The US Treasury Department’s US$700 billion bailout program has stabilized the banking system, but it has done little to prod banks to fully deal with the troubled loans on their books, a congressional oversight panel said in a report to be released yesterday.
The Troubled Asset Relief Program was originally conceived as a program for the government to buy troubled and unsalable mortgages and mortgage-backed securities.
But the Treasury has never actually used the program to buy assets, in part because it was faster to invest money directly into the country’s banks and in part because banks have not wanted to sell their problem loans and book the loss in their value.
“The nation’s banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell,” the panel said in its latest monthly report.
As a result, it warned, many banks could find themselves short of capital if the economy suffered another downturn and their losses on troubled loans soared.
In an encouraging note, the panel said 18 of the 19 biggest bank holding companies would probably have enough capital even if economic and financial conditions deteriorated more than they have already.
But it warned that thousands of small and medium banks, which it defined as those with assets of US$600 million to US$100 billion, might find themselves short a total of US$21 billion if the conditions matched its worst-case assumptions.
The panel noted that other institutions had already estimated the amount of troubled assets on bank balance sheets that had yet to be written down. The Federal Reserve estimated in May that American banks still had about US$599 billion in assets to write down. Goldman Sachs and the International Monetary Fund estimated the total at about US$1 trillion. And RGE Economics, headed by Nouriel Roubini, has estimated the total at US$1.27 trillion.
The panel urged the Treasury to either expand its program to soak up troubled assets, the Public-Private Investment Program, “or consider a different strategy.”
The five-member oversight panel is headed by Elizabeth Warren, a professor at Harvard Law School.
One member, however, Representative Jeb Hensarling, dissented from the report.
The recommendations seem to advocate another bailout of a failed federal program with involuntary taxpayer capital, Hensarling said in a statement.
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