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By Mike Caggeso
After conducting a six-month review of the economic effects of Troubled Asset Relief Program (TARP) spending, a Congressional Oversight Panel suggested the removal of more company executives and liquidating some of the country's bad banks to accelerate a financial recovery.
"All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets," the panel said in its report,.
The 151-page report also slaps U.S. Treasury Department on the wrist, saying that it's possible that the Treasury's approach "fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth." All things considered, the report says "evidence of success or failure is mixed."
The report suggests three fundamentally different alternatives to help efforts to restore the financial systems – liquidation, receivership and subsidization – and also outlines the pros and cons of each.
Liquidation avoids uncertainty and could restore the confidence of surviving banks. Receivership means an in-place reorganization that removes bad assets, replaces failed managers and spins off parts of the businesses. Subsidization involves giving banks the capital necessary to survive in tough economic times until growth begins again.
Whatever path the Treasury follows, the report noted that previous financial rescues, both domestic and abroad, involved governments' "willingness to hold management accountable by replacing – and, in cases of criminal conduct, prosecuting – failed managers."
The panel's two republicans, John Sununu (R-N.H.) and Representative Jeb Hensarling (R-Texas) dissented from the report. They were joined by New York State Superintendent of Banks Richard Neiman.
"The Panel did not reach an agreement on either the economic assumptions underlying strategic choices or on the optimal strategy to pursue," Neiman and Sununu wrote. "Further, we are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new Administration does not have a workable plan."
In the past six months, the Treasury has spent or committed $590.4 billion of TARP funds, and the Federal Reserve has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities, according to the Panel's estimations.
The total value of all direct spending, loans and guarantees provided as part of the government's financial stability efforts now exceeds $4 trillion.
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