[This is the sixth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.]
By William Patalon III
Money Morning/The Money Map Report
The U.S. Treasury Department has done nothing to make sure $700 billion in taxpayer-provided bailout money is used to buttress the weak U.S. mortgage market, which was the catalyst for the growing global financial crisis, congressional watchdog Elizabeth Warren said Friday.
Warren, who heads a congressionally appointed oversight panel, told ABC News there was no evidence the Treasury had used money from the Troubled Assets Relief Program (TARP) to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.
"There's just no money that's gone in that direction,” Warren said. “This one’s not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so."
The government has spent the first half ($350 billion) of the bailout money. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. set aside the second half to be deployed by the incoming Barack Obama Administration. President-elect Barack Obama said last week that he wants more transparency and stricter guidelines for using the second half of the TARP money.
The congressional investigation is just the latest in a series of revelations demonstrating the misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.
The Congressional Oversight Panel has now added to that list of criticisms. In a draft of a report released Friday, the panel said the Treasury Department has failed to reveal its strategy for stabilizing the financial system and had done little to track how the money was used.
The draft report cited "significant gaps in Treasury's monitoring of the use of taxpayer money," including asking financial institutions to account for what those banks, brokerages and insurance companies have done with the taxpayer money. The report also questioned whether Treasury fulfilled the promises made to Congress when it pushed for lawmakers to approve the rescue funds.
Indeed, the panel said in its report that “for Treasury to take no steps to use any of this money to alleviate the foreclosure crisis raises questions about whether Treasury has complied with Congress's intent that Treasury develop a plan that seeks to maximize assistance for homeowners.”
According to the report, the TARP panel had asked the Treasury Department to respond to 45 questions, but the department either didn’t – or couldn’t – answer a number of them.
The Treasury Department “set up the system and [it] didn't put any tracking mechanisms on it. [It] didn't put any restrictions on the banks," Warren said during an interview on ABC TV’s "Good Morning America."
"So the money could be used in lots of different ways. It might be used for lending, which was supposedly the initial purpose," Warren added. "It might be used to buy other banks, it might be used to buy other assets, it might to buy things overseas. Or it may just be stuffed in vaults and left there."
A Treasury spokesman declined comment, saying the department had not seen a copy of the report, Reuters said.
According to Reuters, the panel said the Treasury hasn't used any of TARP's first $350 billion tranche to help borrowers refinance or deal with mortgages that have a face value that is more than the current market value of their homes.
"Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what 'help' means," the draft report said.
Asked if the Treasury had been given too much discretion in the use of the funds, Warren, a Harvard Law School Professor, told TV interviewers that “Congress may want to take a very hard look at that question.
"Ultimately, (I) don't have a badge, don't have a gun," Warren said. "It's up to Congress what they're going to do about making more requirements and how Treasury uses this money."
The Treasury Department must request congressional approval to access the bailout fund's second $350 billion. President-elect Barack Obama's economic team, including U.S. Treasury Secretary Nominee Timothy Geithner, is working on an overhaul of the fund to speed the flow of credit to consumers and the economy.
President-elect Obama's economic team has been talking with the Bush administration about having Treasury Secretary Paulson ask Congress as early as this week for access to the $350 billion remaining in the bailout fund. If Congress rejected such a request, a presidential veto could still free up the money, unless Congress overrode the veto.
"Let's lay out very specifically," Obama said on the ABC News program, "This Week." "And I think that we can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.”
News and Related Story Links:
Money Morning Investigative Report on the Bank Bailouts (Part V):
U.S. Banks Refuse to Detail How They’re Spending Federal Bailout Money.
Money Morning Investigative Report on the Bank Bailouts (Part IV):
Banks That Got $188 Billion in Bailout Money This Year Paid Out $1.6 Billion to Top Execs Last Year.
Money Morning Investigative Report on the Bank Bailouts (Part III):
Billions in U.S. Bank Rescue Funds are Fueling Buyouts Worldwide – Instead of Lending at Home.
Money Morning Investigative Report on the Bank Bailouts (Part II):
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis.
Money Morning Investigative Report on the Bank Bailouts (Part I):
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout.
The Associated Press:
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.