Investigator General Reports TARP is NOT Too Big To Fail (It Probably Will)

Pursuant to the Emergency Economic Stabilization Act of 2008, SIGTARP (Special Investigator General of the Troubled Asset Relief Program) must report to Congress on its oversight activities and compile certain specified data and information about the operation of TARP. SIGTARP’s reports to Congress are due 60 days after confirmation of the Special Inspector General and quarterly thereafter. The Special Inspector General also testifies periodically before relevant Congressional Committees.

The Special Inspector General Neil Barofsky, delivered his quarterly report today and it does not paint a pretty picture of the Tarp program. In the 224-page quarterly report (embedded below) Barofsky acknowledged that TARP had stabilized the financial system, but he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure. He also reports that banks continue their wayward behavior because (as many Conservative commentators predicted), they are sure that the government will not let them fail.

Barofsky criticized the Democratic congress and administration by saying “it is hard to see how any of the fundamental problems in the system have been addressed to date.....the bailout will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”

The top Republican on the Senate Homeland Security and Governmental Affairs Committee, Sen. Susan Collins, (R-MA), said she was “deeply troubled” by the report.

“It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance,” she said. “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.”

In his report, Barofsky wrote that “on the positive side, there are clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008.” He noted many big firms that had received TARP funds had repaid them; that they had been able to raise new capital; that that taxpayers had earned a profit on certain TARP investments, and that the ultimate cost of TARP to taxpayers “might be significantly less than initially estimated.”

But Barofsky warned that in his view, little had changed to head off another financial crisis:

• “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.” 

• "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…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.” (Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies now insure more than 90% of all mortgages from the risk of nonpayment.)

Barofsky also said that TARP goals to increase bank lending and prevent home foreclosures “have simply not been met” – “lending continues to decrease, month after month” and “foreclosures remain at record levels (and) the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages.

“To the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP,” he added. (Source:Fox Business)

Putting it all together it seems as if the Inspector General is saying when the government acts as a safety-net for an industry, it leads to Disaster because the industry expects the "nanny-state" to bail them out. Even the attack on bank compensation is leading the country down the slippery slope of another financial crisis. Its time for Obama and Congress to look at the financial industry and find solutions for the banks to heal themselves rather than the federal government running the banks.

The full quarterly SIGTARP report follows"