Treasury Finds it ‘Difficult’ to Monitor Bailout Funds

The Treasury Department has allocated $162 billion to buy stakes in 208 institutions since implementing a capital purchase program on October 14.  Precisely how are those dollars being implemented within each institution? Well, the government doesn’t exactly know. The Treasury said Wednesday that it’s challenging for government officials to track the use of funds given to those banks participating in the $700 billion bank bailout program. “Each individual financial institution’s circumstances are different, making comparison’s challenging at best, and it is difficult to track where individual dollars flow through an organization,” the Treasury wrote in a response letter to the U.S. Government Accountability Office. In a report released Dec. 3, the GAO said additional actions were “needed to better ensure integrity, accountability, and transparency,” relative to TARP spending activity — specifically suggesting that the program amp internal controls in order to monitor, at least to some extent, how institutions are spending CPP funds. Interim secretary for financial stability Neel Kashkari, who authored the letter Wednesday, said despite the challenges, the Treasury is “working with the banking regulators to develop appropriate measurements and Treasury is focused on determining the extent to which the CPP is having its desired effect.” Kashkari’s letter Wednesday echoed his initial response to the GAO’s assessment, citing the difficulty in monitoring funds. At that time, he signaled that his team was trying to find the next-best solution — on which we assume the jury is still out — in assessing second-order effects. “We are actively engaged with regulators to determine the best way to monitor CPP investments and bank lending,” his Dec. 3 testimony read. “We may utilize a variety of supervisory information for insured depositories, including existing Home Mortgage Disclosure Act (HMDA) data, Community Reinvestment Act (CRA) data, call report data, examination information contained in the CRA Public Evaluations, as well as broader financial conditions.” Kashkari has continued to defend the implementation of TARP amid intense pressure from lawmakers to account for how each institution has used the capital. “Yes” it’s a fair use of taxpayers’ dollars he said in the letter. “Treasury has designed its programs, consistent with EESA, to protect the taxpayer…” House Financial Services Committee Chairman Barney Frank (D-Mass.) and other Democrats have said they will not support releasing the additional $350 billion in TARP funds unless Treasury implements procedures to monitor how participating banks are using the funds. It’s noteworthy, however, that Congress did not explicitly require the Treasury to account for how participating banks would use the funds when it originally approved the bailout bill on Oct. 3. Kaskari says the program is working, just give it time. “The CPP began in October 2008 and the money must work its way into the system before it can have the desired effect,” he wrote. “Moreover, we are still at a point of low confidence…this lending won’t materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks.” Write to Kelly Curran at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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