COP August Oversight Report

To follow up on the previous post with the Elizabeth Warren video I wanted to provide The Congressional Oversight Panels August report.  To access the complete report click on the picture below.  The report is titled “The Continued Risk of Troubled Assets”  and  gives some insight into the current situation that we are in.  It is a good read if you have some time this weekend or a boring Monday at work.  Below is a sample from the report:

It is impossible to resolve the argument about whether banks are or are not solvent because of the uncertain value of their loans. The importance of that question will be reduced substantially if the economy improves and unemployment drops. However, the acid test will come if unemployment remains high and residential and commercial mortgage defaults increase. Moreover, such instability may not emerge until the full extent of any coming crisis in commercial mortgages is fully felt or banks can evaluate the experience of loans that come due after the 2009-10 stress test period.

Treasury has adopted a strategy that it hopes will strengthen at least the nation‟s largest banks to withstand a return instability. Several supplemental steps may help reduce the risks that this could occur:

1. As recommended by the Panel in June, supervisors should repeat the stress tests if economic conditions worsen beyond the adverse economic scenario originally used.

2. Treasury must assure robust legacy securities and legacy loan programs or consider a different strategy to do whatever can be done to restart the market for those assets.

3. Treasury and relevant government agencies should work together to move financial institutions toward sufficient disclosure of the terms and volume of troubled assets on banks‟ books so that markets can function more effectively.

4. Treasury must be prepared to turn its attention to small banks in crafting solutions to the growing problem of troubled whole loans. Those banks face special risks with respect to problems in the commercial real estate loan sector. As one example, the methodology and capital buffering involved in the stress tests could be extended to the nation‟s smaller banks on a forward-looking basis.

Ultimately, everything depends on the care and responsibility exercised by both banks and supervisors in carefully controlling risk and watching for signs of trouble. There is no substitute for acting in advance of a crisis, especially now that some of the signals of potential concern should be clear.

The problem of troubled assets was long in the making, and it would be foolish to think that it could be resolved overnight, or that doing so would not involve balancing equally legitimate considerations affecting the banking industry and the public interest. But it would be equally foolish to think that the risk of troubled assets has been mitigated or that it does not remain the most serious risk to the American financial system.