After $267 billion from the Troubled Asset Relief Program fund was spent in 2008 to prop up the finances of troubled financial institutions, several securities and banking groups are now calling for a return to one of the original key aims of TARP. This aim was to revitalize the credit markets by buying toxic assets that include foreclosed properties.
Tim Ryan, chief executive of the Securities Industry and Financial Markets Association, said that the capital and credit markets remain weak because they are saddled with toxic assets. The banks are being pulled down by billion dollars worth of mortgage-backed securities, most of which have been downgraded due to foreclosures.
Ryan witnessed the fall and recovery of the savings and loan associations in the 1990s when he was director of the Resolution Trust Corp. As he supervised the cleanup of the associations, he learned that the best strategy to help banks recover is to eliminate their bad assets so that they could begin lending again.
Meanwhile, the Organization for Economic Co-operation and Development has released the results of its analysis of three decades of financial crises. OECD found that the most effective strategy to solve a major financial meltdown is to isolate toxic assets.
Oppenheimer finance analyst Meredith Whitney also said that the expected downgrading of mortgage-backed securities will drastically cut the profits of banks, forcing them to sell more stocks to raise capital.
While many support the proposed elimination of bad debts and the RTC model, there are also others who are against the idea. Bill Isaac, who led the Federal Deposit Insurance Corp. for five years in the 1980s, said the RTC model which was applied to save massive savings bank failures can not be applied to current circumstances characterized by foreclosures.
Notwithstanding the proposals, House Financial Services Committee Chairman Barney Frank has insisted on prioritizing the foreclosure crisis by introducing a provision to force the Treasury to spend at least $50 billion to help homeowners avoid foreclosure.
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