TARP Cops

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As head of the TARP Congressional Oversight Panel, Elizabeth Warren has massively extended her mandate, using the office as a sort of forum for broad-ranging commentary on the financial crisis.   Rather than tracking the expenditure of the funds, she's increasingly using the oversight board to push her own ideas about what should be done with the banks.

This is wildly inappropriate.  Elizabeth Warren knows a lot about bankruptcy--but just because it has the word "bank" in it, doesn't make her an expert in banking.  Her specialty isn't even in corporate liquidations; she mostly writes about consumer bankruptcy.  The highly specialized world of bank resolution is not one where she has, as far as I can tell, very much expertise.

Moreover, this isn't her job.  Her job is to watch where the TARP funds go and monitor their effectiveness, not lecture Congress on how hard to punish wayward bank executives.  This Forbes column is scathing:

There are indeed very good lessons to be drawn. There has to be a process to decide which institutions are solvent. One needs an orderly process for dealing with those that are insolvent, particularly if they pose systemic risk. It is unproductive to prop up "zombie" banks. And so on. Most important is to understand why certain policies worked as well or as poorly as they did and what the long-term consequences were. This kind of analysis is largely lacking in the panel's reports.

But the Congressional Oversight Panel Report seems to have come to a more controversial conclusion. The COP argued that historical lessons show that the most effective response to banking crises has involved a combination of ousting "failed management" and liquidating banks. The April report takes on the Treasury's responses in these areas and questions how effectively it has implemented its goals in dealing with the crisis.

The report essentially argues for nationalization on the grounds that, under government reorganization, bad assets can be removed, failed managers can be ousted or replaced and business segments can be spun off from the institutions. "Depositors and some bondholders are protected, and institutions can emerge from government control with the same corporate identity but healthier balance sheets," the report argues, parroting a position that has been staked out by many prominent economic pundits.

Clearly, this is Elizabeth Warren's particular crusade against the banks, since a majority of panel members dissented from the direction the report took and two refused to sign off on it at all. Her letters to Secretary Geithner and Chairman Bernanke stop just short of attacking them for trying to restart the market for asset-backed securities. These markets have been an important part of the financial intermediation system for decades, funding student loans, consumer credit and small businesses. But Professor Warren has had a long-standing antipathy to consumer credit markets.

The sad thing is that the COP now seems completely politicized and fractured at a time when there are important questions to be asked. There is plenty of room for thoughtful analysis of the stress tests. For example, how do accounting rules and the evolving economic contraction affect their validity?

We seem to have lost an oversight panel, and gained another voice shouting slogans at congress.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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