IG Barofsky: TARP not working
The Special Inspector General for the Troubled Asset Relief Program (TARP) said yesterday that the program is not working and that the risk of another meltdown is great.
The government's bailout of financial institutions deemed "too big to fail" has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.
The Troubled Assets Relief Program, known as TARP, has not addressed the problems that led to the last crisis and in some case those problems have festered and are a bigger threat than before, warned Neil Barofsky, the special inspector general at the Treasury Department.
"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," Barofsky wrote.
Barofsky wrote the $700 billion financial bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they steer their ships nearly aground.
"The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions," said Sen. Susan Collins, R-Maine, ranking member of the Senate Homeland Security and Governmental Affairs Committee. "The IG's findings confirm my decision to oppose releasing $350 billion in TARP funds last year and my recent vote to terminate the program altogether."
This was a no brainer from the start of the bailouts. As long as there is the certainty that the government will not let these giant banks go under, why not play roulette with money that's not yours? The Obama administration has done nothing to disabuse the bankers of that notion.
And according to CNN, Barofsky also says that TARP is not working to free up banks to make more loans to businesses:
In his latest quarterly report to Congress, special inspector general Neil Barofsky said that the Troubled Asset Relief Program, or TARP, has failed to boost bank lending as well as halt the spread of foreclosures -- two key aims of the sprawling program.
"Whether these goals can effectively be met through existing TARP programs is very much an open question at this time," Barofsky said in the report.
When Congress enacted TARP, the hope was that injecting capital into hundreds of banks would spur lending and keep the economy from spiraling even deeper into recession.
But since then, lending to both consumers and businesses has continued to decline.
Earlier this month, the Treasury Department reported that the 22 banks that got the most aid from the government's various bailout programs have cut their small business loan balances by $12.5 billion since April.[...]
Even as Treasury allocated $35.5 billion towards that foreclosure-prevention program as of the end of last year, only 66,500 homeowners have received permanent modifications, with another 787,200 homeowners in trial modifications.
Under fire for the low number of people receiving long-term help, the Treasury Department in late November ramped up pressure on servicers to convert borrowers to permanent modifications.
Still, there is no sign that the rate of foreclosures is slowing down anytime soon. Earlier this month, RealtyTrac, the online marketer of foreclosed homes, reported that foreclosure filings surged to a record 3 million in 2009, up 21% from 2008.
Of the homeowners who have received modifications on their mortgages, 25% are now delinquent 90 days or more. Incredibly, more than 3 million homeowners applied for the modification and less than 1% received permanent help. That qualifies this program as being one of the most spectacular failures in the history of government.
The impetus for meltdown could come from anywhere. A country like Spain going bankrupt; a tipping point in home foreclosures; a rash of bank failures; another recession. We are still balanced on the knife's edge of catastrophe with the politicians turning away, hoping for the best.
In the end, that probably won't help much.
Hat Tip: Jim Lewis