Despite TARP billions, bank prospects are iffy, panel finds

There's been progress, but 'toxic assets' remain on the books of many small banks, which have been failing at a rising rate.

By , Staff writer

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    The Congressional Oversight Panel held a hearing on the Troubled Assets Relief Program (TARP) June 24 on Capitol Hill. From left are Elizabeth Warren, chairwoman, Damon Silvers, and Richard Neiman.
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The financial crisis isn't over. It's just in a wait-and-see phase.

That was the broad message Tuesday as an oversight panel issued its latest report card on government rescue programs.

For one thing, billions of dollars in so-called toxic assets still reside on bank balance sheets. These are loans that are likely to default or are so complex that it's hard for banks to sell them. The Congress-created panel said significant problems will remain as long as these loans create uncertainty about future losses. Banks will be less likely to lend, investors will provide less money to credit markets, and the risk of a renewed flare-up of credit distress will linger.

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"The problem of troubled assets is especially serious for the balance sheets of small banks," the Congressional Oversight Panel added in its report. One reason is that these banks "hold greater concentrations of commercial real estate loans, which pose a potential threat of high defaults."

The review comes as small-bank failures have been occurring at a rising pace. The Federal Deposit Insurance Corp. announced two dozen bank failures in July, the most of any month since the credit crisis began. It also comes as the government is finally launching a scaled-down version of its plan, announced in the spring, to aid banks by purchasing toxic assets.

A program in which the FDIC would finance the purchase of individual loans is now on hold, while the Treasury is moving to buy some debt securities (bundled loans) along with private partners.

The view expressed by the five-member panel, chaired by Harvard University finance expert Elizabeth Warren, runs counter to a prevailing sense in financial markets that the credit crisis is easing.

Financial stocks have steadily risen to double their value in March, and other indicators of credit-market stress have eased. It's not that people are ignoring the bad loans and the prospect of continued mortgage defaults in a weak economy.

But some analysts view the scale-back of the Treasury's "public-private investment program" for toxic assets as a good sign. Taxpayers will be doing less on the bailout front, and banks don't seem to mind.

The oversight panel doesn't discount what it refers to as genuine progress. The Treasury's $700 billion Troubled Asset Relief Program has buoyed troubled banks with capital infusions, giving them a cushion to write off some of their losses.

But the report says "it is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today."

The panel also cites outside estimates. The International Monetary Fund estimated in April that about half of $1 trillion in total losses by US banks (in the 2007-2010 period) had been written off already. Goldman Sachs figured in January that banks had worked through more than half of $960 billion in bad loans. On the more pessimistic side, RGE Monitor in January pegged losses at $1.7 trillion, and said $1.2 million in writedowns remained.

The five-member panel included differing views from within: One of two Republican members, Rep. Jeb Hensarling of Texas, refused to sign on to the report's findings. The other Republican, former Sen. John Sununu of New Hampshire, said the report contained sweeping recommendations (to deal with toxic assets and to conduct "stress tests" on small banks) without considering taxpayer costs.

The panel "should be focused on basic oversight and program operations," he wrote.

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