Yesterday, the Senate Committee on Banking, Housing and Urban Affairs held a hearing entitled “Pulling Back the TARP: Oversight of the Financial Rescue Package,” which addressed Treasury’s administration of the TARP. Most recently, Treasury has been heavily criticized by lawmakers for failing to impose requirements for use TARP funds by recipients, and claims that the government in many instances has overpaid for stocks and other assets in efforts to rescue at-risk financial institutions.

Committee Chairman Christopher Dodd (D-CT) noted in his opening statement that “[i]f ever there were a program in need of a sign in front that read ‘under new management,’ it’s this one.” He called for the complete overhaul of the government’s bailout initiatives, which would include enhancing the transparency of Treasury’s decision-making process and imposing stricter limits on executive pay for participating financial institutions, along with express requirements that recipient banks increase lending. Chairman Dodd acknowledged, however, that the Obama administration needed to continue to support efforts to provide government assistance to financial institutions in order to restore the economy.

Testifying before the Committee were the following witnesses:

Gene L. Dodaro, Acting Comptroller General, United States Government Accountability Office  

Neil M. Barofsky, Special Inspector General, Troubled Asset Relief Program  

Professor Elizabeth Warren, Chair, Congressional Oversight Panel for the Troubled Asset Relief Program  

Mr. Dodaro’s testimony at the hearing focused primarily on the findings and recommendations in GAO’s recent report on the status of the Treasury’s efforts to address the transparency and accountability of TARP. Pursuant to Section 106 of the Emergency Economic Stabilization Act the GAO is required to report on TARP every 60 days. Mr. Dodaro stated that, despite efforts to address the GAO’s previous recommendations, Treasury still faced several challenges. He specifically noted that the Treasury has not improved the transparency of the program and has failed to provide a ‘clear strategic vision’ for TARP. In response to questions from the Committee, Mr. Dodaro also focused on the transition of the new administration at the Office of Financial Stability with respect to its hiring efforts, use of contracts and development of internal controls.

The testimony of Mr. Barofsky, Special Inspector General for TARP, focused primarily on the conclusions and recommendations contained in his initial report to Congress, which was scheduled to be released this morning, and certain audits and inquiries that his office had completed and would be commencing. He reiterated the importance of coordinating oversight among his office, the GAO and the Congressional Oversight Panel and other oversight agencies in “establishing protocols and sharing ideas for comprehensive audits” with respect to TARP. He also noted that TARP represented “a massive and unprecedented investment of taxpayer money designed to stabilize the financial industry and promote economic recovery” and further outlined the initiatives that his office, like the GAO, had taken thus far to promote efficient oversight. Such initiatives include recommendations that Treasury post all TARP agreements on its website (which Treasury has since begun to do, include broad oversight language in agreements governing large TARP transactions, and request that recipients of TARP funding provide “details of their plans to comply with applicable executive compensation restrictions.”

Professor Warren, Chair of the Congressional Oversight Panel (the congressional entity charged with the oversight of the TARP program), noted that the COP’s January report concluded that Treasury “need[ed] to provide more information on bank accountability as well as transparency and asset valuation.” She also stressed that “[d]espite the rush to expand both the size and scope of TARP, Treasury must delineate these fundamental points which should have been spelled out at the very beginning of the program.” She stated that the CPO’s February report would be submitted to Congress on Friday, and that this report focused specifically on the question of whether the taxpayers have obtained a fair deal. She stated that the report will conclude “that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value.” After “[e]xtrapolating the results of the ten transactions analyzed to all purchases made in 2008 under TARP, [the CPO has determined that] Treasury paid $254 billion, for which it received assets worth approximately, $176 billion” or an implied subsidy of $77 billion.

Last month, the Congressional Budget Office in its report outlining TARP transactions through December 31, 2008, applied the valuation methods required by the Federal Credit Reform Act,” with minor adjustments to incorporate “market risk as specified in EESA.” The CBO report, like the CPO, performed a similar valuation analysis of TARP transactions and estimated that the implied subsidy amounted to approximately $64 billion.