Page last updated at 11:34 GMT, Wednesday, 3 December 2008

Bail-out plan 'lacks oversight'

By Steve Schifferes
Economics reporter, BBC News

A US home that has been repossessed
Congress was worried about the rise tide of foreclosures

The $700bn bail-out of the US banking system is being carried out without adequate oversight, according to the Government Accountability Office (GAO).

The Congressional watchdog says that the US Treasury is failing to monitor whether banks have complied with requirements on executive pay.

And it says the US Treasury failed to address "critical issues" when it changed the goals of the rescue plan.

Congress approved the controversial bail-out package in early October.

At that time, US Treasury Secretary Henry Paulson said that the $700bn would be used to buy up troubled mortgage assets from the banks.


19 September: US officials start working on a $700bn plan to help rid US banks of bad debts
6 October: The Fed announces plans to buy massive amounts of short-term debt from companies in an effort to unfreeze the money markets
14 October: US government taps into the $700bn available to announce a $250bn plan to purchase stakes in a variety of banks
9 November: Insurance giant AIG gets fresh financial help from the US government, which brings the total aid package for the firm to about $150bn.
12 November: Authorities abandon plans to use some of the $700bn to buy up banks' bad debts. The bail-out fund will be used to buy shares in ailing lenders
25 November: A new $800bn stimulus package announced

But shortly afterwards, he decided that the money would be better spent by providing additional capital directly to the banks.

So far, over $150bn has been invested by government in the purchase of preferred shares, including taking a $115bn stake in eight major national banks, and smaller stakes in 44 other banks.

The Treasury's said its objective was to stabilise the financial system and increase the flow of funds for lending.

But the GAO report says that the Treasury "has no policies or procedures in place for ensuring the institutions... are using the capital investments in a manner that helps meet the purposes of the act."

The GAO pointed out that the major banks had told them that the government investment would not be viewed any differently from other capital, and used to "strengthen their capital base, make acquisitions, and lend to individuals and businesses."

And it questions whether the Treasury has even been able to monitor the actions of the banks.

It also points out that no bank had been refused access to funds.

"The rapid pace of implementation and evolving nature of the programme have hampered efforts to put a comprehensive system of internal control in place," the GAO report said.

But Neel Kashkari, the head of the Treasury bail-out programme, said there was no need to monitor how individual banks were spending the funds and added that "the Treasury has made significant efforts to ensure transparency and good communication."

Mortgage defaults

The GAO acknowledges that measuring the impact of the programme on credit markets will be "challenging" as there have been a variety of actions taken to stabilise the financial system, both in the US and abroad.

The implementation of the [programme] is insufficiently transparent and is not accountable to American taxpayers
Nancy Pelosi, Speaker, House of Representatives

However, it says that there are a number of indicators which should "signal whether [it] is functioning as intended", including interest rate spreads, mortgage rates, mortgage originations, and foreclosures.

So far, none of these indicators has turned positive.

It points out that in addition to the Treasury bail-out, the Federal Reserve has provided around $900bn in credits to banks and purchased $500bn in mortgage-backed securities issued by the govenrment-backed mortgage lenders Fannie Mae and Freddic Mac.

'Discouraging report'

In relation to reducing the number of foreclosures, which was one of the explicit Congressional goals of the bail-out, the GAO says that so far the Treasury has "not announced any specific programmes" despite its assertion that it will work with lenders "to achieve aggressive loan modification.

The lack of progress on providing more help to homeowners has been deeply upsetting to Congress, which recently held hearings on the matter.

"The GAO's discouraging report makes clear that the Treasury Department's implementation of the [programme] is insufficiently transparent and is not accountable to American taxpayers," said House Speaker Nancy Pelosi.

Congress has also established a special five-member oversight panel to monitor the bail-out, which is headed by Harvard Professor Elizabeth Warren.

It plans to issue its first report on 10 December.

In an interview with the New York Times, Professor Warren also expressed scepticism about the shifting approach of the programme.

"You can't just say, 'Credit isn't moving through the system,' " she said in her first public comments since being named to the panel. "You have to ask why."

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on sub-prime mortgages, loans provided to borrowers with weak credit histories.

Since then, the US economy has plunged into recession, and credit available to individuals and businesses has been severely reduced.

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