TARP watchdog on Treasury, AIG, too-big-to-fail
WASHINGTON (MarketWatch) -- As the Treasury Department unveils its plan to dramatically chop its stake in American International Group, the watchdog for the sweeping bank-bailout program is still concerned that the firm hasn't been designated as "systemically" risky four years after the financial crisis.
In a wide-ranging interview with MarketWatch, Christy Romero, the special inspector general for the Troubled Asset Relief Program, or SIGTARP, discussed her concerns with the program that was set up during the height of the financial crisis of 2008 to stem a growing credit contagion by providing taxpayer-funded capital injections into big and smaller banks.
The interview took place Thursday, and on Monday she provided a written response to the news of the Treasury Department sale of the AIG stake.
She talked about how the Treasury Department needs to analyze whether the agency is cashing out of small bank investments in a risky way and how it is too early to tell if post-crisis rules have dealt a mortal blow to the concept that big banks are "too big to fail." Romero, 41, is set to release a series of reports drilling down on how specific big banks are using TARP money. Read commentary on AIG stake sale.
Here's what she said:
MarketWatch: The Treasury Department said Sunday it plans to sell $18 billion in stock of
Christy Romero: I hope so. But it is still not clear if we're going to get all our money back because Treasury estimates a loss on the TARP investment in AIG. It is a positive step that AIG will finally be regulated, especially because the American people are still on the hook for billions of dollars from AIG's bailout.
(The rest of this interview is from Thursday.)
Q: Everyone seems to agree that AIG is the poster chid for systemically risky institutions. As you've noted, AIG still has $168 billion in net notional value of credit-default swaps and CDS contracts are credited for contributing to the crisis. Are you frustrated that AIG hasn't been designated by regulators as a systemic [important] institution and subject it to greater supervision and new capital rules?
A: AIG has to be designated as a systemically important financial institution. When you look at the name of the program that bailed out AIG, the systemically significant failing institutions program, it had only one participant, AIG. At the time of AIG's bailout we were all told that this institution is so large and so interconnected that it has to be subject to regulation. A key problem with AIG is that so far there is no regulator for AIG's financial business. The Office of Thrift Supervision, which was their regulator, was shut down and they weren't adequately regulating the financial business of AIG. I am absolutely frustrated that it is taking so long to designate AIG as a SIFI.
Q: What would you expect regulators to do when AIG becomes a SIFI?
A: This is another problem because not all the rules are out. But I would expect special supervision, limits on concentration, requirements on liquidity, requirements on leverage and risk-based capital. One of the things the markets are watching for is what is that enhanced supervision that comes with a SIFI designation because that isn't known.
Q: TARP still has a 74% stake in Ally Financial, the former GMAC. Looks like taxpayers won't see the $14.5 billion funds we invested in Ally for a while.
A: I'm very concerned. This is one where there is truly no exit plan to get out of TARP. The common stock that Treasury holds is not public. It needs an IPO. They filed to do an IPO and then its residential mortgage unit filed for bankruptcy and Treasury came out with a statement saying that filing of the bankruptcy put off the IPO, so it's not at all clear that the plan is.
A: I am very concerned that Treasury has no concrete plan for its investments in GM, Ally and AIG, the three largest investments. So instead you have Treasury holding common stock in each of these and with each one of them you have official estimates projecting a loss. I'm not saying they should signal to the market what it is, they don't want to put themselves at a disadvantage, but they should be able to tell us what the plan is. I've had several conversations with TARP Treasury folks asking them what the plan is and nothing.
Q: 384 bank and lending institutions are left in TARP. What are your expectations for community banks with TARP and will Treasury see a return of every dollar from these institutions?
A: As we know community banks are still suffering and these are the ones that have had a lot of trouble getting out of TARP. When you look at Treasury's statements on return on investment, the more I think about that, I think that that was not the purpose of the TARP investment.
The purpose of the program is to ensure financial stability and to promote lending. The community banks left in TARP are the ones that are suffering, and if they are suffering they can't make loans in their community. We made a recommendation in October 2011 saying Treasury needed to work with bank regulators to come out with a clear exit path. Treasury's response lately has been to do these hurry-up auctions to try to get out [of their TARP investments] as soon as possible. But that was not the intent of our recommendation. If the purpose of the program is to ensure financial stability and promoting lending in these banks then that purpose is not a past tense purpose. We would expect Treasury to do an analysis so that they are exiting these investments in a way that ensures financial stability. We don't want more bank failures or any impact on financial stability.
Q: Do you think there could be an impact on financial stability from community bank failures? Do you think that the Treasury is going too fast in exiting investment in community banks?
A: That's what Treasury together with the bank regulators need to analyze. If you look at how banks got into TARP it was a combo effort by bank regulators and Treasury. They should work together to analyze these issues.
Q: Congress created a $30 billion small business lending fund and many healthier small TARP banks were permitted to convert over to that program. It has an incentive element where banks that lend more can have their dividend to Treasury reduced. Should that have been employed for TARP banks?
A: By transferring out of TARP they are no longer under SIGTARP's oversight. It did leave the weaker banks behind in TARP and that leads me to this issue of financial stability. It is important that Treasury doesn't look at the goals of the program in the past tense. The analysis shouldn't be about whether Treasury made a return on its investment because the fact is that Treasury is not a regular investor. It has a greater responsibility to financial stability.
I have read studies that showed that lending has increased with the SBLF program. That tells you there was a lost opportunity with TARP. They should have had these incentives for lending in TARP.
Q: The cost for community banks in TARP goes up in 2013, when banks still in the program will face a significant rise in dividend payments they are obliged to make to the government from 5% to 9%.
A: One of the things we recommended is for Treasury to consider whether the agency should hold off on raising the dividend for banks that can't pay it anyway.
Q: What happened to the initiative started by your predecessor, Neil Barofsky, to have banks publicly disclose how they are spending TARP money to see if they are using it to lend more?
A: Probably SIGTARP's first recommendation is that TARP recipients have to say what they are doing with the money. It took more than a year for Treasury to agree to do a survey. We participated in them coming up with what that survey would look like.
We're doing some in-depth looks at how select institutions are using the money, digging into their books and conducting interviews. We're going into specific institutions, asking questions, crawling all over their books.
We also have other reports on the way. We're going to report on the 2012 pay for the top-paid executives at Ally, GM and AIG. I think that is really important, people care about that. Another report we're doing is on tax relief that TARP companies received. We're also looking at the decision making that went in to approving banks to leave TARP and enter the SBLF.
Q: Only 9% of TARP funds set aside for mortgage modifications have been spent as of April. Obama said in 2009 that 3 to 4 million homeowners would be helped and so far only 1 million have received permanent modifications. Barofsky expressed concerns about the incentives for servicers in the program known as the Home Affordable Modification Program. Do you have concerns?
A: I'm deeply concerned that this money is not getting out to struggling homeowners. It comes down to the way Treasury views the programs. They view it as someone else is responsible for it. The [banks' mortgage] servicers are responsible for HAMP and state housing finance agencies are responsible for the Hardest Hit Funds. Treasury is the steward over TARP funds. They have oversight over these programs and they have to do a better job of holding servicer feet to the fire. They have to use other financial remedies. They have to help the states.
Q: Treasury temporarily withheld incentive payments at big bank servicers and then released all the payments as part of a broader settlement of the so-called robo-signing scandal. Would you have preferred monetary penalties?
A: Absolutely. There have never been any monetary remedies in HAMP. The biggest obstacle for homeowners to get access to HAMP are servicers. After a very long time, Treasury came up with metrics for compliance. At some point Treasury did servicer assessments and found some of them were not doing it right and needed substantial improvement. By publicly releasing how servicers were performing against those metrics and showing that they weren't meeting them, the Treasury actually caused some shame and some improvement but they [Treasury] also need to set performance metrics.
Q: Four years after the failure of Lehman Brothers, what are your thoughts about the long-term consequences of TARP. Did it encourage high-risk behavior?
A: Too early to tell. Markets aren't convinced that too-big-to-fail is over. TBTF and moral hazard is a legacy of TARP. These big institutions are getting a competitive advantage and can borrow money at lower rates and have more access to capital because of their status. Regulators have made promises that TBTF is over but those promises have to be matched with action to convince the market that no one is going to bail out another company again.
Also, it is still not clear what a SIFI designation means. If an institution is a SIFI, are regulators going to make changes so that the institution is not in a position to take down the whole economy should it run into distress? I'd like to see some of those decisions made. I'll give you a perfect example--designate AIG as a SIFI. Go into AIG and look at them. That will be a beginning.