Saturday, February 7, 2009

Risk Of Providing Continual Aid To Banks

With the current debate raging over the best way to apply the remaining TARP fund, there is a tremendous risk that we would not be saving the banks from their own ineptitude, even after giving them the full $700 billion. Here is the basic reasoning, based upon my experience as a risk manager:

In risk management, one has to identify clearly the goal and timeline of any risk mitigation planning, the “Exit Strategy.” The Exit Strategy takes into account (a) the probability of various outcomes, (b) their associated costs and benefits, (c) method of measuring and reporting on the progress (transparency), (d) have built in contingency plans to work around potential problems that may occur, and (e) have a clear and easily measurable action plan for achieving best possible outcome.

The previous administration completely bumbled in implementing the first half of the TARP. There was no clear “Exit Strategy” for the $350 billion funding as the TARP did not did not have a clear and easily measurable action plan, method of measuring progress, or even contingency plans to work-around potential problems.

The complete ineptitude of the previous administration’s handling of the TARP was laid bare by The Congressional Oversight Panel (COP) report, which came out a few days ago (actual report here; and news article here). The Congressional Oversight Panel lambasted the previous administration’s shortsightedness of purpose, poor planning, fumbled execution, lack of transparency, and bad deal making by asking the Treasury in December 2008 the following 10 questions:

1. What is Treasury’s Strategy?
2. Is the Strategy Working to Stabilize Markets?
3. Is the Strategy Helping to Reduce Foreclosures?
4. What Have Financial Institutions Done With the Taxpayers’ Money Received So Far?
5. Is the Public Receiving a Fair Deal?
6. What is Treasury Doing to Help the American Family?
7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?
8. How is Treasury Deciding Which Institutions Receive the Money?
9. What is the Scope of Treasury’s Statutory Authority?
10. Is Treasury Looking Ahead?

The Treasury should have had answers to these questions PRIOR to releasing the first $350 billion of the TARP. Even now, it appears that the Treasury is still unwilling (or unable) to address these basic issues, which only heightens the risk that the remaining $350 billion will be squandered yet again with no measurable benefit.

Since the Treasury was unable to answer any of the 10 questions, it would be very interesting to hear what the new Treasury Secretary Geithner will say next week. Whatever it is, I doubt that any of the questions posed by the Congressional Oversight Panel would be answered. The problem lies not only with the Treasury Department but also with President Obama. The Administration needs clearly state that lax accounting, poor planning, and insufficient results will not tolerated and, going forward, there will be strict performance and reporting requirements associated with the bailout. Without these directions, the risk of additional $350 billion being wasted is great.

Ed Kim
Practical Risk Manager

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