Former TARP Official on TARP: A Big Fat Failure, Mostly

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Tim Geithner should have gotten banks to lend. (Larry Downing/REUTERS)

Neil Barofsky, the soon-to-be-former Special Inspector General of the Troubled Asset Relief Program – the government’s $700 billion fund to bailout the banks – was never well liked at the Treasury Department, even though that is technically where he worked. Timothy Geithner reportedly repeatedly tried to have him fired, or at least have Barofsky’s role downsized. Now it appears the feelings were mutual.

Barofsky was confirmed by the Senate back in December 2008 to be one of two watchdogs who monitored how the Treasury Department doled out the $700 billion fund that Congress approved at the height of the financial crisis to bailout the banks and save the economy. (The other was Elizabeth Warren who for a while ran the Congressional Oversight Panel for the bailout.) Today is his last day. To mark the occasion Barofsky has an Op-Ed in the New York Times on his final assessment on whether the Treasury Department and Geithner in particular went about spending those funds wisely. Barofsky’s take: Heck No.

In general, Barofsky says the fund did a very good job of bailing out the big banks and recreating the massive money machine that is Wall Street. And in the meantime giving the bailout the bad name and reputation it mostly deserves. That mission was accomplished. But Barofsky makes the point that bailing out the banks wasn’t TARP’s only stated goal, and it shouldn’t have been the most important one, at least when it was passed by Congress. On every other count TARP was one big flub. He calls one TARP funded program a “colossal failure.” He might as well have called the whole problem that.

The bank bailout, more formally called the Troubled Asset Relief Program, failed to meet some of its most important goals.

So how did TARP fail? Let’s let Barofsky count the ways:

1) TARP did not get credit flowing back into the economy. Barofsky says the Treasury Department had the ability to compel the banks that received TARP money to boost lending. To funnel some of those billions that the government gave the banks back into the economy in the form of loans. In fact, Barofsky says that when the Treasury Department shifted TARP from buying the troubled mortgages to just handing over money it did so with the express promise that the banks would boost lending. But banks didn’t do that. And the Treasury never really did anything to make sure they did.

It was only in April of last year, in response to recommendations from our office, that Treasury asked banks to provide that information, well after the largest banks had already repaid their loans. It was therefore no surprise that lending did not increase but rather continued to decline well into the recovery.

In fact, a recent study found that one of the main reasons the economic recovery has been so slow is because start-ups have not been able to get the loans they need to start-up and create jobs.

2) TARP has not ended the foreclosure crisis. Barofsky says the Treasury Department stalled before announcing a program that officials said would help 4 million borrowers who were facing foreclosure. But the program was weak and underfunded. So far the Treasury Department’s key Home Affordable Modification Program has helped fewer than 600,000 borrowers. Another 800,000 borrowers have entered the program, only to have their temporary modifications canceled. Foreclosures continue to mount across the country.

3) TARP was supposed to end Too-Big-To-Fail. Barofsky says Congress approved the bailout fund with the idea they were only willing to do it if they never had to do it again. In other words, we’ll give you a bailout as long as you put in place the necessary reforms so that we won’t have to bailout the mega banks again. Yet, Barofsky says TARP has not only done nothing to solve the problem of Too-Big-To-Fail, it probably has made it worse by enabling the mega banks to stay mega. In fact, Barofsky says the big banks are now 20% larger than they were before the crisis.

That’s Barofsky’s list. I also think that TARP failed when Treasury decided to start handing out money to the small banks. That’s done nothing to solve the small bank financial crisis, which is still growing today.

And I think Barofsky is mostly right. The first point is the only one I would quibble with. I’m not sure forcing banks to make loans at the height of a recession makes a lot of sense. A lot of people and companies would have had their hands out, and many of those loans would have gone bad. Then you would have read lots of articles about how the banks used government money to make risky loans, which is exactly how they got themselves in the troubled situation in the first place.

But I think TARP went mostly wrong when it decided to be a bailout fund and not a resolution fund, like we had after the S&L financial crisis. Had the government stuck to the plan of buying up the mortgages and trying to work out the problems things might have turned out differently. Nationalizing Citigroup might have also been a better way to go. Yes, the S&L resolution fund has its problems as well. But at least the government would have had more of a role in how our money was spent. Instead, two and a half years after the financial crisis we are still trying to figure how to get banks and their mortgage servicers to deal fairly with troubled borrowers.