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