Treasury Defends Its Actions to an Oversight Panel

Responding to a congressional panel's attack, the Treasury Dept. says it's responded effectively to the financial crisis. That won't be the last word

By Theo Francis

Early on the afternoon of Dec. 31, just as many Americans were beginning to tune out and focus on New Year's Eve celebrations, the Treasury Dept. issued its response to a blistering Dec. 10 report from the congressional panel established to oversee the agency's actions.

The 13-page Treasury report broke no new ground, strongly echoing recent comments and testimony from Treasury Secretary Henry Paulson and Neel Kashkari, his deputy managing the crisis response. At the same time, it sidestepped some of the most pointed questions and observations raised by the Congressional Oversight Panel in its initial report. In that report, the COP criticized the Treasury for failing to monitor what the banks and others actually did with billions of dollars in federal funds they had received, and questioned whether the Treasury had an overarching strategy or could show concrete results.

In its response, the Treasury effectively responded that it knows what it's doing, things could have been a lot worse, its efforts should improve matters in time, and the programs are working even if results are difficult to measure.

Unclear Answers

Throughout its report, the Treasury offers summary for explanation, recapitulating the events of late September and early October to account for its abrupt changes of course—injecting capital instead of buying toxic assets, then abandoning toxic-asset purchases altogether; ignoring the automakers only to aid them later—and describing why its programs ought to work instead of providing the evidence of results the COP members clearly sought. (Or most of them, anyway: The lone Republican on the panel at the time, Texas Representative Jeb Hensarling, declined to sign the report.)

The report also left unclear how aggressively the Treasury is seeking to determine how banks are using federal funds—a central criticism of both congressional leaders and the COP's initial report. In Dec. 10 testimony before the House Financial Services Committee, Kashkari said his team was "working with the banking regulators to develop appropriate measurements" to track the flow of federal funds through financial institutions, "and we are focused on determining the extent to which the [federal investment] is having its desired effect." No further detail emerged in the Treasury's report Wednesday, which echoed Kashkari's testimony in nearly identical language.

Central to many of the agency's answers in the report—and echoing Paulson and Kashkari in recent weeks—is the argument that, without Treasury's actions, worse could have happened: "The most important evidence that our strategy is working is that Treasury's actions, in combination with other actions, stemmed a series of financial institution failures," the report says. In other words, Treasury seems to be saying, Citigroup (C) teetered on the brink even after receiving an initial $25 billion capital infusion from the Treasury; but after a second bailout, it survived.

Undistributed Funds

The Treasury said it also continues to "monitor lending"—responding at least in part to criticisms by Democrats and others that it never actually required banks to lend the government funds they received. Again echoing Paulson and Kashkari, the agency notes that it hasn't distributed much of the $250 billion allocated to shoring up bank capital. (As of Dec. 29, $172 billion was out the door.) "Clearly this capital needs to get into the system before it can have the desired effect," the report says.