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ASU business expert testifies before Congress

March 12, 2009

As the amount of money spent on bailing out banks and other financial institutions continues to grow, more and more Americans are asking what is happening to their taxpayer money. A top mortgage expert from the W. P. Carey School of Business will testify before Congress Wednesday about the need for greater transparency when it comes to the use of Troubled Assets Relief Program (TARP) funds.

“Transparency is of critical importance to the stability of financial markets, as well as the reputation of the United States in the international economy,” says Professor Anthony Sanders, the Bob Herberger Arizona Heritage Chair at the W. P. Carey School of Business at Arizona StateUniversity. “Greater transparency about use of the TARP money can alleviate concerns among U.S. taxpayers and the investment community that the funds are being used appropriately and not being wasted.

Sanders, a former director and head of asset-backed and mortgage-backed securities research for Deutsche Bank in New York, has consulted with domestic and international banks, as well as the World Bank, European Central Bank and Bank of Japan. He has previously testified about Fannie Mae and Freddie Mac before the U.S. Senate Banking Committee. In November, he testified about the TARP before the Domestic Policy Subcommittee of the U.S. House of Representatives’ Oversight and Government Reform Committee. He will testify before that subcommittee again on Wednesday.

Sanders is calling for greater transparency about both the use of TARP funds and the Treasury and Federal Reserve deployment of those funds. He says the public should be able to understand how the Treasury and Federal Reserve are valuing banks relative to the way they’re being valued in the private sector and the stock market. He says if the Treasury is systematically overvaluing the banks, then that indicates toxic assets, such as mortgages, have not really been dealt with, and the financial system will not start recovering until investors are confident banks have written down those toxic assets and accurately priced the rest of their assets.

“If banks that received TARP funds are in jeopardy of further significant losses, we should be asking what they are doing with those funds and whether the funds would be better used elsewhere,” Sanders says. “Despite our accounting and regulatory reporting on these institutions, the TARP funds seemingly sink into an abyss or a black hole.”

Sanders says financial institutions report information in SEC filings and quarterly call reports, but the information is not “real time.” He calls for more aggressive auditing to determine whether TARP funds are effective at increasing the number of bank loans to Americans or reducing bank losses, instead of being wasted or spent on items that taxpayers might find undesirable, such as to settle predatory lending lawsuits, name a sports stadium, or send staff members on an expensive retreat. He says the question to bank executives should be, “In this climate, would you have made that investment or expenditure without access to TARP funds?”

“Clearly, simply giving capital to banks makes it difficult to understand the money’s uses,” Sanders says. “Instead, the government could either issue vouchers to the banks requiring them to use the funds for targeted purposes only, subject to verification, or else loan the money to financial institutions with a system of verifications and draws. Construction and development lenders often use the draw system to monitor the progress of borrowers and only give the next allocation of funds upon completion and verification of a task.”

Sanders says giving banks TARP funds in exchange for stock is only going to make it harder for the banks to eventually go back to private ownership. Also, systems of verification will make it easier to avoid giving more loans to banks that will ultimately fail, anyway.

“Taxpayers have the right to know what is being done with their wealth, and transparency helps achieve more economically sound use of the TARP funds,” Sanders says. “Research has shown the frequency of stock market crashes is higher in countries with companies that are less transparent to outside investors.”