are so desirable that they should be codified in legislation that holds the financial institutions receiving TARP funds, Congress, and the President accountable for their achievement. Accountability, in this case, means more than mere disclosure of data: for example, if financial institutions use TARP money to make acquisitions that do not benefit taxpayers, Treasury should be authorized to revoke the loan and contemplate further punitive measures. Indeed, delayed authorization of the second tranche could have provided an opportunity for Congress to link longer-term corporate governance reform with the taxpayer bailout.
As proposals for using the second $350 billion are debated, the Obama administration must work to minimize taxpayer risk while committing to a rigorous program of foreclosure mitigation. Foreclosure prevention should include a moratorium on foreclosures, mortgage write downs, and alteration of bankruptcy law to permit modification of mortgages on primary residences. Treasury should not shy away from bank nationalizations in cases in which commitment of TARP funds would provide nothing more than a subsidy to financial institutions while leaving taxpayers at risk.
Stabilization of financial markets is a critical element of economic recovery and requires, in part, efforts to open credit markets to consumers and businesses. But neither financial stability nor the credit crunch is the only or even the greatest public policy concern at the moment. As foreclosures persist and increasing unemployment makes mortgages, health care, tuition, and other bills increasingly difficult to pay, policymakers must use every opportunity to address the interests of middle-class Americans. This would have been achieved best by including in the TARP authorization measures for foreclosure prevention, stricter corporate governance with enforceable sanctions, and disclosure of how funds are used. In this way, the second TARP would have set the stage for a necessary rethinking of who the financial system works for in the United States.
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