Finding Holes in the TARP

Elizabeth Warren is on the warpath. As chair of the Congressional Oversight Panel, charged with making sure TARP expenditures make sense, she's going to be scathing, according to the WSJ, when she presents her first findings to the House today.

Quite right too: Treasury never did what it said it was going to do with the first $350 billion, and it certainly gave no indication of driving hard bargains when it repurposed those funds for recapitalization efforts rather than debt purchases. What we've seen so far looks much more like a bailout for the banks' benefit than a bank rescue for taxpayers' benefit.

That alone would make it hard for Treasury to get the second $350 billion from a very unhappy House. But when you add in the difficulties that the automakers have faced in getting much less cash, the hurdles facing Paulson and Kashkari seem immense.

All the same, there's a huge amount of momentum behind TARP, and everyone knows the downside of failing to release the second tranche of funds:

House Financial Services Committee Chairman Barney Frank (D., Mass.), said Monday that Treasury would have to commit to using a large amount of the money to help prevent foreclosures in order to satisfy him. He said it would still be a tough sell with other lawmakers.
"With most of my colleagues, they'll need police protection to even ask for the money," he said.
Even though a growing number of lawmakers have criticized the program, it is unclear whether Congress could actually block the second $350 billion from being used.
"I would see that being very difficult," Sen. John Ensign (R., Nev.) said of the prospect of Congress blocking the funds.

My guess is that the second tranche won't be released before January. The oversight panel was installed for a reason, and it's clearly unhappy about progress to date. If Treasury can simply barge on regardless and effectively ignore the panel, that's tantamount to telling Congress that it has no real control over government expenditure. And that's something you never want to tell Congress.

Besides, the financial markets aren't placing as much weight and hope on the second tranche as they were on the first. They thought the first tranche would help a lot; it didn't. They're pretty sure that the second won't be sufficient; they're right. So if the $350 billion doesn't come now, it'll simply be tacked onto a much bigger stimulus package in January -- one which House Republicans will find much harder to block, thanks to November's election results.

I, for one, am suffering from a certain amount of bailout fatigue these days, and these ad hoc measures aren't cutting it for me. If Geithner's Treasury put together a strategic plan for the second $350 billion with Warren's input, that would be a much easier sell.