TARP Inspector General Gives Program, And Treasury, Low Marks

In his latest quarterly report card for the TARP program, released October 21, Special Inspector General Neil Barofsky provides a discouraging record. For the program itself, progress in spurring loan growth is slow, and in spite of news tidbits to the contrary, the return on taxpayers' investment has been poor. He also faults the Treasury Department's management of TARP. Not only are taxpayer funds being squandered, says Barofsky, the credibility of the U.S. government and economy are at risk.

In December 2008, a few months after the government started disbursing TARP funds to banks, Neil Barofsky was appointed watchdog for the program. Having earned his stripes as an assistant federal district attorney in New York on mortgage fraud and drug gang investigations, his group reports on TARP in general, and audits areas of particular concern (for example, the quality of oversight on individual banks, or compliance with compensation rules).

Barofsky appeared on MSNBC this morning, discussing his 256-page report on TARP's progress in the third quarter, and was not a happy man.

The report renders few judgments on the substance of TARP, but presents plenty of facts that speak for themselves: the total program was authorized at $699 billion; $454 billion has been expended through 10 programs; and $72.9 billion has been repaid, leaving $317 billion, or a little less than half of the original total, available for distribution.

Of the $454 billion, about 70 percent had gone to financial institutions, and $27 billion, or six percent, allocated to homeowners. The graph below is from the 3Q 2009 report.

But wait: that's just the potential allocation. Actual funds that have gone to homeowners on loan modifications are just $950,000. Less than a million.

About $12 billion has been received in dividends or from the sale of warrants, and that led to cheery reports, including one or two of my own, that TARP was earning a decent return on investment.

Not so, Barofsky said this morning on teevee: the 17 percent return on investment being cited is not realistic, because there are many billions that, by design, will never be repaid. More to the point, most of the warrants on bank shares, billed as an "equity kicker," are out of the money, and not worth anything unless their stock prices go higher. AIG has missed the dividends on the $80 or so billion it was lent, and in total, unpaid dividends are about $76 million.

Barofsky's harshest words, however, were for the Treasury, and its inadequate management of TARP. (Pages 166 through 171 of the report list Treasury's noncompliance with rules, or with good sense.) Treasury has placed no conditions on how banks use TARP money, and not required them to disclose what they do with it. Barofsky wants detailed reporting, institution by institution, but Treasury has pushed back on this requirement and deems the issue "closed."

He also cites Treasury for not requiring the asset managers of the PPIF program, hired to value and sell off various assets, to report their trades and avoid conflicts of interest.

Perhaps most disappointing, though, is Barofsky's conclusion (Section 5 of the report) on the message that the poor management of TARP sends to the rest of the world, and the U.S. citizenry:

Although [I acknowledge] the unprecedented circumstances that Treasury was operating under last fall, the lesson to be learned here is that it is precisely during such extraordinary times, ...that the Government must exercise increased vigilance about accuracy and transparency in its statements to the public. It is axiomatic that the Government's capacity to address financial crises depends in no small measure on its credibility, both with market participants whose confidence is essential to stabilize the financial system and with the American public whose confidence is essential... [S]tatements that are less-than-careful or forthright -- like those made in this case [asserting that certain banks were strong, when they in fact were on the verge of collapse] -- may ultimately undermine the public's understanding and support... This loss of public support could damage the Government's credibility and have long-term, unintended consequences that actually hamper the Government's ability to respond to crises.

Postscript: Maybe some of the message is getting through. Today Treasury announced that it will order the companies that received the biggest bailouts to cut executive salaries.