Senate Democrats

Remaining TARP Funds Needed to Ease Credit Markets and Mitigate Foreclosures

Today, Congress will debate whether to provide the Treasury Department with the second half of the funds under the Emergency Economic Stabilization Act (commonly referred to as TARP). According to numerous experts, this funding is necessary in order to stabilize the financial markets and mitigate the ongoing foreclosure crisis. House Financial Services Chairman Barney Frank said, “If we do not get the second $350 billion, I don’t see a way we can get substantial foreclosure relief.” Since the measure was passed, key economic indicators have shown some ‘thawing’ in the credit markets, but more needs to be done to put our economy back on sound footing. Democrats are committed to ensuring transparency and accountability for these funds, which will be critical to turning our economy around.  


One Key Indicator Reveals Credit Markets Have Begun to Thaw… The cost of three-month loans between banks fell to fresh multi-year lows Tuesday amid signs that the pressures in credit markets are easing. The interbank lending rate on three-month loans in dollars known as the London Interbank Offered Rate, or Libor fell around 0.07 percentage points to 1.09 percent, its lowest level since June 2003, according to the British Bankers’ Association. Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals. Rates have been high during the financial crisis as banks have hoarded cash and worried that other lenders might collapse and not pay them back. Though the interbank lending rates have been falling consistently over the last few weeks in the wake of large interest rate cuts around the world and massive central bank liquidity provisions, all three rates remain above the levels markets think benchmark interest rates will be in three months. [AP, 1/13/09]

…However More Is Needed. Even as Libor falls, there remain signs that lending remains limited because of a worsening economy and falling home prices. “The behavior of Libor over the coming days and weeks will be a crucial sign of whether or not liquidity is returning to money markets,” Morgan Stanley told clients this week. “If not, authorities around the world will find they still have a lot of wood to chop.”[Wall Street Journal, 1/7/09]

Credit Is Still Difficult to Obtain for Businesses and Consumers as Banks Are Unclear of Washington’s Next Steps. As the financial industry rounds out one of the most wrenching years in its history, bankers and policy makers are struggling to see the way out of this mess. Despite triage by Washington and trillions of dollars of taxpayers’ money, credit is not flowing nearly as much as many had hoped. Even after receiving millions, in some cases billions, of dollars from the government, banks are reluctant to lend money. Crucial parts of the financial system have stopped functioning. The exuberance of the boom, which led bankers to make loans to people who could not repay them, has given way to a seemingly intractable fear of making any loans at all. Since late November, news that the government planned to acquire billions of dollars in mortgage securities issued by Fannie Mae and Freddie Mac, the two mortgage finance giants, has driven down home loan rates. The national average 30-year fixed mortgage rate has fallen a full percentage point, to just over 5 percent, setting off a huge refinancing boom. The drop in mortgage rates, coupled with a steep decline in government bond yields, is prompting investors to reconsider riskier, albeit higher-yielding investment-grade corporate bonds. Since October, the difference between the yields on such bonds and comparable Treasuries, a measure of the risk investors perceive in corporate debt, has fallen to about 4.3 percent, from 5.7 percent. “’October was the peak, during which everybody shut down and stopped doing a lot of things,” said Curtis D. Ishii, the senior investment officer for fixed income at Calpers, the large California pension fund. ”In December, things got a little better.” Still, many bond investors and analysts remain cautious. Despite the government interventions, and indeed even because of them, many investors are reluctant to act until they are sure of Washington’s next step. [New York Times, 12/31/08]

Prominent Investment Advisors Argue For Assistance to Lenders Coupled With an Economic Recovery Plan To Get the Nation Out of the Recession. Linda Duessel of Federated Investors said, “I met with a financial services company and the banker was quizzed by some angry person, who asked, ‘Why won’t you lend the money?’ And the banker said, ‘We have the same standards as we have always had. But the problem is our customers’ situation is rapidly getting worse. So why are we going to go ahead and lend?’ So it is going to take a while because things will still get worse.”

Hugh Johnson of Johnson Illington Advisors noted, “Obviously, now there is a significant risk in lending. Banks are very concerned about the state of the economy. And the truth is, there isn’t a lot of loan demand, which is why this stimulus plan is so important. Hopefully it will jump-start the credit-demand part of the equation, and the two together will start to lead to an increase in lending so the credit creation process can once again start. [USA Today, 12/15/08]

Even though it has Criticized the Treasury Department’s Management of TARP Funds, the Congressional Oversight Panel Conceded Market Indicators Have Improved.  According to the report, “Treasury claims that the TARP capital investments stemmed a series of financial institution failures and made the financial system fundamentally more stable than it was when Congress passed the legislation. It cites the “average credit default swap spread” for the eight largest U.S. banks, which Treasury notes has declined by about 240 basis points since before Congress passed EESA. Treasury does not state the dates of their measurements or note that credit spreads have been extremely volatile over the fourth quarter. The metric Treasury cites is the spread between the London Interbank Offered Rate (LIBOR) and the Overnight Index Swap rates (OIS). Treasury notes that 1-month and 3-month LIBOR/OIS spreads have declined about 220 and 145 basis points, respectively since the law was signed, and about 310 and 240 basis points, respectively, from their peak levels before the Capital Purchase Program (CPP) was announced. While it is true that the short-term spreads have contracted, they remain far above historic averages. Moreover, the long-term bank spreads remain extremely elevated. And, bank spreads represent a single indicator on the broader financial crisis. There is a need to have metrics that gauge the markets more broadly, as well as other economic measures, in order to form any firm view of the effectiveness of Treasury’s strategy.” [Congressional Oversight Panel Report]

Ø      According to the Treasury Department, Key Indicators Reveal The TARP Program Has Improved Conditions in the Marketplace. According to the Treasury Department’s response to the Congressional Oversight Panel Report, “While it is difficult to isolate one program’s effects given policymakers’ numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined by about 240 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: 1 month and 3-month LIBOR-OIS spreads have declined about 220 and 145 basis points, respectively, since the law was signed and about 310 and 240 basis points, respectively, from their peak levels before the CPP was announced.” [Treasury Department Response to Congressional Oversight Panel Report]


Fed Chairman Ben Bernanke Supports Democratic Efforts For an Economic Recovery Package, But Also Called for Capital Injections into Financial Firms. “The Federal Reserve will do its part to promote economic recovery, but other policy measures will be needed as well,” Mr. Bernanke said in a speech at the London School of Economics. “The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. “In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” he added. Mr. Bernanke said the government may need to provide more capital injections to financial firms to help stabilize the markets considering the worsening of the economy’s growth prospects. Additionally, guarantees may become necessary “to ensure stability and the normalization of credit markets,” he said, according to a prepared text of his London speech. [Wall Street Journal, 1/13/09]

Federal Reserve Vice Chairman, Donald Kohn, Called For the Rest of the TARP Funds to be Released And Be Used To Prevent Foreclosures. Kohn encouraged Congress to release the second $350 billion, saying the remaining funds “will play an essential role” in restoring the flow of credit in the economy. He didn’t specify the amount of funds that should go for foreclosure relief or additional capital injections in banks. He insisted, however, that policymakers need to do more to deal with the record numbers of foreclosures that continue to weigh on the economy. This will be a major focus of congressional Democrats and the Obama administration as they move ahead with the TARP program. “Although a number of efforts are underway to address the problem of preventable foreclosures, more needs to be done,” Mr. Kohn said. [Wall Street Journal, 1/13/09]

Former McCain Adviser Mark Zandi Called for the Rest of the TARP Money to be Released and Used for Foreclosure Mitigation. Former McCain campaign advisor, Mark Zandi argued, “[t]he remaining $350 billion in TARP funds need to be deployed aggressively and more broadly. The equity infusions should be extended beyond commercial banks to other institutions whose failure would threaten the financial system and broader economy.” He went to argue, “A much larger and more comprehensive foreclosure mitigation plan is also needed. Millions of homeowners owe more than their home is worth, and unemployment is rising quickly. Foreclosures, already at record-high levels, are sure to mount. The Hope Now and Hope for Homeowners programs face severe impediments and even under the best of circumstances will likely be overwhelmed by the wave of foreclosures still coming.” [Testimony of Mark Zandi, 11/19/08]


Obama’s Transition Team Assured Congress They Would Focus on Providing Greater Accountability and Foreclosure Relief. “It is clear that the financial system, although improved from where it was in September, is still fragile,” Obama said Monday in making the case for the additional bailout funds. Lawrence H. Summers, whom Obama chose to head his National Economic Council, promised in a three-page letter to congressional leaders Monday that the new administration would “act both quickly and wisely.” He broadly outlined the changes that Obama was planning for the second part of the fund, including more transparency in how the money is spent and “a sweeping effort” to reduce foreclosures. [AP, 1/13/09; Los Angeles Times, 1/13/09]

Obama’s Transition Team Assured Congress Resources Would Be Directed Toward Increasing Lending and Not Enriching Shareholders. According to the letter sent to Members by the Obama economic team assured Congress they would do everything in their power “to ensure our efforts are more directly reaching Main Street.” The letter also stated that those entities receiving “exceptional assistance will be subject to tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies.” [Letter to Congressional Leaders from Director-designate Larry Summers, 1/12/09]

Obama Stressed He Would Focus on Getting Credit Flowing Again. “We’re going to focus on housing and foreclosures. We’re going to focus on small businesses,” said Obama. “We’re going to focus on what’s required to make sure that credit is flowing to consumers and businesses to create jobs in the United States.” [Orlando Sentinel, 1/13/09]