Financial Regulatory Forum

Toxic assets still threaten banks -US bailout panel

August 12, 2009
TARP | USA

USA/   By David Lawder and Kevin Drawbaugh
   WASHINGTON, Aug 11 (Reuters) – Toxic assets on the books of banks still threaten the financial system, 10 months after the government targeted hundreds of billions of dollars to attack the problem, Congress’ bailout watchdog said on Tuesday.
   Smaller banks, in particular, face mounting losses on commercial real estate loans and their issues need to be addressed, said the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) in a monthly report.
   By focusing its efforts narrowly on toxic, securitized mortgage loans held by big banks, TARP is neglecting smaller, second-tier banks with large portfolios of troubled whole mortgage loans, said panel chairman Elizabeth Warren.
   “There are some significant worries about the banks that are just below ‘big,’” Warren said on a conference call.
   Despite the $700 billion devoted to TARP, little progress has been made in addressing toxic assets, she said, other than a relaxation of mark-to-market accounting rules that has allowed banks to mask the assets’ true values for now.
   “That may make their paperwork look better, but it doesn’t change the underlying reality. … Toxic assets posed a very real threat to our economy 10 months ago and they have not yet been resolved,” Warren told reporters on the call.
   The panel’s report came as the White House sent a draft bill to Congress on Tuesday proposing new rules for over-the-counter derivatives in a broad crackdown on financial markets of the sort that created and sold toxic assets.
   The Obama administration and congressional Democrats are also seeking changes in how mortgages and other loans are securitized, or bundled and sold by brokerages to investors.
  
   NO FIRM ESTIMATE
   Over-aggressive issuance and securitization of subprime mortgages is widely seen as a key cause of the financial crisis of 2008-2009, the worst in generations. Even today, no firm estimate is available of the value of toxic assets created during the real estate bubble before the crisis, Warren said.
   “No one has a good handle how much is out there,” said Warren, a Harvard Law School professor. “Here we are 10 months into this crisis … and we can’t tell you what the dollar value is.”
   Estimates of the total write-downs banks could face on the assets range widely from $600 billion to $1.2 trillion.
   The panel said Treasury needs either to assure a robust program is available for handling toxic assets as they default, or consider another way to restart markets for the assets.
   The report came as the Treasury prepares to launch a scaled-down version of its toxic asset program — a series of public-private investment funds to purchase toxic mortgage securities with $30 billion in government subsidies.
   Last October, the entire $700 billion TARP bailout was aimed at buying up toxic assets. But its complexity and the financial crisis quickly convinced then-Treasury Secretary Henry Paulson to shift gears and inject the money directly into banks.
   Since then, Paulson’s successor, Timothy Geithner, has announced plans to entice private investors to buy “legacy” securities and whole loans from banks. That approach’s success was limited by accounting changes and some large institutions’ success in raising new capital.
   Warren said, “I don’t know of any plans” at Treasury to use the legacy asset purchase program on buying whole loans.
  
   NO WHOLE LOAN PURCHASE PLAN SEEN
   The Congressional panel cited “continuing uncertainty … whether the troubled assets that remain on bank balance sheets can again become the trigger for instability.”
   Another round of stress tests, like those recently completed, may be need for the largest 19 financial institutions if the economy deteriorates beyond worst-case assumptions used in initial tests in April, the panel said.
   Second-tier banks, too, may need stress tests and capital support, it added.
   The five-member panel approved the report by a 4 to 1 vote, with a dissent by Republican Representative Jeb Hensarling, the panel’s sole sitting congressman.
   Hensarling said he could not approve the report because it advocated intervention with additional government funds when that may not be necessary. (Additional reporting by Glenn Somerville; Editing by Leslie Adler)
 ((david.lawder@thomsonreuters.com; +1 202 898 8395; Reuters Messaging: david.lawder.reuters.com@reuters.net)) Keywords: FINANCIAL BAILOUT/WATCHDOG 
  
Tuesday, 11 August 2009 22:54:45RTRS [nSP102961 ] {C}ENDS

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