TARP Update: Overpaying for bad assets

Remember when we heard that we needed brilliant people like Henry Paulson and Tim Geithner to manage the bailouts, with as little oversight as possible, because no one could be expected to understand their economic genius?  How well did that work out?  According to the CBO and the chair of the Congressional panel overseeing the TARP program, the best and the brightest couldn’t figure out proper valuation for the assets they bought:

Obama has been facing a slew of problems in his early days of presidency. The latest problem is the inaccurate valuation of bank assets by the Treasury as part of the $700 billion TARP (Troubled Asset Relief Program) bailout package enacted in 2008 under Bush.

According to the testimony of Harvard Professor Elizabeth Warren, who is chairing the Congressional Oversight Panel for TARP, Treasury doled out $254 billion for bank assets worth only $176 billion – an overpayment of $78 billion of taxpayer funds. She has also noted that Treasury has not cited any reason for the overpayment. According to the Congressional Budget Office’s independent estimate released a month ago, Treasury overpaid $64 billion.

These reports add another dimension to the American taxpayer’s woes. Until this time, we feared only misuse by Wall Street with the likes of John Thain (former head of Merrill Lynch) freely handing out billions of dollars in bonuses in 2008 despite registering massive losses. Now we have to be seriously concerned with the standards of the Treasury.

That’s not exactly accurate.  Many of us wondered why Congress essentially wrote blank checks to Paulson and now Geithner (in TARP and TARP II) without any significant oversight or reporting requirements.  Even those of us who supported a limited, Resolution Trust-style program to buy back the mortgage-backed securities that Congress mandated, expected better oversight.  We were repeatedly told that we had brilliant minds at the top of this effort who could not be bothered to justify themselves to ankle-biters who worried about such mundane matters as whether the Treasury could accurately value the assets they wanted to buy — assets which changed dramatically from the MBSs to bank equity after Congress wrote the checks.

Now we know that the geniuses couldn’t even get within 20% of the correct price.  Over 30% of the hundreds of billions spent from TARP got completely wasted.  To put this in perspective, the amount of money lost by Treasury on these transactions amounts to more than the annual budget of the Department of Education ($56 billion), HHS ($69B), or HUD and the VA put together ($74B in aggregate).  In fact, the $78 billion gap is more than half of the money spent in supplementals on the Global War on Terror, which Democrats insisted is a tremendous waste of American resources.

Time to put a leash on the geniuses.  Better yet, let’s get a new set of them, along with a Congress with enough balls to watch over their spending.