Yesterday, the Congressional Oversight Panel (COP) released its January oversight report, “Exiting TARP and Unwinding Its Impact on the Financial Markets.” In its report, the COP noted that the repayment of TARP assistance represents only the first stage of exiting TARP. Although Treasury’s authority to make new commitments to purchase assets, commit funds and establish guarantees ends on October 3, 2010, Treasury will be authorized to continue making purchases with funds that were committed in advance of the deadline. Further, the COP noted that once repayments are complete, Treasury will hold a pool of assets worth hundreds of billions of dollars, and the unwinding process could continue for several years.

The Emergency Economic Stability Act permits the Treasury to hold TARP assets until maturity or to sell them earlier. The Treasury articulated three principles to guide its determination to unwind TARP: (1) maintaining the stability of the financial system; (2) preserving the stability of individual institutions; and (3) maximizing the return on taxpayers' investments. According to the COP, however, these principles may be at odds with one another. For example, the COP notes that “the most profitable moment to sell a TARP asset may not be the moment that best promotes systemic stability or the moment that best serves a particular institution.” Further, the COP expressed concern that, since the three principles are so broad and subjective, the Treasury could justify almost any decision, which would “effectively give no metric to determine whether the Treasury’s actions met its stated goals.”

The COP also noted that the “Treasury must learn from the mistakes made in the past and demand greater disclosure in funds spent this year.” In particular, the COP urged the Treasury to disclose to the public more information about its plans for disposing of its assets and for greater transparency “with respect to the constraints under which it operates and how it will balance its sometimes conflicting obligations to satisfy the three principles of TARP.” However, the COP also urged greater transparency from TARP-recipients, recommending that the Treasury require much greater disclosure of future participants’ use of TARP dollars.

Finally, the COP remarked on the government’s long-term challenge of eliminating implicit guarantees. According to the COP, the widespread belief that the federal government will rescue financial institutions deemed too big to fail encourages financial institutions to take unreasonable risks and continues to distort prices and endanger the economy. Thus, the COP urged that a new approach, including regulatory options, liquidation and reorganization and proposed legislation, was necessary to prevent businesses from insulating themselves from the effects of their decisions.

In their concurrent remarks, J. Mark McWatters and Paul S. Atkins recommended that each TARP recipient submit a formal exit strategy and update that strategy each calendar quarter. They suggested that the Treasury provide the COP with its written assessment of the exit strategies and updates submitted by TARP recipients. In addition, they recommended that Treasury’s foreclosure mitigation efforts be structured so as “to incorporate an effective exit strategy by allowing Treasury to participate in any subsequent appreciation in the home equity of any mortgagor whose loan is modified under HAMP or any other taxpayer subsidized program.” Finally, they asserted that the resolution of the issues arising from implicit guarantee and political risk should remain with Congress.