With Congress mulling allocating the second half of the Troubled Asset Relief Program, there was lots of action in Washington D.C. Tuesday. From Assistant Treasury Secretary Neel Kashkari's update on the progress of TARP earlier in the day to hearings held by House Financial Services Chairman Barney Frank in the afternoon, the progress and fate of TARP came under scrutiny.

During a late afternoon press conference, Speaker of the House Nancy Pelosi said Congress “fully intends” to meet a deadline of having an economic recovery package before the Senators leave for the President’s Day recess. Presidents Day is Feb. 16. Pelosi said lawmakers won’t leave here without an economic recovery package.
 
Senate Majority Leader Harry Reid, said that after a meeting with President Elect Obama Tuesday, he left feeling “positive about what the future for this country holds.” He said with transparency, accountability and jobs creations the future is good.
 
First out of the gate Tuesday was Kashkari, who said earlier that the Treasury has invested $189 billion of the $250 billion Capital Purchase Program in 257 institutions, with demand for the program remaining high.  

“The number of applications under-review at the regulators is in the thousands, representing every state in the country, and hundreds more have already been pre-approved by Treasury. We are pleased with the large number of banks that have applied,” said Kashkari.

And while the Treasury has come under criticism since credit hasn’t loosened even though banks have been taking millions and some cases billions from the government, Kashkari said the Treasury has designed features into its investment contracts with the banks that limit what they can do including dividend increases and share repurchases as well as executive compensation.

Many have said the Treasury's oversight of the money has been lackluster to say the least, but Kashkari said the Treasury is working with bank regulators to put in place a program to measure where the funding is being used including quarterly call report data from the banks and collecting monthly data from the big banks that get government aid. The Treasury is aiming to start culling the data at the end of the month. 

 Kashkari said the Treasury didn’t prohibit the banks from engaging in mergers and acquisitions because when a failing bank is acquired by a healthy bank its better for the community than if the bank was allowed to fail.

“Branches and financial services in that community are usually preserved. Costs to the taxpayers via the FDIC deposit fund are also lower than had the bank been allowed to fail. Prudent mergers and acquisitions can strengthen our financial system and our communities, while protecting taxpayers,” he said.

As for when banks will resume lending Kashkari said that more than $60 billion of the $250 billion has yet to be received by banks and that the capital needs to be in the system before there will be a resumption of lending. Kashkari said it critical that the nation’s banks make credit available but cautioned that banks shouldn’t be forced to make loans that are too risky. “Bad lending practices were at the root cause of this crisis. Returning to those practices will not help end this financial turmoil,” he said.  

Kashkari concluded by calling for patience, saying it will take time for all of the government actions to work through the system. “The current crisis took years to build up and will take time to work through, and we still face some real economic challenges,” he said.

In the case of Frank’s hearings, the topic is the priorities for using the second $350 billion of TARP under President Elect Barack Obama’s administration. On Monday President George Bush said he would ask Congress to release the second round at the request of Obama. Witnesses that testified included the Federal Reserve Vice Chairman, the deputy to the FDIC’s Chief Operating Officer, the heads of the bankers, homebuilders and realtors associations and community activists  Frank has been supporting legislation that gives specific restrictions and directions on how the second $350 billion will be used, including more to prevent foreclosures.

In Federal Reserve Vice Chairman Donald Kohn's testimony Kohnl said an important use of the second half of TARP is to avoid foreclosures that are preventable. He called for a streamlined re-underwriting process to modify a large number of troubled mortgages in quick time frame and a plan to increase the proportion of loan modifications that borrowers will be able to sustain over the longer term. One example would be for the Treasury to use TARP funds as working capital to buy delinquent mortgages from lenders and investors at steep discounts to the balances. The mortgages would be modified to meet the criteria for refinancing into Hope for Homeowners or other government programs. 

Kohn also said another use of TARP funding should be to support program that restart the credit markets and to strengthen financial institutions. 

Edward Yingling, President and Chief Executive of the American Bankers Association called on Congress to fully fund the original $250 billion Capital Purchase Program as part of TARP, arguing healthy banks are already lending. Yingling also wants future TARP funding to go to help prevent foreclosures.

Meanwhile John Bovenzi, deputy to the Chairman and COO of the Federal Deposit Insurance Corp. said not enough has been done to help struggling home owners. He said the FDIC believes the original intent of TARP—to get rid of toxic assets from banks balance sheets—is still very important.  Charles McMillan, president of the National Association of Realtors called for the real estate market to be stimulated by using TARP funding for mortgage relief via lower mortgage interest rates, eliminating the repayment feature of the first time homebuyers tax credit, expanding the credit to all homebuyers and extending the credit effective date to December 31 2009. McMillan also wants increased liquidity in the commercial real estate loan market.