According to its website, COP is currently comprised of four panelists. However, the statute creating the Oversight Panel indicates that there are to be five panelists. One was to be appointed by each the Speaker of the House of Representatives, the minority leader in the House, the majority leader of the Senate, and the minority leader of the Senate. A fifth was to be chosen by the Speaker of the House and the majority leader of the Senate, after consultation with the minority leaders in the House and Senate. The Oversight Panel was just empanneled a couple of weeks ago, and there will be a fifth member joining soon.
So far, the panel consists of chairperson Elizabeth Warren, a Harvard Law professor; Representative Jeb Hensarling, from the Texas 5th Congressional District; Richard Neiman, Superintendent of Banks, New York State Banking Department; and Damon Silvers, Associate Counsel, AFL-CIO. They all have very impressive bios, but the only one I am really familiar with is Elizabeth Warren. I have read a couple of her books, and I am looking forward to reading more of them when I get a chance. She is probably the nations leading expert on bankruptcy law and her studies of the economy of the middle class are very insightful.
So what questions will COP be raising? Here is a video introduction from Elizabeth Warren:
The COP is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Its job, through regular reports, is to oversee the Treasury's actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that the Treasury's actions are in the best interest of the American people.
In its first report, COP has formulated 10 questions that need to be answered.
- What is Treasury's strategy?
- Is the strategy working to stabilize markets?
- Is the strategy working to reduce foreclosures?
- What have financial institutions done with the taxpayer's money received so far?
- Is the public receiving a fair deal?
- What is Treasury doing to help the American family?
- Is Treasury imposing reforms on Financial Institutions that are taking taxpayer money?
- How is Treasury deciding which institutions receive the money?
- What is the scope of the Treasury's authority?
- Is Treasury looking ahead?
Included in the report are some pretty good realizations of which Congress should take note. The most obvious is that Treasury must explain how the tax money is being used and it has a responsibility to ensure that the support to the economy from each dollar spent is maximized consistent with the purposes of the Act creating the TARP. To do this, the Treasury must understand the problems facing American families and act in a manner that will provide the most benefit to them.
For example, efforts to increase the availability of credit assume that the fundamental problem is a lack of liquidity. But if Americans are more worried about their own economic security – their employment prospects, their current expenses, and their debt levels – then increasing liquidity will have little impact on consumer spending.
Similarly, buying or guaranteeing some mortgage-backed assets could help place a floor on the value of those assets and move those toxic assets off the books of financial institutions, reducing systemic risk and leaving the institutions with higher-rated assets. But if those toxic assets were over-valued across the board, due in part to failures in the ratings systems, then it is not clear that once Treasury has bought or guaranteed some securities that investors would want the remaining assets that Treasury had not purchased. Instead, investors may believe those assets remain toxic. Uncertainty—or skepticism—over the value of these assets would persist, making efforts to support the market largely unsuccessful.
If the Treasury doesn't have its eye on the big picture, pumping massive amounts of taxpayer money into the banks isn't likely to benefit the American people. The explosion of foreclosures will continue to add to "financial instability and economic decline."
Federal Reserve Board Chairman Bernanke recently reported that foreclosures in 2008 will number approximately 2.25 million. Neighbors see their home prices decline from blighted nearby properties, and foreclosure sales saturate the real estate market with low-priced inventory, further pushing down home prices. Foreclosures also place a double burden on local governments, as they impose direct costs from crime and fires while eroding the local tax base.
Moreover, foreclosure rates have continued to increase in recent months, and one in ten American mortgage holders are now in default or foreclosure. Rapidly rising unemployment is likely to increase mortgage defaults and drive foreclosure rates even higher.
As rising foreclosure rates continue to put downward pressure on home prices, financial institutions will be forced to recognize even greater losses. Each time a family loses its home due to foreclosure, the value of every home within one eighth of a mile declines nearly 1%. In 2002, when home prices were rising, researchers estimated that the holders of a loan are forced to recognize an average loss of $58,792 each time they foreclose on a home. Losses are much greater, however, when home prices are declining.
These are all excellent observations that place the focus on the American family and flailing economy. It has seemed that Congress and the Administration charged with spearheading this unprecedented bailout have lost sight of the people who have suffered as a result of the credit crisis. All we hear about are the big financial institutions bordering on bankruptcy and the emergency need to rescue them.
To put that into perspective, AIG received the largest share of the TARP fund so far - $40 billion. Just a few days after getting the cash it spent $440,000 on "a posh California retreat for its executives, complete with spa treatments, banquets and golf outings." In addition, it was recently reported that AIG has paid out 168 "retention" payments to company executives ranging from $92,500 to $4 million.
PNC Financial Services got a $7.7 billion slice of the pie and rather than use its new-found fortune to increase lending to customers, it purchased National City for $5.58 billion.
And, the day the U.S. automakers' CEOs pleaded for Congress to offer them a $25 billion bailout, all three flew to Washington D.C. in private luxurious jets.
Who exactly is benefiting from the generosity of the Treasury with our tax dollars? Many lenders are terminating small business lines of credit for no reason. American Express discontinued its entire small-business credit program nationwide. Bank of America, as it was receiving $15 billion in TARP funds, cancelled the line of credit at Republic Windows & Doors causing the company to abruptly close. Workers organized a sit-in demanding their 60-days severance pay that federal law requires if they do not get 60-days notice of a plant closure. Bank of America has since agreed to extend a limited amount of credit. Small businesses are still suffering from the credit crisis and they employ about half of all private sector employees.
The American people may be directly affected by the lack of available credit as credit card companies begin to cancel accounts.
The country's biggest credit-card lenders -- Bank of America, Citigroup, JPMorgan Chase, American Express and Capital One -- could cut as much as $2 trillion in consumer credit lines during the next 18 months, according to a recent report by Meredith Whitney, an analyst with Oppenheimer & Co.
This will freeze money when credit is already tight and will hurt consumers -- even those who are current on their bills -- and their credit scores.
There is no doubt that we need more oversight of the Treasury's use of TARP funds. Even the Government Accountability Office said that oversight of TAPR is "seriously lacking." The COP will certainly provide that, but what is even better, in my opinion, is that the chairperson, Elizabeth Warren, will provide it with a keen awareness of plight of the middle class family.
There has been a perception that the bailout has been orchestrated by Wall Street and Harvard elitists, and although Warren is a Harvard professor, she describes herself as the "kid from Oklahoma who has the degree from the University of Huston." She has been researching the middle class for 25 years and she knows what she is talking about.
Among her many publications, there are two that I am eager to read: "The Vanishing Middle Class" in Ending Poverty in America: How to Restore the American Dream; and The Two-Income Trap. Though I haven't had the opportunity to read these yet, I have read two of her bankruptcy books and I have watched some of her interviews and lectures on YouTube. (See The Coming Collapse of the Middle Class and Conversations with History: Elizabeth Warren).
I am pleased to see Warren on the COP. We all need someone with her particular understanding of the middle class economy to take a hard look at what the government is doing with hundreds of billions of tax money in the TARP fund.
Robert A. Franco
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