Senate TARP Reform Less Unlikely, More Unsatisfactory

Harry Moroz

Senate TARP Reform Less Unlikely, More Unsatisfactory

The House engaged in a bit of theatrics yesterday designed to show the Obama administration it was serious about TARP reform. The Senate took note and now seems to be reconsidering its carte blanche release of the second $350 billion of TARP funds. Still, the House TARP reform bill, championed by Financial Services Committee Chair Barney Frank and passed by the body yesterday, addresses substantially more issues of concern to TARP critics than does the Senate legislation, sponsored by Senator Byron Dorgan and still in committee with no cosponsors.

Perhaps most importantly, the Frank bill (H.R.384) prevents any TARP funds from being made available to Treasury unless between $40 billion and $100 billion are committed to a foreclosure prevention plan. The legislation calls for creation of FDIC’s popular and oft-cited loss-sharing foreclosure mitigation program that would prevent an estimated 1.5 million foreclosures. Problems exist with the effort, as David Sirota notes, but the truth remains that 0$ of the first $350 billion in financial bailout funds were spent on foreclosure mitigation. The Dorgan bill (S.195) omits all foreclosure provisions. Is this any way to ensure that a foreclosure mitigation plan will actually be administered?

Though the conditions for receiving TARP funds included in each bill – agreements laying out how the funds will be used – are similar, Frank’s provisions are stronger. Frank’s bill prevents the use of TARP funds for M&As without certification that the action will reduce taxpayer risk or could have occurred without taxpayer money. Frank’s legislation requires reports on lending increases attributable to TARP where the Dorgan bill requires only “a detailed monthly report about how emergency economic assistance…is being used…” This Dorgan provision leaves “the intended objectives and goals of [emergency economic] assistance” undefined, while the Frank legislation requires that Treasury establish “benchmarks” in its agreements with firms receiving TARP assistance.

Further, the Frank bills clarifies that the auto industry is eligible for TARP funds and makes the increase in FDIC insurance permanent. Dorgan's concept of a Taxpayer Protection Prosecution Task Force sounds great, but two new commissions (the bill also creates a commission to investigate "how the economic crisis happened") doesn't seem to relate to our goal of increasing accountability for how the next $350 billion in taxpayer funds are used.

The efforts taken by Frank and Dorgan to increase TARP oversight are welcome. But both measures lack sufficient accountability because they lack sanctions for nonperformance (this is why Frank’s provision withholding any TARP money in the absence of a foreclosure prevention plan 30% of its total size is so attractive).

TARP reform should meet two broad criteria: it should prevent foreclosures and it should include oversight measures that hold financial institutions, Congress, and the administration accountable for achieving, first, foreclosure mitigation and, second, financial stability. If a financial institution does not use TARP funds appropriately, Treasury should be obliged to revoke any financial assistance made to the firm.

The first $350 billion in TARP funds were authorized in part with promises of efforts at foreclosure prevention, but none of the money was used for this purpose. Without accountability measures, why should we expect the second $350 billion to be spent on such efforts?