Oversight Panel: Loan Guarantees Created Major Risk

By Chris Carey, Bailout Sleuth

Several of the federal bailout programs will make a profit, but the effort has also exposed taxpayers to enormous risk and created a moral hazard for investors, according to a new congressional report.

The Congressional Oversight Panel said the Treasury Department’s expanded efforts to guarantee loans and deposits at federally regulated banks had a “significant role” in stabilizing credit markets.

These efforts, which included expanding the amount of deposits covered by the Federal Deposit Insurance Corp. and guaranteeing as much as $300 billion in assets held by Citigroup Inc. in late 2008, “have exceeded the total value of TARP, making guarantees the single largest element of the government’s response to the financial crisis,” the panel reported.

At its high point this year, the government was guaranteeing $4.5 trillion in assets. Because few if any of these guarantees have been called on, the government stands to make a profit on fees connected to the program.

Nevertheless, the effort was a major risk, the oversight panel said, noting that if the markets had collapsed further, “taxpayers could have suffered enormous losses.” In addition, the panel said that the loan guarantees had created a moral hazard that might encourage banks and other institutions to take large risks out of the belief the government would back their positions.

The panel urged the Treasury to provide more details about the rationale behind guarantee programs, the alternatives that may have been available and the reasons they were rejected. It also said the agency should provide more information about whether these programs have achieved their objectives.

It also asked for specific disclosures about the Citigroup asset guarantee, “including information on the status of the final composition of the asset pool and total asset pool losses to date, as well as what the projected losses of the pool are and how they have been calculated.”

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