The Troubled Asset Relief Program (TARP)

This morning’s Senate Banking Committee hearing was still continuing as the Bush Administration, House Banking Committee Chairman Barney Frank (D-MA), and House leadership were making plans for an urgent briefing today at 4 p.m. to convince House members to agree to the Treasury’s Troubled Asset Relief Program (TARP). Press reports about this morning’s House Democratic and Republican conference meetings characterized members’ reactions as “resistant.” Our sources on the Hill and off are saying the meetings were worse than reported, and the mood at both was antagonistic. As of now, the House does not have anywhere near the 218 votes needed to pass the Treasury plan, even with Chairman Frank’s endorsement.

Members of the Senate Banking Committee, including Sen. Chuck Schumer (D-NY), questioned whether the TARP could be funded in installments, precluding the need for Congress to authorize $700 billion in one lump sum. However, both Federal Reserve Chairman Bernanke and Paulson rejected the suggestion, saying that bolstering consumer confidence requires Treasury to have the full $700 billion authority, even if they do not utilize the entire amount. Both Paulson and Bernanke repeated on several occasions that lawmakers must not view the $700 billion as an expenditure, but as an investment that would be recovered – though perhaps not in full – over time.

There were numerous questions regarding the procedure for purchasing troubled assets and the methodology involved in pricing such assets. Bernanke has proposed using a reverse auction – bidding to sell rather than bidding to buy – which would allow not only troubled firms, but also commercial banks and savings and loan institutions to come forth with their assets. Bernanke emphasized that reverse auctions would stabilize pricing only if numerous participants are willing to sell their troubled securities. He also stressed that several proposals, including granting Treasury the authority to cut the salaries of executives and the authority to provide profit-sharing for taxpayers through stock warrants, would ultimately cut down on participation and further distort the price of such assets. Addressing other congressional demands to include bankruptcy protections and foreclosure prevention authority to the Treasury, Bernanke said the effects of increased liquidity and credit availability under this plan would ultimately lower interest rates and stop preventable foreclosures. Sen. Dodd assured both Paulson and Bernanke that executive salary cuts would be a part of any package that passes muster in Congress, and he and Paulson were in agreement on the need for Treasury oversight.

Following this afternoon’s weekly policy lunches held by both Senate Democrats and Republicans, respectively, the apparent sentiment is to let the House work out the details and move first to pass a bill. The Senate would then act on the House bill. If progress in the House stalls in the next day or so, the president may have to address the nation and make the case directly to the public.

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