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The government’s $700 billion financial rescue plan may itself be in need of rescue, if early assessments are any indication. The credit markets are still floundering, and questions are arising already about the Department of Treasury’s administration of the plan. Before the ink was dry on the Troubled Asset Relief Program (TARP) — it was signed into law October 3 — Treasury officials had decided not to use the money to buy troubled assets at all, as the program envisioned. Instead, they decided to follow the lead of foreign governments and pour cash directly into banks to improve their balance sheets and persuade them to resume lending. Treasury so far has injected more than $150 billion in capital into 52 institutions, but the nation’s businesses and consumers have yet to see credit loosen. The crunch is so bad that vehicle sales in the United States plunged to their lowest rate in 26 years in November, helping to push automakers to seek their own bailout. The Government Accountability Office (GAO), while allowing that the TARP program is new and the challenge daunting, warns that Treasury has not yet put into place a system to gauge the program’s success. The department does not have conflict of interest rules in place, nor any monitoring of the bailout law’s requirement limiting compensation for executives of participating banks, the GAO said. Treasury interim Assistant Secretary Neel Kashkari said in a letter to the GAO that “more can and will be done” to improve transparency and communication, and he agreed that Treasury needs to develop a means to ensure compliance with provisions of the law. But Elizabeth Warren, chairwoman of Congress’ own panel overseeing the bailout, has raised a more fundamental question — whether Treasury understands why banks aren’t lending, and whether more attention should be paid to shoring up the finances of households instead of banks. Treasury Secretary Henry Paulson has maintained that TARP should not be seen as the sole remedy for the ailing economy, but a program “to first stabilize a financial system on the verge of collapse.”

A key point person in ensuring accountability of the TARP program will be a special inspector general (IG), who is charged with auditing and investigating how the federal aid money is spent; the IG will also have the authority to make criminal referrals. It took six weeks for the Bush administration to name veteran New York federal prosecutor Neil Barofsky for the job, and he was confirmed by the Senate on December 8, after a delay caused by an anonymous senator who had put a “hold”on the nomination. Meanwhile, President-Elect Obama, who is eyeing an economic stimulus plan that could dwarf the size of the initial bailout, has signaled a departure in policy from Paulson in saying he wants to see some of the $700 billion in TARP funds used to help homeowners struggling with their mortgages. Mortgage default and foreclosure rates have reached the highest level seen in the 29 years that the Mortgage Bankers of America has been keeping records, and they are expected to increase further.

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