Kashkari details Tarp oversight plans

Assistant secretary for financial stability Neel Kashkari defended the US Treasury against accusations of poor oversight of the $700 billion Troubled Assets Relief (Tarp) programme in front of the House of Representatives' financial services committee this week.

"Given the severity of the financial crisis, we must build the Office of Financial Stability, design our programs, and execute them - all at the same time," Kashkari remarked. As part of the plan, he stated there would be close monitoring of financial institutions receiving assistance under the Capital Purchase Programme (CPP), and that the Treasury is developing agreements that ensure institutions remain in compliance with the executive compensation restrictions laid out by Congress.

Kashkari also said the Treasury has drafted and submitted conflict-of-interest regulations to the Office of Management and Budget (OMB), which will be published soon.

This statement came on the heels of a report published on December 2 by the Government Accountability Office (GAO), which claimed the Treasury had failed to provide adequate oversight of the CPP.

Asserting that Tarp is working, Kashkari insisted "the system is fundamentally more stable than it was when Congress passed the legislation". He pointed to the reduced risk of default among financial institutions as evidence of the programme's success: "the average credit default swap (CDS) spread for the eight largest US banks...has declined more than 200 basis points since before Congress passed the Emergency Economic Stabilization Act (EESA)".

Kashkari declined to mention that the drop in the average CDS spread of the largest US banks was almost entirely down to dramatic movements on Morgan Stanley and Wachovia, who saw their CDSs peak at 1022.0 basis points and 1560.5bp shortly before the EESA was enacted on October 3. On December, the cost of protection on Morgan Stanley had fallen 58.6% to 423.4, while CDSs referencing Wachovia narrowed even further from 1560.5bp to 160bp, an 89.7% fall.

Since the GAO's critical report was written, Kashkari said the programme has acquired an inspector general - Neil Barofsky, who was confirmed on December 8 - but admitted that tracking the use of CPP funds would not be easy.

"Each individual financial institution's circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization," said Kashkari, but said the Treasury would continue to improve internal controls in the programme.

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