Based on Elizabeth Warren’s work as chairman of the Congressional Oversight Panel, it is not clear she has the balanced judgment needed to direct the new Consumer Financial Protection Agency within the Federal Reserve.
The oversight panel was created in the fall of 2008 to study and report on execution of the $700 billion Troubled Asset Relief Program intended to help stabilize chaotic conditions in U.S. financial markets that were threatening to bring on a second Great Depression.
Under Warren’s leadership, the panel has acknowledged — though only in passing — that actions related to TARP helped the country avert a financial collapse. The main focus of the panel’s reports have emphasized the program’s supposedly “enormous” costs while proposing cheaper alternatives that might well have failed to work.
As a result, the reports have undercut public confidence in the government and helped foster the widespread notion that TARP did nothing but bail out wealthy Wall Street investors who didn’t deserve it.
In a new study published last month ,“How the Great Recession Was Brought to an End,” economists Alan Blinder of Princeton University and Mark Zandi of Economy.com reviewed TARP: “Both the program’s $700 billion headline price tag and its goal of ‘bailing out’ financial institutions — including some of the same institutions that triggered the panic in the first place — were hard for citizens and legislators to swallow. To this day, many believe the TARP was a costly failure.
“In fact, TARP has been a substantial success, helping to restore stability to the financial system and to end the freefall in housing and auto markets,” with its ultimate cost to taxpayers of less than $100 billion and “with the bank bailout component probably turning a profit,” Blinder and Zandi said.
Most of the $100 billion involves subsidies to protect homeowners from mortgage foreclosures. Nearly $50 billion of TARP money helped fund the rescue of the American International Group, arguably the world’s largest insurance company, in September 2008 when it was on the verge of bankruptcy. AIG was in trouble primarily because it had sold a large number of credit default swaps — a form of insurance contract that pays off if a bond or other type of security goes into default — to financial institutions. Many of the securities involved subprime mortgages that turned sour. Had the government known much earlier that AIG was becoming a basket case — and the panel justifiably criticizes the abysmal failure of regulators to recognize this — some of those options might have been viable.
In June, Warren’s oversight panel issued a 337-page report on the AIG rescue, which initially required $85 billion from the Federal Reserve and later the TARP money. In a video linked to the opening page of the report, Warren said the total amount of about $182 billion was equal “to almost $2,500 for every household in America.” Moreover, “the government failed to exhaust all options before rescuing AIG,” putting taxpayer dollars at risk.
According to the report, before using taxpayer money, the government should have considered a type of public/private rescue, a loan conditioned on AIG creditors granting concessions, or a short-term bridge loan from the New York Fed to provide AIG time for longer-term restructuring.
Had the government known much earlier that AIG was becoming a basket case — and the panel justifiably criticizes the abysmal failure of regulators to recognize this — some of those options might have been viable.
But the Fed and the Treasury were also trying that September to find a buyer for the investment bank, Lehman Brothers Holdings, an effort that finally failed. The Lehman bankruptcy did enormous damage to financial markets and made AIG’s plight far worse.
In fact, AIG was attempting that month to find lenders on its own. When that failed, the company then hoped the Fed would back it up with tens of billions of dollars worth of loan guarantees. However, as the report notes, AIG couldn’t even tell how much assistance it needed and every day between Sept. 12 and 16 the amount shot up.