Bailout Tops $4 Trillion: Congressional Oversight Panel Says Time to Liquidate Banks

April 9, 2009

(ChattahBox)—The Congressional Oversight Panel, set up to provide accountability to the Troubled Asset Relief Program or Tarp, issued a comprehensive 151 page report this week. The Panel, headed by Harvard Law Professor Elizabeth Warren, suggested the Treasury Department seriously consider the liquidation of insolvent banks, while also holding failed managers accountable by sacking them and even, filing criminal charges if appropriate. Warren also called for greater transparency in how the funds are being used.

Warren’s Panel’s also noted that the original Tarp price tag of $700 billion, has mushroomed to an astonishing figure exceeding $4 trillion, based on the Treasury’s expansion of the Federal Reserve Board’s balance sheet, combined with all other direct spending, loans and guarantees.

April’s report, entitled, “Assessing Treasury’s Strategy: Six Months of TARP,” addresses the question of, “What is Treasury’s strategy?” The very detailed and scholarly report serves as an historical primer on how to effectively deal with financially troubled banks, and how to make a complete mess of things.

Warren’s Panel presented its findings against the backdrop, of awarding the Treasury Department headed by Timothy Geithner with a grade of a “gentlemanly C,” saying, “evidence of success or failure is mixed.” The Panel says Geithner’s new subsidization approach may be fundamentally flawed and “fail to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”

The Panel provided an historical analysis of past governmental actions dealing with failed banks, including the 1980s savings and loan crisis and establishment of the Resolution Trust Corporation, and the government seizure of Continental Illinois in 1984. It also discussed various approaches taken by European countries, some good, Sweden and some bad, Japan.

Warren’s Panel was quick to note, it was not demanding that the Treasury Department change direction from its current plan of government subsidization to outright liquidation of troubled banks, but the report certainly presents the view that liquidation may be the best course of action.

The report said, bank liquidation “avoids the uncertainty and open-ended commitment that accompany subsidization,” believing it may better restore market confidence and “potentially accelerate recovery,” more so than the seemingly never-ending infusing the institutions with government cash.

Warren gives the Treasury Department the benefit of the doubt in its belief that current financial problems are the result of “temporary liquidity” brought on by “nonfunctioning markets for troubled assets.” Hopefully concluding, “If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis.”

What’s interesting in this new oversight report, is the sharp divide between Republicans and Democrats, in how they view government liquidation of failed banks. The two Republicans on the five-member Panel, former Senator John Sununu and Rep. Jeb Hensarling, both voted against the report. Sununu was concerned with possible bank “nationalizations,” as well as New York State Superintendent of Banks Richard Neiman, although Neiman voted for the report.

Elizabeth Warren is a Harvard law professor, recognized expert in bankruptcy and consumer debt and author of “The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke.” It seems Professor Warren provided Geithner and the Treasury Department with all the informational weapons and political cover it needs when and if, bank liquidation is necessary.

According to Warren’s report, that day may be coming soon.



2 Responses to “Bailout Tops $4 Trillion: Congressional Oversight Panel Says Time to Liquidate Banks”

  1. Hal on April 9th, 2009 4:44 pm

    This is crazy. Our free market society was supposed to liquidate these bad banks to begin with. That’s what it does with failed businesses. It’s what keeps the markets strong and thriving. Should have liquidated them to begin with. No business or country for that matter is too big to fail.

    What’s too bad is I doubt that the advice of liquidating them will be heeded.

  2. Obama TARP Advisors, Incompetent or in Banks’ Pockets: Says Economist Joseph Stiglitz | ChattahBox News Blog on April 17th, 2009 11:52 am

    […] head of the TARP Congressional Oversight Panel, said much the same thing as Stiglitz in her recent report, suggesting the Treasury Department seriously consider the liquidation of insolvent […]

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