Treasury Defends Its Actions to an Oversight Panel

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But if lending is in fact not measuring up, the Treasury report continues, Congress should blame "low confidence" rather than the agency's strategy. "As long as confidence remains low," the report says, "banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended."

Overall, some of the more challenging questions asked by the COP remain unanswered, including whether increasing consumer lending will really have a concrete effect on the financial crisis. "Efforts to increase the availability of credit assume that the fundamental problem is a lack of liquidity," the oversight panel wrote on Dec. 10. "But if Americans are more worried about their own economic security—their employment prospects, their current expenses, and their debt levels—then increasing liquidity will have little impact on consumer spending."

And, while the Treasury outlines why it thinks its efforts have worked—a tough task, given how interwoven its actions have been with those of the Fed, the FDIC, and other bodies, and how many outside factors influence the financial markets—it doesn't address a fundamental suggestion by the COP, echoing an earlier Government Accountability Office report: Treasury should "define what the Department itself [believes] constitutes success."

Instead, the Treasury mostly addresses concerns about its effectiveness by recounting its actions:

"Is the [Treasury's] strategy helping to reduce foreclosures?" the COP asked.

"Yes," the Treasury responds. "Treasury has moved aggressively to keep mortgage financing available and develop new tools to help homeowners."

Foreclosures on Hold

Specifically, the agency adds, it prevented Fannie Mae and Freddie Mac from failing, it established a voluntary coalition of mortgage servicers and others in October 2007 to modify some homeowners' loans, it set up a protocol to make loan modifications under Fannie and Freddie's control simpler, and Fannie and Freddie are putting foreclosures on hold for 90 days. But just one statistic is offered on the actual effects of these moves: The housing-industry coalition, HOPE NOW, "estimates that roughly 2.9 million homeowners have been helped by the industry since July 2007," and an estimated 200,000 homeowners a month more are being aided. It remains unclear from the report how many of the assisted homeowners were facing foreclosure but avoided it with industry help, or how much of that help was the result of the Treasury's actions.

"What have financial institutions done with the taxpayers' money received so far?" asked the COP.

It's hard to say, the Treasury responds. Much of the money hasn't been handed out. What has been handed out over the last two-plus months "must work its way into the system before it can have its desired effect." Confidence remains low. Injecting capital into banks should make them stronger and less likely to tighten credit further—and things could have been a lot worse. The Treasury report says lending "won't materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks."

The exchange between COP and the Treasury isn't over; panel chairwoman Elizabeth Warren is likely to thank the Treasury politely for its yearend report. But chances are good that she and her fellow panel members will get the last word. In its earlier report, they made clear that they see their job as evaluating the Treasury's performance themselves, and won't rely on information from the agency alone to evaluate its success. And within a few weeks, Paulson and his deputies will be replaced by an Obama Administration more closely aligned with the COP's congressional sponsors.

Francis is a writer in BusinessWeek's Washington bureau.