WASHINGTON — A congressional panel reviewing the government’s $700 billion rescue package for the financial sector questioned the Bush administration’s spending of bailout funds and challenged its reluctance to use the money to reduce foreclosures.
In a report made public today, the Congressional Oversight Panel for Economic Stabilization spelled out 10 pointed queries to the Treasury Department and questioned whether its shifting remedies constitute a strategic response to the financial crisis. The review represents the latest critical assessments of the Troubled Asset Relief Program, the massive federal intervention into the nation’s financial system.
The report comes as Democrats, including President-elect Barack Obama, insist that instead of simply injecting money into banks, the government must use the funds to halt rising foreclosures. Federal Reserve Chairman Ben Bernanke has predicted that foreclosures this year will reach about 2.25 million.
“In the macroeconomic sense, foreclosure reduction is an essential part of getting us out of the problem we’re in,” House Financial Services Committee Chairman Barney Frank, D-Mass., said today. “The refusal so far to use the money to that purpose has been I think a violation of the intent and undermines the ability to get the votes in this Congress to do things in the future.”
Frank made his comment as he opened a hearing on the bailout.
The 37-page oversight report offers no specific conclusions, but the questions suggest sharp disagreements with Treasury Secretary Henry Paulson’s stewardship of the program and echo some of the criticism raised in a Government Accountability Office audit of the program last week.
“The American people need to understand Treasury’s conception of the problems in the economy and its comprehensive strategy to address those problems,” the report said.
The tough reviews also come as the Bush administration is considering whether to seek access to the second half of the $700 billion fund. All but $15 billion of the first $350 billion has been allocated in the two months the program has been in place.
Neel Kashkari, director of the Treasury office that oversees the bailout program, told lawmakers at the hearing that Paulson has made no determination about whether to request tapping the remaining money. He said the Treasury department is keeping Obama’s economic team abreast of developments.
He defended the work of the program in the face of tough questions from lawmakers.
“The system is fundamentally more stable than it was when Congress passed the legislation,” he said. Pressed by Rep. Maxine Waters, D-Calif, to put more resources into reducing foreclosures, he said: “Imagine how many foreclosures we would have if we had allowed the financial system to collapse.”
Still, he cautioned that economic anxieties are not helping ease the current credit crunch.
“As long as confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans themselves,” he said. “As confidence returns, we expect to see more credit extended.”
The oversight report noted that Treasury was considering having mortgage giants Fannie Mae and Freddie Mac guarantee and purchase 30-year fixed mortgages with rates as low as 4.5 percent. But the report said the program was designed only to encourage new home buyers.
“The program does not appear to offer any help to already distressed homeowners,” the draft said.
Much of the criticism aimed at Paulson centers on his decision to shift the program’s mission from purchasing troubled assets from banks and other financial institutions to infusing capital into banks by buying stakes in their equity.
“What is Treasury’s strategy?” the draft report asks. “Is the strategy working to stabilize the markets?” and “Is the strategy helping to reduce foreclosures?” The draft presses the Treasury to answer those questions and more.
The panel’s chairwoman, Elizabeth Warren, a Harvard Law School professor and a Democratic appointee to the oversight group, were testifying about the panel’s report today before Frank’s committee.
Rep. Jeb Hensarling of Texas, the panel’s only Republican declined to sign the report. He said he had raised several concerns with the panel over access to resources and other issues that “have not yet been addressed.”
At one point the report notes that Congress is demanding that the auto industry restructure itself in exchange for $15 billion in bridge loans and challenges the Treasury to do the same with banks.
“Has Treasury required banks receiving aid to: Present a viable business plan; replace failed executives and/or directors; undertake internal reforms to prevent future crises, to increase oversight, and to ensure better accounting and transparency; undertake any other operational reforms?” it asks.
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