Bernanke Encourages Return to Original TARP Mandate, Remove Toxic Mortgages

Two of the Federal Reserves top officials advocated a refocusing on ridding bank balance sheets of toxic mortgage assets. In recent statements, both Federal Reserve Chairman Ben Bernanke and Vice Chairman Donald Kohn highlighted the adverse effects these illiquid mortgage assets are having on the proper functioning of financial institutions and credit markets.

The Federal Reserve is returning attention to the role that these troubled assets play in undermining the proper assessment of the "underlying value" of banks and preventing "private investment and new lending."

Sounding like a voice from the past Bernanke and Kohn are essentially making the same case that was brought before the Congress by US Treasury Secretary Paulson in October 2008. A presentation and fact pattern that eventually secured $700 billion for a Troubled Asset Relief Program to precisely remove these toxic mortgage from bank balance sheets.

However, once secured Paulson--supported by the Federal Reserve--took a radically different path with TARP funds. An initial $350 billion in bank capital infusions, whose accountability is now being questioned. This may raise some constituent concern as regulators call for immediate release of the remaining $350 billion from Congress.

Democratic lawmakers, like House Financial Services Committe Chairman Barney Frank (D-MA) seem much more determined to get the remaining TARP funds directly to US homeowners. Democrats are advocating foreclosure prevention programs like loan modifications.

Meanwhile, Republican House members, like Spencer Bachus (R-AL) are cautioning that TARP has served its emergency purpose and the remaining $350 billion is likely to turn into a "grab bag" of special interests pandering.

Bernake and other banking analyst are convinced we are still at square one with banks fighting insolvency and becoming comfortable enough with capital reserves to really begin lending properly. Recent San Francisco and Seattle FHLB announcements of measures to conserve capital seem to support this line of analysis.