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Barofsky Report: TARP Is Not ‘Too Big To Fail’.

January 31, 2010

TARP has been an issue for much debate for the past year. Proponents insist that it’s the only thing that has saved our country from total financial collapse, it’s opened up lending to consumers and prevented foreclosures all across the country. While the other side insists it’s been nothing more than more federal regulation which has done little to nothing to help the country recover. In a report released yesterday Neil Barofsky, Special Inspector General of the TARP program has said, “it is hard to see how any of the fundamental problems in the system have been addressed to date.” He does say that it’s helped stabilize the financial system but it’s failed to prevent foreclosures and increase lending to businesses and consumers.

One of the first things I noticed while reading through this report is that Barofsky says the one good thing about TARP is that it’s prevented many major banks from collapse.

Many large banks have once again been able to raise funds in the capital markets, and some institutions — including some that appeared to be on the verge of collapse — have recovered sufficiently to repay their TARP investments years earlier than most would have predicted. These repayments and the sales of the warrants associated with them have meant that Treasury (and thus the taxpayer) has turned a profit on some of the individual TARP investments; as a result of these repayments, among other positive developments, it now appears that the ultimate cost of TARP to the American taxpayer, while still substantial, might be significantly less than initially estimated.

“significantly less than initially estimated”. Kind of makes that bank tax seem slightly less necessary. Also, keep in mind, this guy was hand-picked and nominated by President Bush. In a recent interview with New York Magazine he said, “My job is to be a pain in the ass. I took this job, and there’s only one way to do it, which is without worrying about anything but the truth, and delivering to the taxpayer what they deserve, which is an honest appraisal of what happened.”

In the report he states that while the banks may have been saved, “Many of TARP’s stated goals, however, have simply not been met.”

Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.

Barofsky says that while on the surface things appear to be working okay, the fundamental problems, that caused the financial trouble in the first place, have not been corrected. As anyone who’s ever played basketball, hockey, or ping pong knows, if you don’t have the fundamentals down, ie: running, ball handling, skating, hand-eye coordination, you don’t have anything to build on. He says, “Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.” Scary thought my friends.

That said, he goes on to explain a number of fundamentals that he feels need to be fixed.

To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

The theory here is that, before TARP, the idea that many banks were “too big to fail” was what drove the necessity for the bailouts. But in this “post-TARP” world, the banks are now “FAR too big to fail”. They’re more interconnected and entwined. So if Bank A has trouble, it could, in theory, take down Bank B and Bank C and maybe even Bank D. As Sen. Susan Collins (R-MA), top Republican on the Senate Homeland Security and Governmental Affairs Committee, says, “It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance. The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.” She also said she’s “deeply troubled” by the report. Not surprising, given that when you look at the rationale for the program, it was supposed to be designed to avoid these problems.

To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

The last three were things that Bush and Obama have said were the driving forces behind TARP. The guy in charge of the whole entire program is now stating that the program has failed. Not only a little bit, but in internet speak, “an epic failure”. TARP has NOT prevented foreclosures, nor has it prevented risky practices by some of our countries biggest banks, and to top it all off, many banks still have government backing so, it’s not really their loss if they make another mistake.

The report also states the financial status of TARP:

As of December 31, 2009, Treasury had announced programs involving potential spending of $549.4 billion of the $698.8 billion maximum available for the purchase of troubled assets under TARP as authorized by Congress in EESA. Of this amount, Treasury had planned TARP expenditures of approximately $500.1 billion through the 10 implemented programs to provide support for U.S. financial institutions, the automobile industry, the markets in certain types of ABS, and homeowners. As of December 31, 2009, 67 TARP recipients had paid back all or a portion of their principal or repurchased shares for an aggregate total of $165.2 billion of repayments and a $5.0 billion reduction in exposure, leaving $368.8 billion, or 52.8%, of TARP’s allocated $698.8 billion available for distribution.

In addition to the principal repayments, Treasury has received interest and dividend payments on its investments, as well as revenue from the sale of its warrants. As of December 31, 2009, $12.9 billion in interest, dividends, and other income had been received by the Government, and $4.0 billion in sales proceeds had been received from the sale of warrants and preferred stock received as a result of exercised warrants. At the same time, some TARP participants have missed dividend payments: among CPP participants, 74 have missed dividend payments to the Government, some of which made the payments on a later date. As of December 31, 2009, there was $140.7 million in outstanding unpaid CPP dividends. Finally, three TARP recipients that received a combined $2.6 billion in TARP funds have filed for bankruptcy.

Three companies that received TARP fund have filed bankruptcy? It would be ok it was just a few million dollars of investment out the window, but we’re talking about $2.6 BILLION dollars of taxpayer funds out the window. Too big to fail? Yeah right. All the government intervention in the world couldn’t prevent something destined for failure to be saved. As more banks leave the program the government has little to no control over what they do. Which is great for all of us “free market” proponents.

“Step one was, we saved the banks. Step two was, we encouraged them and enabled them to become bigger than ever and more interconnected than ever. We enabled acquisitions. Banks that would have otherwise fallen were buttressed. And now we’ve let them leave the TARP program, so whatever thin leverage we could have had as shareholders is gone. Meanwhile, it’s not like they’ve all returned to profitability; you still see some of them posting billions of dollars in losses. And in case anyone out there has any question of whether we’re going to let big, large, interconnected firms hit the rocks, not only have we shown throughout this crisis that we haven’t but we now are maintaining an enormous war chest under the TARP. You’ve made it worse in trying to rescue them, you’ve let them out, and there is nothing in place to prevent 2008 from happening all over again. We have to do something, and fast.” –Barofsky on TARP failure

This report is another slap in the face to the Obama administration and any chance they had to change the business practices of many of our large financial institutions is all but gone. It has to be the most damning evidence that TARP is nothing more than a big money deal to save some of the richest on Wall Street, which, supposedly goes against everything Obama “stands” for. I’d be laughing right now if I wasn’t so upset over my tax dollars literally flying out the window while I see dozens of small businesses shutting down shop and laying people off because they can’t get a loan. That, my friends, IS the definition of failure.

11 Comments leave one →
  1. January 31, 2010 12:01 pm

    Nice breakdown, Candice.

    “Barofsky says the one good thing about TARP is that it’s prevented many major banks from collapse.”

    That’s why I hated TARP from the beginning. I sound like a broken record at this point, but the parallels between the US and Japan are too significant to not mention. The interconnected nature of the US financial system, like that of the Japanese Keiretsu, has successfully insulated itself from the necessary creative destruction that fuels capitalism. The 2008 crash could have been a great forest fire that cleared old decaying institutions and made room for new growth. Instead, thanks to a successful fear mongering campaign by reckless financiers and their regulatory cousins, market forces were subverted and the average American will pay an even greater price for the sins of a few well connected financiers. TARP put out the fire and it will guarantee that the fire that’s too big to put out will consume this entire nation.

    • Candice permalink
      January 31, 2010 10:58 pm

      Thanks Stickee.

      At this point, it all seems like a broken record. Those of us who were saying it was bad form the start are starting to see our predictions come true and I don’t know about you, but that’s damn scary.

      I’m with you in your analysis. This program, by its very design, wasn’t intended to help out the “average American”, it was implemented with the sole purpose of helping the banks, to demonize them publicly, to show “the people” just how bad and evil they really are, and that government intervention is the only way to prevent this “crisis” from happening again. The problem is, the government didn’t take into account the fact that some banks would and COULD pay the money back, therefore they would no longer be in debt to the government. But I’m pretty sure Geithner is playing the “Well…we helped you out, homie…” card.

      That said, like I said in the post, things are more screwed now than it was before TARP, and if the Bank A scenario comes to pass, we’ll either see 3 banks fail or MORE government intervention. And we KNOW the government isn’t ok with “failure”.

  2. ANONYMOUS permalink
    January 31, 2010 5:18 pm

    Where is the help for the people who were, and continue to be, victims of the mortgage scams that fueled the financial crisis? Further, as trading of the securities derived from the loans has shut down, private equity, hedge funds, and distressed debt buyers, are benefiting from the purchase of the whole loans at steep discounts to profit on foreclosure. There is no incentive for modification, which must include principal reduction for any meaningful benefit to home owners. In addition, these new purchasers of the whole loans continue to fraudulently conceal their identity in foreclosure actions across the country.

    I am not a foreclosure victim, but I am so tired of the people, who do not need help, and were not victims of mortgage fraud, whining “what about me?” By not helping the people who really need the help, we continue to perpetrate the fraud and greed that culminated in the financial crisis. The crisis has caused permanent damage to the US global reputation. There are so many stories to be told by the people – let us hear them. All we hear is self-motivated business talk pundits who continue to blame the people because their investments are not what used to be!!! If it were not for the people there would be no investments at all. The Wall Street mortgage fraud game is over – let the people now speak.

    • Candice permalink
      January 31, 2010 11:14 pm

      The major problem with the mortgage fraud game is a “shared blame” problem. Everyone wants the “American Dream” but not every can achieve that. When banks were offering their sub-prime mortgages people who, had they done any research and really looked at the bottom line, should have realized they were into something fishy. We can’t solely blame the banks for “taking advantage” of these people. People make mistakes all time time because they’re ill informed.

      All that said, it’s apparent that TARP wasn’t designed specifically to help these people out. Although it was promoted that way. TARP is not, and will not, be in the business of adjusting housing prices or your mortgage interest rate. The market is supposed to do that. And when everyone’s home value was rising because of sub-prime mortgage holders buying up houses all over, no one complained. “Let them buy because then my property value rises.” But now we’ve got a huge chunk of homeowners underwater because of all these foreclosures.

      TARP was supposed to help people get their mortgages adjusted, but many people either do not qualify, or have had problems with their paperwork that have prevented them from using the program as intended. This, in my opinion, is by design. It doesn’t make the Gov’t look bad, it makes the banks, once again, look bad because the banks “aren’t helping people fix their mortgages.” Well…it’s quite clear that’s not entirely true. You can thank poor planning and bureaucracy for that.

      The problems with TARP go far deeper than the mortgage scams, and fact of the matter is, because of TARP we will probably not know for years what real damage has been done. All TARP has done is slow down or mask any failures caused by the deep rooted corruption.

  3. February 4, 2010 11:33 am

    While President Obama was visiting Nashua, Gregg’s birthplace, the three-term senator was on Capitol Hill skewering Peter Orszag over the plan to funnel $30 billion from the Troubled Asset Relief Program.

  4. Jay permalink
    February 18, 2010 10:14 pm

    Great post, Candice!

    If it were up to me, I would have let the strong survive and the weak die. The bottom may have been a bit deeper but the recovery would have been quite a bit faster, cheaper and we would not have had the dastardly consolidation in the industry that happened on the tax payers dime.. But that’s why I’m not in office. I’m probably too cold, harsh and logical.

    Interesting topic to research: Geitner and Paulsen’s involvement in the destruction of Lehman Brothers and Bears and Sterns. All of this bail out business has made a few individuals quite a bit of money but the trail is hard to follow.

  5. ANONYMOUS permalink
    March 2, 2010 8:31 am


    You fail to point out that home price values were being manipulated by Wall Street in order to promote loan sharking loans. Home appraisals were being purposely inflated – and, again, homeowners did not appraise their homes nor could they “approve” their own mortgage loan.

    Most homeowners understood the egregious terms of mortgages but were comforted by the (false) value of the home. And, if the homeowner could not keep up with escalating adjustable rates, the homeowner could always refinance to a fixed rate or sell their home. However, as Wall Street’s charades were finally exposed, homeowners became trapped – unable to refinance or sell their home.

    Because homeowners have no market power, or voice in Washington, they continue to be victims of Wall Street’s fraud which was built upon unregulated greed.

    • Jay permalink
      March 2, 2010 8:36 am


      So the home-buyers had no responsibility? The risk was there’s from beginning to end. They signed on to the loan and agreed to the terms. Part of the responsibility lies in their hands.

      I’ve never heard of “Wall Street” going out to peoples properties and over inflating appraisals. What do you base that on? The entire market was over inflated.

      Why is it always “Wall Street’s” fault and do people really understand what “Wall Street” really is? They think everyone who works in the financial sector is in the mob.

    • Anarcho-capitalist permalink
      December 1, 2010 3:55 pm

      “The boom by definition is a period of above-average business activity enabled by financial credits. Production and finance are both stimulated. Both receive the abnormal stimulation of government regulatory and monetary policies. The boom of 1869—1873 involved a banking system that created money backed by government bonds. The Fed does the same today. In both cases, it also involved Congressional stimulus. In the 1860s, it was railroad subsidies. In this century, it was a variety of measures to stimulate house construction and to absorb the mortgage credits via government-sponsored institutions like Fannie Mae and Freddie Mac.

      Government leads the boom, business follows. Government prepares the boom. Wall Street commits it. The government’s tracks are hidden. Wall Street’s are not. Few blame government for the inevitable bust. Many blame Wall Street. Government investigates Wall Street and makes sure of that.”


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