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ListenOp | Elizabeth Warren

Keeping tabs on the bailout

By Elizabeth Warren
April 12, 2009
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Until last year, Harvard Law School professor Elizabeth Warren was perhaps best known for her writing on bankruptcy and consumer finance. But last fall, she was appointed chair of a newly created Congressional Oversight Panel, which is charged with keeping tabs on the $700 billion bailout of the financial sector - an effort formally known as the Troubled Assets Relief Program. Warren was recently interviewed by Globe deputy editorial page editor Dante Ramos, who prepared the following edited excerpts.

Q: You've been quite critical of the Treasury. What troubles you most about what you're getting and what you're not getting?

A: There's no discussion of the overall policy. Instead, there are specific programs that are announced, and from that, it's necessary to reason backwards to figure out what the goal must have been. It's like a "Jeopardy!" game. If this is the answer, what was the question? It's frustrating because without a clearly articulated goal and identified metrics to determine whether the goal is being accomplished, it's almost impossible to tell if a program is successful.

Q: Do you have a clear sense of what the overall TARP plan at this point is supposed to do? Are you capable of summarizing what it's supposed to be doing?

A: No. And neither is Treasury. Treasury has given us multiple contradictory explanations for what it's trying to accomplish.

There's a major problem and a minor problem. The minor problem is documentation. I've spent four weeks now looking for someone who can give me the details of the stress test so that we can do an independent evaluation of whether the stress test is any good.

We get: "someone will call [you] right back." Only the call doesn't come.

The major problem is that Treasury has not articulated its goals. And without that, we can't have a robust debate about whether they're headed in the right direction; instead, we're stuck with this more technical argument about the implementation of the [Term Asset-Backed Securities Loan Facility] or the details of the Capital Acquisition Program. And that misses the central question of, should we be subsidizing failing banks or liquidating them? When we acquire capital, should we exercise more control over the institutions that take the money or less control? Those are the central policy issues that the American public has a right to participate in.

Q: What [is] the underlying problem? Is it that there aren't the right people at Treasury? Or is the lack of transparency and the lack of resolution on the conceptual front, is that an unspoken part of the policy?

A: I can only look at the evidence. When the panel asked [Bush administration Treasury Secretary Henry] Paulson in December whether or not the American taxpayer was getting full value when it invested billions of dollars of the original TARP money, he sent a letter back to me that said, "Yes. These are par transactions." That means, in effect, for every $100 of taxpayer money that went into those banks, the US taxpayer was getting back $100 worth of stock and warrants.

We did an independent valuation of the transactions, crunched a lot of numbers, used a lot of different approaches for how to value the transactions. And we discovered that for every $100 of taxpayer money put into the financial institutions, the taxpayer got back about $66 in current value.

Q: So what accounts for the $34 difference?

A: Treasury specifically designed a program that had the effect of subsidizing the financial institutions, and simultaneously represented to the panel and to the American people that there was no subsidization.

Q: So they weren't really telling you the truth?

A: They said one thing and did another.

Q: It seems that there's a culture clash. The public-policy culture says there should be public participation, and the goal is to allocate the benefits and the pain as fairly as you can. And then there's the Wall Street culture, which is built upon self-interested institutions maximizing benefit without a lot of outside interference. Those two things clash pretty strongly in the AIG case.

A: I see this as an insiders/outsiders problem.

The insiders, the investment bankers and other financial services specialists, have a system that works very well for them. The problem is they're now using the outsiders' money to fund that system. Their system has collapsed. AIG is not functional without substantial taxpayer dollars. And the insiders don't seem to have appreciated the seismic shift in their world when they need money, gifts, subsidies from outsiders.

Anyone who thinks that they can take tens of billions of dollars of taxpayer money and continue to operate business as usual lives in a fantasy world that I don't understand. Culture clash? No! This is not a culture clash. This is not about taxpayers who don't get it. This is about people who think [in a] fantasy, that their world is prosperous and continues to create value that can be parsed out privately, when they are relying on huge subsidies from the taxpayer. It's just wrong!

Q: What's the connection between the squeeze that consumers are feeling and the financial bailout that you're now charged with trying to scrutinize?

A: I bring a very different perspective to the bailout than those who spent the last dozen years in the financial services industry. I believe that ultimately, the banks exist to serve the American people. Not vice versa. We cannot have a vibrant economy without a strong and reliable banking system, but it is impossible to save the banking system independently of saving the American family.

The whole Treasury program began as a top-down analysis: Large financial institutions are at risk of failing; how can we prop them up? We might have asked a different series of questions: Large financial institutions are failing; how do we make sure that there are some financial institutions to keep the economy going forward while we let the failures go? There was a real focus on saving all of the institutions rather than a focus on saving enough of a system to keep it workable for the underlying economy.

Saving everyone is a lot more expensive than saving the minimal number to keep the economy functional.

Every time I do the paperwork for the panel and note a $10 billion expenditure, I think about how many schools that might have built, how many hospitals that might have updated. Those dollars are not just ink on a page. They're real.

Q: If at the end of all of this you and your panel have done a good job, what does that look like?

A: Wow, that's a tough one. I suspect it will be a comparative measure. We will have wasted comparatively less money, and spent more on comparatively more successful programs. If as the result of our panel's work, Treasury takes a more comprehensive perspective on how to commit $3 trillion of taxpayer money, then we succeed.

Q: And what happens if they keep being unresponsive? What can you do?

A: They've already changed. Secretary Paulson asked for $700 billion announcing one program, and within weeks had changed directions entirely. The current Treasury has recognized that as a strategy that will not be tolerated.

Q: Is there anything else that you would want people to understand?

A: I don't have a badge and a gun. The power of this panel is derived entirely from the voice of the American people. If they stay out of the policy debates, then Treasury can spend at will and reshape the American economy with no one in the room but insiders. If they are involved, the policies will look different.

It's the design of the rules going forward that will tell us or that will determine whether we are moving to a cyclical economy with high wealth, high risk, and crashes every 10 to 15 years. Or whether we will emerge, as we did following the new regulatory reforms in the Great Depression, with a more stable economic system that benefits people across the economic spectrum. It's an amazing moment in history.

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