Treasury answers bailout critics

ROAD TO RESCUE

• Home prices up for 1st time in 3 years
• New home sales: 'Really good news'
• Wall Street: Here comes the hard part
• 7 regional banks fail
• Banker: "TARP helped avert a global calamity"

The ballooning bailout

More Videos

Quick Vote

What was the biggest business news story of 2008?

• Auto industry meltdown
• Bailout of Wall Street
• Foreclosure storm
• Oil price's wild ride
• Stock market meltdown
• It's official: U.S. in recession

or View results

Tracking the bailout

Economy rescue: Adding up the dollars

The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.

View chart

NEW YORK (CNNMoney.com) -- In the face of criticism that its bailout efforts are not working, federal officials said Wednesday that they have prevented widespread failure of financial institutions, but they conceded that the credit crisis won't ease until the economy recovers.

The Treasury Department released a 13-page document directly responding to a report from the Treasury Asset Relief Program's congressional oversight panel delivered to Congress and Treasury earlier this month.

The oversight panel's review of the $700 billion financial rescue plan said Treasury must ensure that the money it is using to bail out banks is working and needs to establish clear measures to gauge success.

In the report sent to the panel's chairwoman, Harvard Law School professor Elizabeth Warren, Treasury said that TARP has worked immediately to stabilize the financial markets. It added that factors beyond the government's control will prevent the credit situation from rapidly improving.

Capital investment money is still being delivered to banks, consumer confidence is at an all-time low and the economy has a long way to recover, Treasury said.

"The financial system is fundamentally more stable than it was when Congress passed the legislation," said the report. "As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans."

Treasury has also been harshly criticized by economists and lawmakers for changing its bailout strategy. The original plan was to buy up toxic mortgage-backed securities from banks, but Treasury quickly abandoned that plan, opting instead to make capital investments in banks.

The report said the decision was made for two reasons: speed and scope.

"Treasury ... determined the fastest, most direct way was to increase capital in the system by buying equity in healthy banks of all sizes," the report said. "Illiquid asset purchases, in contrast, require much longer to execute."

Regarding scope, the Treasury Department said its rescue efforts would be far more expansive in a capital purchase program.

"For an asset purchase program to be effective, it must be done in very large scale," said the report. "Each dollar invested in capital can have a bigger impact on the financial system than a dollar of asset purchase; capital injections provide better 'bang for the buck.' "

Also released Wednesday were minutes from a meeting of Treasury's own TARP oversight board. The minutes suggested the panel thought the program's success would be difficult to gauge, because of the scores of government bailout initiatives working in tandem with TARP.

According to the minutes, officials "discussed the difficulty of isolating the effects of the TARP given the variety of policy actions taken by the U.S. government to support financial stability and promote economic growth."

The 13-page Treasury report stated that some credit market gauges indicate that TARP is helping to free up lending. The spread between Libor, a bank lending rate, and the Overnight Swap Index rate, a measure of actual borrowing and risk, serves as a measure of how much lending is going on in the market.

Treasury notes the Libor-OIS spread, which is usually at about 0.05 to 0.1 percentage points, rose as high as 3.64 points at the peak of the credit crisis in October. Now it is 1.24 points. Treasury said the drop indicates that credit conditions are improving.

Critics have said Treasury's lack of reliable indicators of the program's success are unacceptable. If the government's recently acquired assets continue to decline in value, some say tax dollars would have been wasted.

Treasury said its holdings are currently "at or near par," though the value may be judged lower when compared to the date of purchase on a mark-to-market basis. But it cautioned that the investments will take awhile to grow in value as market conditions slowly improve.

"Treasury is not making these investments for short-term gains -- we are not day traders," said the report.

Warren, the oversight panel chair, was unavailable for comment, but the panel released a brief statement.

"The panel is in the process of evaluating the answers that have been provided, and will continue to work with Treasury to get the information we need to fulfill our statutory responsibilities to Congress and the American people," the statement said.