Second Half of TARP Funds to Carry More Strings

Despite some of the current questioning on Capitol Hill and in the media, Congress will likely soon approve the second half of the $700 billion Troubled Asset Relief Program (TARP) funds, according to experts who have been following the developments. The Senate is expected to vote Thursday on whether to approve the release of the funds.

There has been a lot of consternation about lack of transparency and the actual use of the first tranche of the money, $350 billion approved last fall. A handful of financial institutions used some of the funds to repurchase their own stock, to purchase other “healthy” institutions — a relative term in today’s financial industry — or for a host of other unintended uses. In the meantime, many still paid lucrative executive compensation while also maintaining some or all of their dividends.

So the second half of the funds are expected to come with a lot of strings attached. In a letter to Congress earlier this week, Larry Summers, President-elect Barack Obama’s chief economic adviser, wrote: “[President-elect Obama] shares the frustration of the American people that we have seen too little effect from this rescue plan on jobs, incomes and the ability of responsible homeowners to stay in their homes. [He] believes there has been too little transparency and accountability; too much upside for financial institutions and executives who acted irresponsibly without providing enough help for small business owners, families who are struggling to keep their jobs and make ends meet and innocent homeowners.”

Legislators, notably Rep. Barney Frank (D-Mass.), head of the House Financial Services Committee, have also asked for more accountability for the funds. But despite the posturing in Congress, the funds are likely to be approved, according to Scott Sinder, a partner and chair of the government relations and public policy practice for Steptoe & Johnson, Washington, D.C.

“There’s a perception that the money is being abused,” Sinder said. “There’s an honest dispute, the money has yet to be used as intended: to bring relief to [distressed] homeowners.”

Though Frank and several others are asking for more accountability, the concerns are not all that different from those posed by Summers, Sinder says. So he expects either the House or the Senate (only one is needed) to approve the release of the second half of the TARP funds to the Treasury, which will disperse it. How exactly it will be dispersed and what additional strings will be attached is unknown.

Once funds start being dispersed, it should help free up some of the logjam in the credit markets, according to Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm.

When the credit markets start loosening up, the market for asset-backed securities is likely to come back, which will further ease tight credit markets, said North.

North expects to see an upturn in the economy in the second half of the year due to improving credit markets and improving confidence in the government and its actions.

“A lot of what we’ve been through is a crisis of confidence,” North said, adding that new faces in the administration will help boost consumer confidence.