The Congressional Oversight Panel reported recently that toxic assets continue to be a potential threat to the smaller banks, and more cleanup may be needed. Reuters:

"No one has a good handle how much is out there," Warren said. "Here we are 10 months into this crisis...and we can't tell you what the dollar value is."

Estimates are that "somewhere between $600 billion and $1.5 trillion in toxic assets (is) spread across the balance sheets of the small and the large banks," Warren said, adding: "That's a lot."

In its report, the panel said the Treasury needs to either assure that a robust program is available for handling toxic assets as they go into default or else consider a different strategy for restarting markets for the assets.

The critical report comes as the Treasury prepares to launch a significantly scaled-down version of its toxic asset program, a series of public-private investment funds to purchase toxic mortgage securities with $30 billion in government subsidies.

Last October, the entire $700 billion U.S. bailout program was aimed at buying up the toxic assets that threatened to bring down the financial system. But due to the plan's complexity and with market confidence rapidly deteriorating, then-Treasury Secretary Henry Paulson quickly shifted gears to use the money for direct capital injections into banks.

Since then, Paulson's successor, Timothy Geithner, announced plans to entice private investors to buy "legacy" securities and whole loans from banks. But accounting forbearance that allowed banks to avoid recognizing losses on these assets combined with large institutions' ability to raise capital after regulator "stress tests" in May reduced investor angst over toxic assets.

COMMERCIAL PROPERTY TIME BOMB

The Congressional Oversight Panel said, however, that smaller U.S. banks faced billions of dollars in losses from delinquent commercial property loans and were far less able to raise capital and absorb losses than their larger counterparts.

While we've been (understandably) preoccupied with healthcare, Commercial real estate has been quietly tanking. From the Boston Globe:

The collapse in commercial real estate is preventing Federal Reserve chairman Ben S. Bernanke from declaring the economy and financial markets are healed.

Property values have fallen 35 percent since October 2007, according to Moody’s Investors Service.

That’s making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls, and hotels this year, pressuring companies such as Maguire Properties Inc., the largest office landlord in downtown Los Angeles, to put buildings up for sale.

The industry is likely to be high on the agenda when Bernanke and his colleagues sit down in Washington today at the Federal Open Market Committee meeting on monetary policy. Lawmakers including Barney Frank and Carolyn Maloney are pushing the central bank to extend an aid program designed to restore the flow of credit.

If nonresidential real estate remains in the doldrums, the Fed may be forced to leave emergency-lending programs in place and keep its benchmark interest rate close to zero for longer than some investors expect, given positive signs elsewhere in the economy.

Commercial property is “certainly going to be a significant drag’’ on growth, said Dean Maki, a former Fed researcher who is now chief US economist in New York at Barclays Capital Inc., the investment banking division of London-based Barclays PLC. “The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.’’

The Fed is “paying very close attention,’’ Bernanke, 55, told the Senate Banking Committee on July 22, the second of two days of semiannual monetary-policy testimony before the House and Senate. “As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices, and so, more pressure on commercial real estate.’’

Back to Reuters:

An analysis done by the panel showed that under a scenario 20 percent worse than assumptions used in the Federal Reserve's stress tests [which we suspect were rigged], about 719 banks with assets between $600 million and $100 billion would need to raise some $21 billion in new capital to offset loan losses.

"Treasury must be prepared to turn its attention to small banks in crafting solutions to the growing problem of troubled whole loans," the panel said, adding that it should consider using similar stress tests -- along with pledges for additional capital -- on smaller institutions.

It said triggers for further supportive actions could come if unemployment remains high and residential foreclosures continued to mount.

The five-member panel approved the report by a 4 to 1 vote, with a dissent by U.S. Rep. Jeb Hensarling, a Texas Republican and the committee's only sitting congressman.

Anybody surprised at that dissenting vote?

These smaller banks are regional players, without the clout and inside influence of Goldman Sachs or Bank of America. (Or UnitedHealth, for that matter.) Treasury's resistance to doing the right thing for the Too-Big-To-Fail banks could mean more resistance to doing anything at all for these.

A lot of our attention and energy has been focused on the healthcare reform battle recently, but as I've tried to make clear in recent posts, there is ongoing concern about the way the Federal Government is handling the Big FAIL, and the two issues are interlinked. We need to be monitoring this as well, and be prepared to press our representatives as needed. (For example, on the PROFIT Act.)

[See the excellent WSJ reporting for a fuller account of the commercial real estate loan problem and how those loans were packaged into securities.]

On the title: At first I thought "The toxic assets ticking bomb", but it occurred to me that it's really more like a minefield, in that we are always at risk of stepping on another toxic-asset mine as we go forward. What I really want is some metaphor that combines the two.