A scathing new report by a congressional watchdog panel blames the Treasury Department for failing to track how banks are spending taxpayer money provided through the government's $700 billion financial rescue package, also known as the Troubled Asset Relief Program, or TARP.
The panel, which has been charged with overseeing TARP and is led by Harvard Law professor Elizabeth Warren, said in its report that it "still does not know what the banks are doing with taxpayer money."
By investing in banks that have refused "to provide any accounting of how they are using taxpayer money," the Treasury Department has "eroded" public confidence, the report stated.
The panel also asked whether the Treasury Department, which has allocated more than $350 billion from the rescue package so far, failed to comply with Congress' instructions to tackle the country's foreclosure crisis.
The department took "no steps to use any of [the $700 billion rescue package] to alleviate the foreclosure crisis," and that "raises questions about whether Treasury has complied with Congress' intent that Treasury develop a 'plan that seeks to maximize assistance for homeowners,'" the report said.
"I'll be perfectly blunt with you, I'm shocked that we have to ask these questions, but what I will say is I'm not giving up on this," Warren told Chris Cuomo in an exclusive interview today on "Good Morning America."
But Warren added that it falls to Congress to "take a very hard look" at whether the Treasury Department has too much discretion in spending TARP funds.
"Ultimately [I] don't have a badge, don't have a gun," she said. "It's up to Congress [to decide] what they're going to do about making more requirements in how Treasury uses this money."
The good news, Warren said, "is that these questions have gotten a lot of attention and a lot of people are demanding answers and when a lot of people start to demand answers, things start to change."
Treasury Secretary Henry Paulson today defended the TARP program while acknowledging that challenges remain.
"The TARP has been essential and I believe that the decisions we've made with 20/20 hindsight will prove to be the right ones with the TARP, but there's a lot more that still needs to be done," he said in an interview this afternoon with Bloomberg television.
Paulson made no direct reference to the Warren report, but he did speak about at least one issue highlighted by the report: the lack of TARP spending in helping homeowners facing foreclosure.
The government's initial focus, he said, was stabilizing the financial system through investments in banks. Paulson said he was "reluctant to move ahead with a foreclosure plan immediately" because he was concerned about getting "the maximum bang for the buck" and the initial results of early home loan modification "were not encouraging."
He suggested that it would be up to the incoming Obama Administration to deal with the foreclosure crisis.
"I think this is something that Congress and the American people want and I'm going to look with interest at what the next team does here because I think it's important," he said.
The Congressional Oversight Panel plans to issue another report with recommendations on stemming foreclosures.
Among the other issues raised in today's report:
Executive Compensation: The panel asked why the Treasury Department hasn't developed a "uniform program" to limit executive compensation at banks receiving TARP funds, noting that there have been "extensive conditions" imposed on auto companies that are receiving TARP money.
"Healthy" Banks, "Overvalued" Assets? The report noted that the Treasury Department initially said that it would invest funds in "healthy" banks, naming Citigroup among them and providing the bank with $25 billion. But less than a month later, Treasury gave Citi $20 billion in additional financing "apparently to avoid systemic failure."
"These events suggest that the marketplace assesses the assets of some banks well below Treasury's assessment," the report said. "Until asset valuation is more transparent and until the market is confident that the banks have written down bad loans and accurately priced their assets, efforts to restore stability and confidence in the financial system may fail."
Strategy Behind Who Receives TARP Money: Though TARP originally was conceived as a bank rescue plan, the dozens of companies that have received preliminary or full approval for TARP funds include the credit card company American Express and insurance giant AIG.
The panel said that Treasury should "clearly identify the types of institutions it believes fall under the purview" of the rescue package.
"The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards," the report said.
Unanswered Questions: Of the 44 questions the panel presented earlier to the Treasury Department, the department responded to 19. The report suggests that some of the answers the Treasury provided were inadequate.
"While Treasury's letter provided responses to some of the panel's questions and shed some light on Treasury's decision-making process, it did not provide complete answers to several of the questions and failed to address some of the questions at all," the report said.
"The panel is concerned that Treasury's initial response to our questions is not comprehensive and seems largely derived from earlier Treasury public statements," it said.
The Origins of the Credit Crisis: The panel said that the Treasury should "provide an analysis of the origins of the credit crisis and the factors that exacerbated it."
"Only then," the report said, "will Congress be able to determine the appropriate legislative responses."