Alert August 18, 2009

Congressional Oversight Panel Issues Report on Continued Risk of Troubled Assets

The Congressional Oversight Panel (“COP”) issued a report entitled “The Continued Risk of Troubled Assets” (the “Report”).  The Report states that because the Treasury determined to use Troubled Asset Relief Program (“TARP”) funds to provide capital directly to banks rather than to purchase the banks’ troubled loans, substantial troubled assets remain on the banks’ balance sheets today.  The Report states that “[i]f the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value.”

The Report next notes that the Treasury is now trying to restart the mortgage-backed asset market by moving forward with the Public-Private Investment Program (“PPIP”), but the Report cautions that accounting rules that allow banks to carry assets at higher valuations than market might make banks unwilling to sell and buyers may be concerned about political interference or governmental restrictions.  In addition, the Report expresses concern that small banks, which have not been subject to the stress tests imposed on the largest 19 banks, may be hit hard by credit deterioration, and the Report notes that smaller banks tend to have a harder time raising capital to offset the loan write-offs.  Furthermore, the Report advocates regulatory imposition of stronger disclosure requirements that would lead to greater disclosure by banks of the terms and volume of troubled assets on their balance sheets.