Watchdog groups have an important role to play in the public discourse, but it’s a shame when politicians use convenient narratives to shift the focus away from unpleasant realities and more important questions. One watchdog report, courtesy of the Congressional Oversight Panel, that is sure to draw attention is the one that contends that the Fed overpayed by $78 billion for toxic bank assets under TARP. Politicians on both sides of the aisle will use the occasion to continue making TARP a scapegoat. As Noam Scheiber points out, though, it’s only logical to overpay:

Suppose a bank paid $100 billion for its portfolio of mortgage-backed securities, which it says are worth 90 cents on the dollar. Almost no one thinks they’re worth that much. But if we price them closer to what people think they’re worth (let’s say 30 cents on the dollar), we’ve just wiped out $60 billion in stated assets. If the difference between the bank’s assets and liabilities was less than $60 billion, it’s now insolvent.

The reason banks aren’t lending is that, even though they say their portfolio is worth $90 billion, they know it’s actually worth closer to $30 billion, so they don’t have enough capital to support new loans. Which is to say, they know they’re insolvent (or close to it). They’re just not admitting it. …

Put simply: The whole point is to overpay, because without overpayment the banks would be deep in the red. The question is what we get in return for that overpayment.

There are certainly legitimate questions to be asked about TARP’s management, and the Congressional Oversight Panel report raises some key points. But we’re going to have to swallow the fact that TARP is a giant subsidy to the banks — a subsidy which is keeping the banks from imploding further.

(cross-posted at www.gwdiscourse.com)