Last week I ventured the view that Professor Elizabeth Warren, of Harvard Law School, is exactly not the woman to head the panel Congress established to provide oversight of the Treasury Department’s implementation of the TARP program. Warren has a long paper trail--and every page of it shows that she has it in it in for the banking industry in a very big way. As I said at the time: “The Professor doesn’t just quibble with this lending practice or that one. She thinks the entire industry is diabolical. Warren apparently believes consumer lenders have some mystical, systematic advantage over consumers, which they see as their duty to exploit at every turn. Or, as she puts it, ‘Credit products aimed at both middle class and poor families are designed to trick them, trap them, and otherwise pick their pockets.’”
“Pick their pockets.” How level-headed! Given Warren’s record of animosity toward lenders, I also predicted the panel’s opening report wouldn’t be a sober, even-handed summary of the issues it sees as most critical in carrying out the TARP most effectively, but rather a laundry list of budding gripes.
I wasn’t disappointed. The panel’s “Questions About the $700 Billion Emergency Economic Stabilization Funds” came out last week. Sure enough, the questions the report poses are tendentious and beside the point. This is not a good start.
Take, for example, her Question 3: Is the strategy helping to reduce foreclosures?
Not to put too fine a point on it but, when it comes to the government’s effort to stabilize the financial system, the absolute level of foreclosures is . . . irrelevant. For a lender, the foreclose/don’t foreclose decision ought to be a matter of straight economics. A lender should not foreclose (and should offer the borrower a loan modification instead) when it expects the modified loan to generate a higher net present value of cash flows than an immediate foreclosure would. Modifications on more liberal terms would simply be a giveaway from the lender to the borrower—which is not what the TARP program was intended to fund. Liberal modification terms would be worse than useless: they would unnecessarily hurt bank balance sheets at the very moment those balance sheets need to be strengthened. So forget about reducing foreclosures just for the sake of reducing them. That won’t do anyone much good.
Or Question 6: What is Treasury doing to help the American family? (In particular, “What restrictions will Treasury put on credit issuers to assure that taxpayer dollars are not used to subsidize lending practices that are exploitive, predatory or otherwise harmful to customers?” . . .)
Who cares? Congress passes lots of laws intended to “help the American family.” There’s food stamps, for instance. PBS funding, too. But the TARP program isn’t one of those laws. Its purpose is to salvage the country’s financial system. (If the plan succeeds, the American family will be helped very much, by the way.) Prof. Warren and her panel no doubt have specific ideas about what constitutes the sort of “lending practices that are exploitive, predatory or otherwise harmful” that Treasury should restrict. But in the real world, “predatory” is often in the eye of the beholder. Payday lending, for one thing, is too often unfairly maligned. Certain policies of the card lenders might seem severe, but they are often necessary: unsecured, open-ended consumer lending happens to be a highly risky business. Regardless, any move by the Treasury to restrict lending it deems “predatory” would surely have the effect of restricting the flow of consumer credit throughout the economy—exactly the opposite of what the TARP plan is supposed to do. If Prof. Warren and her group want the federal government to tighten regulation on consumer lending, they should sign up for a different oversight board.
Finally there’s Question 5: Is the public receiving a fair deal?
Actually, I can answer that one: No! The Treasury thought it was getting a fair deal from AIG when it loaned the company $85 billion at Libor plus 850 basis points, as part of the initial bailout plan. The subsequent interest burden was so crushing the government later had to agree to easier terms, for fear of a bankruptcy. For that matter, the 5% preferred the government bought from Citigroup late last month was nowhere near what Citi would have had to pay if it had done the deal with a private investor (if could have found a willing private investor, which it couldn’t have). But, again, the idea isn’t to earn a fair return for taxpayers. It’s to keep the financial system—and the economy—from keeling over into the abyss. I happen to believe the federal government will end up earning a solid return from its TARP investment and related moves. But this is no time for the Treasury to get hard-nosed.
I could go on through all ten of the panel’s questions, but you get the picture. This simply isn’t a serious effort at responsible oversight. It’s ax-grinding. And everyone seems to know it: Already, one Republican member of the committee, New Hampshire Sen. Judd Gregg, has resigned, citing a heavy workload. The other, Rep. Jeb Hensarling of Texas, refused to sign the group’s initial report, and has characterized the panel’s efforts so far as a “sham.” What good is any of this doing?
When I heard that Elizabeth Warren was appointed to oversee the TARP plan, I feared she’d use her position to browbeat the industry and lobby for overly strict, counterproductive regulation, rather than provide the sober oversight the program needs. From what I can tell, I was right to be worried. In its first report, all her group does is lay out some issues it can use to unnecessarily bludgeon the government with later on. This is going to be an unneeded distraction, for a program that could use as few of those as possible.