According to new forecasts set to be released by the International Monetary Fund (IMF) “toxic debts racked up by banks and insurers could spiral to $4 trillion”:
The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy.
With that harrowing number hanging overhead, the TARP’s Congressional Oversight Panel released its six-month report yesterday. The panel, chaired by Harvard Law School professor Elizabeth Warren, questioned Treasury Secretary Timothy Geithner’s assumption that the toxic assets clogging the banks are merely economically depressed, noting that Treasury’s response “fails to acknowledge the depth of the current downturn”:
If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. […] On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.
The Warren panel also noted that Treasury “has not explained its assumption that the proper values for these assets are their book values.” These are very important observations, and it would behoove Treasury to provide some responses.
For its part, the panel suggested that liquidating troubled banks would be the strategy “least likely to sap the patience of taxpayers,” while also giving Treasury a definitive way out of its entanglement with the financial system. “Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal,” the report said.
As estimates regarding the number of toxic assets climb higher and higher — with Nouriel Roubini claiming there are $3.6 trillion worth — its becoming clearer just how much depends on Treasury finding a workable plan for cleaning up the banks. As IMF managing director Dominique Strauss-Kahn said, “you never recover before the cleaning up of the banking sector has been done.” And right now, Geithner’s clean up is premised on an assumption that more and more people are taking issue with.