U.S. Government Should Not Micromanage Banks, Treasury Official Says

March 12, 2009 - 5:24 AM
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Washington (AP) - The government should refrain from micromanaging banks that receive taxpayer assistance, a top Treasury official cautioned lawmakers itching to see results from a $700 billion rescue program for the financial sector.
 
Neel Kashkari, interim assistant secretary for financial stability at Treasury, told a congressional oversight panel Wednesday that banks should not be forced to make loans that bankers might deem risky.
 
"However well-intended, government officials are not positioned to make better commercial decisions than lenders in our communities," he told a subcommittee of the House Oversight and Government Reform Committee.
 
Kashkari, who was put in the job during the Bush administration, testified amid growing impatience among members of Congress who want evidence that the taxpayer money and the Treasury strategies are actually loosening credit markets.
 
Within weeks, Treasury Secretary Timothy Geithner plans to unveil a new public-private investment fund that will be used to purchase illiquid assets, such as toxic mortgage related securities at the heart of the financial crisis. Kashkari said the private sector has voiced interest in the program and said he expects pension funds and mutual funds that hold retirement savings to be among the major investors.
 
"My assumption is that most of the capital will come from the savings of the American people," he said.
 
Kashkari said he didn't expect the private sector investment to get any advantage over the government's investment. "If the private sector wins, the taxpayer wins," he said. "If the taxpayer loses, the private sector loses."
 
Lawmakers voiced frustration with what they said was a continued lack of clarity from the Treasury on how banks were spending money they have received under the Troubled Asset Relief Program.
 
Under the TARP initiative, the federal government has used more than $300 billion in taxpayer money to infuse financial institutions with cash, much of it by purchasing preferred stock and other assets.
 
Subcommittee chairman Dennis Kucinich, D-Ohio, complained that at least three financial institutions that have received TARP money -- Citigroup Inc., Bank of America Corp., and JP Morgan Chase and Co. -- have made billions of dollars in foreign investments.
 
"If the banking system is in serious enough trouble to require massive amounts of federal support, shouldn't that federal support be channeled to the domestic economy?" Kucinich asked.
 
Kashkari said large financial institutions operate globally and that it was difficult to track whether foreign loans were made with U.S. deposits or foreign deposits because money "is fungible."
 
"We also have to be careful that if we set hard rules not letting our largest institutions do business abroad, other counties may say, OK, they're going to reciprocate and not let foreign banks then lend in America," he said.
 
In a television interview, House Financial Services Committee Chairman Barney Frank, D-Mass., disputed the notion that taxpayer money could not be tracked.
 
"If everything was fungible, you would never have any kind of cost accounting," he said on MSNBC. He argued that lawmakers don't want to block banks from investing in foreign entities.
 
"We are trying to stop them from using the money that's advanced by the American taxpayer overseas," he said.
 
The misgivings about Treasury's investments were bipartisan. Republicans and Democrats called for the banks to reveal how they were using the money and detail whether they were increasing lending.
 
"We don't know if $300 billion has changed anyone's behavior," said Rep. Darrell Issa, R-Calif.
 
The Government Accountability Office said Treasury has improved transparency and accountability in its bank assistance programs for some of the largest institutions, but said it needs to do more to track the use of TARP money with hundreds of smaller banks.
 
Kashkari said Treasury has used TARP's existing capital purchase program to invest an average of $16 million in 489 banks. He said the program was making about 30 new investments a week. At the same time, about 200 banks have declined funds and several recipients have indicated a desire to pay back the federal funds early. Many have cited the number of government restrictions that the Obama administration has attached to the capital injections and the fear that other limits may be added.