By Silla Brush - 08/11/09 12:08 AM EDT
The Congressional Oversight Panel (COP) said that while the economy shows signs that it is improving since the worst of the financial crisis, many uncertainties remain about banks holding hundreds of billions of dollars in troubled residential loans and related securities.
"This crisis was years in the making, and it won‘t be resolved overnight. But we are now 10 months into TARP, and troubled assets remain a substantial danger to the financial system," the report said.
While some of the nation's biggest banks are reporting multibillion-dollar profits and are increasingly emboldened after repaying the government bailout money, the panel's report underscores the lingering uncertainties in the financial system, particularly at some of the less prominent, smaller firms.
The panel said that those small and mid-size banks will be hardest-hit from the remaining troubled assets. Those banks may need to raise more than $12 billion in additional capital to shore up their balance sheets, the panel said.
"It is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today," the panel said. "The problem of troubled assets is especially serious for the balance sheets of small banks."
The panel is led by Elizabeth Warren, a professor at Harvard University and supporter of several of the Obama administration's efforts to overhaul the financial system.
The government's $700 billion bailout package, known formally as the Troubled Asset Relief Program (TARP), was used to inject capital directly into banks rather than to purchase troubled assets, as it was originally intended. The government has injected more than $200 billion in equity into more than 600 banks, and has used hundreds of billions of dollars to prop up the auto industry, insurance firm AIG and Bank of America and Citigroup.
Earlier this year, the Obama administration also announced an effort — the Public-Private Investment Program (PPIP) — to draw in private investors to help price and purchase the distressed loans and securities remaining on bank balance sheets.
But the effort has been slow to get off the ground. The government postponed the loan part of the program and continues to set up the securities part.
"Whether the PPIP will jump-start the market for troubled securities remains to be seen," the report said.
Rep. Jeb Hensarling (R-Texas), a member of the panel, dissented from the report's conclusions. Hensarling argued that he is "not necessarily discouraged by the results for the smaller banks," because the panel's assumptions may be "excessively pessimistic."