Moody's Economist: Banks 'Overcapitalized' after TARP
Economists testifying before the Congressional Oversight Panel, Thursday, agreed on the necessity of the Troubled Asset Relief Program (TARP) 13 months after its launch but debated the health of banks that received funds from the US Treasury Department. COP, which reviews and reports on actions taken by the Treasury, heard the views from five economists on TARP’s effectiveness. The US Congress passed the Emergency Economic Stabilization Act of 2008 in October of last year, allowing the Treasury to spend $700bn to purchase distressed assets and inject capital into struggling banks. More than a year later, Mark Zandi, the chief economist and cofounder of Moody’s Economy.com, said that banks were “overcapitalized.” “That’s laughable,” responded Charles Calomiris, a professor of financial institutions at the Columbia Business School. Zandi testified that the most effective aspect of the TARP program has been the use of funds to provide capital to the banking system. The Treasury committed $205bn through the Capital Purchase Program (CPP) to recapitalize the banking system and another $115bn to support AIG, Bank of America and Citigroup, Zandi said. “The most successful part of the TARP program has been the CPP,” according to Zandi’s testimony. “Without capital injection from the federal government, the financial system would have likely collapsed.” Zandi said that the while the financial system is not functioning normally, it is stable. “The stress test conducted earlier in the year was substantive,” Zandi said. “Once housing prices stop falling and unemployment numbers go down, lending will go up.” Calomiris disagreed. He also works as a consultant to banks, and he said that some of the major banks are in trouble. “In my conversations with banks, it’s widely believed that some of the banks are insolvent,” Calomiris said. He did not want to go on the record to say which banks will fail, but he did say that one bank is insolvent. Regulators, he said, are playing political games with capital requirements and are creating an “overkill” environment. Dean Baker, the co-director at the Center for Economic and Policy Research, also disagreed with Zandi, citing that the adverse scenarios used in the stress test of the banks were only for 2010 and that tougher times wait ahead. According to Baker’s testimony, the current downturn will likely lead to a loss of nearly 40% of GDP, equaling $6trn in total, and while the economy benefited from a collapse prevention, TARP could have been carried out in more beneficial ways. “In terms of broader economic goals, the TARP was approved with promises to ensure that homeowners would be allowed to stay in their homes and also that executive compensation in the bailed out banks would be restrained. It has failed miserably in both areas,” according to Baker’s testimony. Simon Johnson, the professor of global economics and management at the MIT Sloan School of Management, said that while banks maneuver government funds at their own discretion, the Treasury “is basically running a hedge fund.” Alex Pollock, a resident fellow at the American Enterprise Institute, suggested that TARP be run like a business with quarterly reports and focusing on acquiring assets. “However, with the $50 billion “Home Affordable Modification Program” (HAMP), TARP is not acquiring an asset at all, but simply spending the taxpayers’ money to subsidize mortgage loan modifications, including subsidies to mortgage servicing companies. There is no asset acquired,” according to Pollock’s testimony. Of the five panelists, only Zandi held confidence that the banks were "overcapitalized." “Capital scarcity persists,” Calomiris said. Write to Jon Prior.