Panel: Toxic Assets Still a Danger

WASHINGTON, DC-Toxic or troubled assets are still posing a danger to the US financial system, according to a Congressional oversight panel that is monitoring the Troubled Asset Relief Program launched last year.

When TARP was formed last autumn the economy had gone into free fall, with experts warning that even worse dangers could be in store: namely a complete seizure of the banking system thanks to the then-uncharted toxic assets bloating many banks’ balance sheets. Since then, conventional wisdom has decreed the worst danger passed. This sense of a near-miss was further emphasized earlier this year when the nation’s banks did surprisingly well in the Treasury Department’s widely watched stress tests.

According to the TARP panel, though, we may have sighed with relief a little too soon. “The problem of troubled assets was long in the making, and it would be foolish to think that it could be resolved overnight,” it said in its August oversight report. “It would be equally foolish to think that the risk of troubled assets has been mitigated or that it does not remain the most serious risk to the American financial system.”

Risks to the financial systems still include ongoing unemployment and a possible collapse of the commercial real estate market. Also, despite the relaxation of mark-to-market accounting rules, banks could easily find themselves in the position of having to raise additional capital if their non-performing assets are worth even less than the balance sheets currently indicate.

At the same time, the new approach to mark-to-market has meant some banks will not wish to sell their troubled assets–one problem in getting trades in this space underway. Finally, the report focused on the Public Private Investment Program by Treasury, which has yet to get underway. PPIP is the key government initiative to dispose of troubled assets. It remains to be seen if it will, as expected.

Still, though, considering where the economy was eleven months ago, the progress made is notable, Adam Weissburg, partner with Cox Castle & Nicholson, tells GlobeSt.com. “The stock market is stabilized, if not up. Banks seemed to have strengthened their balance sheets. Pundits are suggesting, on an almost daily basis, we are past the worst and things are going to get better.”

As the markets stabilize, more lenders will feel comfortable clearing their books of their distressed debt, restructuring loans that are fundamentally sound with good principals–and merely caught by the economy–and, ultimately, providing fresh capital, he says. “Also, new opportunities will start to emerge, both as ventures take advantage of distressed debt opportunities–such as with the PPIP–Legacy Loan Program–and enter the market as opportunistic lenders.”

Certainly there is still much pain in the economy and commercial real estate markets, he says. “Given high vacancy rates in both commercial and office properties, the bottom may not necessarily spell ‘relief’ for commercial real estate owners.”

Weissburg says, “While [there is] light at the end of the tunnel we still have a way to go. But, with each day, we get a little closer–as opposed to farther away.”