Should the Remaining $350 Billion TARP funds be Released for Obama?

President George W. Bush has requested Congress to release the second half of the $700 billion financial-rescue fund (TARP) on behalf of President-elect Barack Obama. Given the controversy over the lack of oversight and inefficient distribution/usage of the first $350 Billion tranche, a huge political fight and close scrutiny is expected in Congress over the release of the remaining funds. Obama was quoted as saying “In consultation with the business community and my top economic advisers, it is clear that the financial system, although improved from where it was in September, is still fragile. I felt that it would be irresponsible for me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system.”

Congressional aides said at least one and possibly both chambers of Congress could vote against releasing the funds. The president could however veto any disapproval legislation, ensuring the $350bn is disbursed, but such a defeat would spook markets and undermine hopes of a strong start under the Obama administration. The Congressional Oversight Panel for Economic Stabilization also released its second report on the Troubled Asset Relief Program (TARP) today. The key issues that need to be addressed, and which Congress will focus on before releasing any additional funds were: Accountability, Transparency, Effectiveness of foreclosure mitigation efforts and the change of strategy in using the TARP funds.

Clearly there are issues with the way Treasury Secretary Henry Paulson has used the first $350 billion, which was obtained relatively quickly with few strings attached. Because the funds were used to prop up banks, rather than to stem foreclosures and buy toxic assets as initially proposed, lawmakers from both parties are going to much more reluctant to release additional funds despite a worsening economic situation. However, I do think that rising unemployment, weak housing market and depression-state fears will force congress to release the funds (off course this will come after many debates and media interviews). Also, they would be reluctant to create a lot of political controversy at the start of the Obama administration.

The key thing that the new president needs to ensure Congress support is appropriate governance of the next round of TARP funds which means an overhaul of the current management team overseeing the rescue package – whose response to congress questions have been woefully inadequate. Will the remaining TARP funds, in addition to the proposed $800 billion stimulus package make a difference? I hope so. However the first obstacle the Obama will have to deal with is getting Congress approval for his spending plans.

Do you think Congress should release the TARP funds?

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