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TARP's Legacy: More Foreclosures, Bigger Banks, Lost Jobs

By Alain Sherter

Updated on: October 26, 2010 / 12:50 PM EDT / MoneyWatch

The federal official in charge of overseeing the government's management of TARP concludes in a new report that the program has worked wonders for big financial firms, but largely failed to help average Americans. Asserts Special Inspector General Neil Barofsky in judging the overall impact of the $700 billion bailout:

For large Wall Street banks, credit is cheap and plentiful and the stock market has made a tremendous rebound.... While large bonuses are returning to Wall Street, the nation's poverty rate increased from 13.2 percent in 2008 to 14.3 percent in 2009, and for far too many, the recession has ended in name only.

Specifically, Barofsky faults TARP for having failed in its goals of boosting lending, especially for small businesses; promoting economic growth; and preserving homeownership.

He is particularly critical of the U.S. Treasury's move following its rescue of GM and Chrysler to speed the closure of thousands of car dealerships, claiming that this caused unnecessary job losses:

Stated another way, at a time when the country was experiencing the worst economic downturn in generations and the Government was asking its taxpayers to support a $787 billion stimulus package designed primarily to preserve jobs, Treasurymade a series of decisions that may have substantially contributed to the accelerated shuttering of more than 2,000 small businesses, thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls -- all without sufficient consideration of the decisions' broader economic impact.

Barofsky also rips the Home Affordable Modification Program, the Obama administration's main initiative for helping homeowners facing foreclosure. HAMP has fallen "woefully short" of its goal of helping up to 4 million homeowners obtain mortgage relief, according to the report. It also says the program allows participating banks and loan servicers to pad their income by keeping homeowners who have applied to the program in "limbo" for months. Despite a barrage of consumer complaints about HAMP, meanwhile, the government has failed to hold servicers accountable for violating the rules of the program:

To date, no financial penalties have been imposed by Treasury on any servicers participating in the program....

Another legacy of TARP, Barofsky says: Wall Street is stronger than ever. That distorts competition and raises financial industry expectations of future government bailouts, increasing so-called moral hazard:

The biggest banks are bigger than ever, fueled by government support and taxpayer-assisted mergers and acquisitions. And the repeated statements that the government would stand by these banks during the financial crisis has given a significant advantage to the larger "too big to fail" banks, as reflected in their enhanced credit ratings borne from a market perception that the government will still not let these institutions fail, although the impact of this cost may be blunted by recently enacted regulatory reform.

The report even suggests that Treasury fudged data to prettify HAMP's performance and to minimize projections of taxpayer losses from the government's $182 billion bailout of AIG. The Treasury recently reduced those forecasts from $45 billion to $5 billion. But Barofsky all but accuses the agency of cooking its books in arriving at the lower figure:

This conduct has left Treasury vulnerable to charges that it has manipulated its methodology for calculating losses to present two different numbers depending on its audience... Here again, Treasury's unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in government.

Between the lines of the report lies an uglier charge -- that Treasury recently sought to discredit Barofksy's office, called SIGTARP, by claiming that it harms taxpayers by disclosing information related to the government's purchase of troubled financial assets. This amounts to a political smear, he hints:

Treasury thus makes the reckless suggestion that SIGTARP has harmed taxpayer interests by inappropriately publishing this information in the past, and that SIGTARP will continue to inflict such harm in the future. When understood in context, this charge, and the manner in which it has been leveled, suggests that Treasury's motive for advancing it has little to do with protecting the taxpayer.

Barofsky does credit TARP for having propped up the financial system when it was on the verge of collapse. Although that obviously benefited Main Street, the greatest gains went to Wall Street, he contends. Indeed, that has always been the most serious charge against TARP.

The usual way of judging TARP -- asking whether the feds should've bailed out big financial firms or let them cave under their own debt -- is a false dichotomy. The choice was never between TARP and nothing, in other words; it was between TARP and other approaches to stabilizing the financial system. So the more pertinent question is whether the program was designed and managed chiefly to aid financial firms rather than the taxpayers who saved them. As the NYT's Ross Douthat eloquently sums up:

TARP may have saved the United States from 15 percent unemployment, but it also implicated our government in the kind of crony capitalism you'd expect from a banana republic. If it was necessary, it was also un-American. If it worked, it did so while doing grievous damage to the credibility of Wall Street and Washington alike.

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