Watchdog Warns Toxic Assets Remain a Major Danger to Financial System

Aug. 11, 2009— -- Signs abound that the worst of the recession is over: Stocks have been surging, the rate of job losses has slowed, so it seems that the economic apocalypse has been averted.

Government programs such as the $787 billion stimulus and last fall's $700 billion Troubled Asset Relief Program have so far been successful, the Obama administration says.

Except, the Congressional Oversight Panel warns in its August report, TARP never actually bought any troubled assets.

"It is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today," the panel's report says.

Those bad assets are still there, rotting away on banks' books, making banks reluctant to ratchet up lending, and maybe, the watchdog warns, paving the way for another financial meltdown.

"We are now 10 months into TARP," the panel's report notes, "and troubled assets remain a substantial danger to the financial system."

Even hundreds of billions of taxpayer dollars later, they say, the country could still be susceptible to the same problems that existed in the first place -- especially if the economic situation deteriorates again.

"If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value," the report says. "Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix."