Inspector General: TARP Has Created a Looming Disaster
by Morgen RichmondFor all the phony talk coming out of the White House this past year about transparency and accountability, there actually is an institution outside of the executive branch which does a pretty darn good job at this most of the time: the Inspector General system. In fact, IG’s may do too good of a job by producing lengthy and meticulously detailed reports, difficult even for politically-attuned readers to digest, and which usually do not contain the types of partisan zingers that attract a lot of media attention.
Yesterday the Inspector General for the Troubled Asset Relief Program (SIGTARP) released their Quarterly Report to Congress for the period ending 12/31/2009. The executive summary tells us all we need to know about their assessment of the TARP initiatives over the past year. This whole segment is a MUST READ (it’s not a pretty picture):
The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — 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. It is hard to see how any of the fundamental problems in the system have been addressed to date.
- 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 — as discussed more fully in Section 3 of this report — 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.
Stated another way, 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.
But don’t worry, it’s a hybrid.
I am sure the Administration will argue that this report only reinforces the need for the financial regulatory reforms they are attempting to push through Congress. Congress, of course, is likely to water down these proposals due to intense lobbying by the financial industry. But even if they are passed as proposed, they would only slightly mitigate the risk factors identified above. By placing some new limits on the risk-taking behavior of very large financial institutions, and by mandating much broader, and more integrated, regulatory oversight of the financial industry.
Notably, the reforms proposed by the Administration would do nothing to address the systemic risk posed by the federal government’s effective takeover of the residential mortgage industry. Given that the government-brokered inflation of the housing market was the root cause of this crisis to begin with, the fact that the federal government is now underwriting or insuring virtually all new mortgage loans, and has purchased well over $1 trillion of existing mortgage-backed securities, should be of great concern to us all.
The White House is in the midst of a campaign to focus populist anger on Wall Street, which is certainly deserving of some blame for the financial crisis. But by continuing to leverage the future of our children by adding trillions of dollars more to our national debt over the next few years, the Administration is demonstrating where the ultimate blame should reside for the culture of irresponsible borrowing and financial mismanagement which led us to this point. It’s not Wall Street – it’s Pennsylvania Avenue.
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52 Comments
TARP has created a looming disaster?
"The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility….."
Nah. TARP is a symtem of the problem. GOVERNMENT created TARP, and thusly Government created the problem. Get Government out of our daily lives, get Government out of Wall Street, get Government out of our capitalist society, and you have just solved the problem.
And let's not forget who put TARP in place. Just saying, it's a bipartisan thing.
Now let's see if there will be a real effort at reform from the Wall St. controlled Dems and if the Republicans will just say no like everything else.
Should read: Get Wall Street out of government.
Mr. Richmond,
You wrote an excellent article.
"Stated another way, 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."
Going back to fall of 2008 when CONgress was voting on TARP, and Pelosi lost the vote the first time, she went absolutely berserk. Frothing like the rabid lunatic she is. I was very involved during that time, with CONgressmen, and Senators, in five different states where I do business.
Any businessman who ever passed Economics 101 knew that this would be a disaster of epic proportions. Pelosi had to take the TARP Plan to a second vote. Anyone remember Hank Paulson getting down on his knees and begging her? Anyone remember Bush's famous words: "This suckers goin' down".? We were sold out by CONgress in the fall of 2008, long before Barry Obama, the Kenyan Keynesian was ever elected. All he has done is exacerbate the problem.
JPA should read: Communist Manifesto.
Oh wait… you already have. My mistake.
The Inspector General of TARP should be careful what he releases or Hussein and his Posse of Clowns will remove them as they did with Gerald Walpin over the corupt Kevin Johnson deal!
PBS Frontline did a great documentary about the collapse of the banking industry, and one womans ignored warnings that predicted it all. View it here —-> http://www.pbs.org/wgbh/pages/frontline/warning/
The future doesn't look any better when you realize that the Fed has reduced interest rates to virtually 0%. To survive they will eventually have to raise the rate, which will put in place a huge wave of economic turmoil. The government took out loans with China to fund the TARP, now imagine China deciding to call in their marker, and what that will do to our government, seeing that no other nation in the world dares to assume the financial risk we're in.
Just wanted to point out that this line…
"Stated another way, 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."
…is actually a direct quote from the Inspector General's report.
It's a great line. I wish I wrote it, but I didn't. Should be included in the block quote. It was an editing glitch that will hopefully be corrected soon.
Morgen
geither have a little bit of a headache there..sure looks like it….
"Stated another way, 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. "
Are Republicans going to support Reform? Unlikely. The Banks have already killed off most of the reform concepts that are floating around, and from the looks of things, if reform passes at all, it will be watered down, ineffective, and passed with 60 votes.
The only thing these Politicians want is a One World Government. Sometimes I think they all hate our Constitution because they continually try to circumvent it at every turn. Obama is hell bent on bankrupting this country, to help move us along towards his Socialist/Marxist Government with him in control. He will only continue to make calculated mistake after mistake. But he has his reasons, see Copenhagen, and his push to burden America with world taxes, over false science.
Airplanes have an interesting behavior–when they're in the air, absent any drastic changes–they'll stay in the air. Updrafts or downdrafts will change the altitude, but the plane will right itself and achieve equilibrium almost by itself.
Sometimes, though, something will happen that looks dangerous to the pilot. Often, the pilot can react and nothing bad will happen to the plane. Sometimes, the reaction itself is flawed, and what was a small danger becomes a large one. For example, if the plane is descending too fast, it makes sense to pull up. Pull up too hard, the plane stalls and you die.
Economics works kind of the same way. The system likes to make money, and left to its own devices, it raises everyone's quality of life. There are ups and downs, but they always return to equilibrium.
Enter government influence and you get the mortgage bust, risky loans, and the stalling of the American Market. If the plane is stalling, no amount of forcing the stick is going to recover it. If it's not stalling, then a gentle touch or no touch at all will right it.
At least we have competent people with the highest standards and integrity administering the program … wait, that was just wishful thinking. I thought the adults were in charge.
In 1987 the great Reagan was faced with a similar “emergency,” he said…NO! Result, short lived recession, and we lost Dean Witter…darn!
ytterbiua…Repubs supported reform in 2003 and 2006, don't you remember congressional hearings with Barney and Dodd…they said the systems are good…fannie and freddie are well-oiled machines…how's that for the Dem's intelligencia?
Obie's daily tv appearance was in a New Hampshire 'town hall' meeting today. He touted the new small business initiative plan to pump $30billion towards helping the small business. The trap? He wants that $30billion from the repaid TARP funds. Doing so will set precedent of using those funds to create a government program rather than defecit reduction… not to mention that the Constitution doesn't allow for congress to delegate that authority to the president.
[...] INSPECTOR GENERAL: TARP has created a looming disaster. [...]
These clowns think that "small business" should just start hiring people to improve the economy.
Why would any small business hire more people unless they first had an increase in their work load?
Why would any small business hire more people if we keep hearing that the health care bill is still going to get pushed through, which will cost small businesses even more in taxes?
Why would any small business hire more people if this administration has already incorporated into it's budget the "Cap and Trade" bill as a done deal, causing even more taxes?
Even if loan money was made available to small businesses, this environment is hostile to small business. Any small business making a loan that it does not have a very short term means to repay that loan is simply put – the fish taking the bait.
Still waiting for the other shoe to drop… commercial real estate. I do not recall seeing so many empty spaces in malls, strips, office/small business condos, auto dealerships, etc. How will the CONgressmen and SINators (sic, on purpose) react?
constitution? rules for radicals is what they go by
Obamao doesn't give a rat's patootie about the Constitution. To him, it's an evolving document that he can circumvent at whim. He "won."
Double down. Aske for more donations, with both hands outstretched.
You are right about commercial real estate being theother shoe to drop.Personally, it is more like a sized 15 brogan shoe. It is big, and is going to send shock waves.
I have had the luxury over the past several months to take some time off, and sit here and dawddle on the computer. It was a nice hoppy to pas the winter when it's 35 below out, and three feet of snow. I have a different perspective though, and have the luxury of thinking globally. I have many friends scattered abroad, and they are all scared to death about the current state of the US. My friends in commercial real estate are all like little boys whistling past the grave yard. They know the tsunami is coming, they just don't know when. Small pieces are falling off as we speak, and it'll be a bloodbath, making the domestic loan portfolio look like a dress rehearsal.
LCC __agree w/your points. I'll serve as evidence. I'm getting older and have a small business that could easily grow if I were to hire my 1st employee to help with the labor. But there's no way I'm going to do that due to the reasons you say, and more. In the current atmosphere there's no limit to the imagination of what employer requirements may be. I'll just do what I can by myself and know that keeping it simple is worth any additional government intrusion I'd have to endure in becoming an employer.
But wait we were told TARP would fix everything…dogs and cats would start sleeping together..Americans would be in the streets praising the government for a job well done….what could of possibly gone wrong.If we didnt get tarp passed a huge black hole would form and suck our kids into debt forever….ohhhh wait a huge black hole did form and our kids are sucked into debt forever….never mind my bad.
This is an excellent article. The problem began with government, the problem continues with government, and the problem won't be solved until we get government entirely out of the market. Obama has done so much damage it will take fifteen years to correct things even if we block him in 2010.
Superb article. Please keep reporting on the bailouts and the effectiveness (or lack thereof) of government oversight. Big Government's Investigative journalism is making a real difference!
Confirms what we already knew. The gigantic economic resources thrown at the problem only took care of some of the symptoms but did noting to attack the disease. CRA needs to be thrown out, Glass – Stegall needs to be ri-instituted. Unions need to be drubbed into non-existence and the EPA needs to be curbed. Then and only then will our economy have any chance to heal itself. And hela itself it will if Obama just gets the Hell out of the way.
STOP SPENDING OUR MONEY!!!!
Who can forget, it was Big Gov't Bush and the Democrat-controlled congress. Not Conservatives.
Democrats think Republicans are their enemies. They are wrong. The Republicans are their adversaries. Their enemies are the American people; and we know it.
The problem is not lack of reform, if by "reform" everyone means regulation. Regulations are invariably populist in nature and have little to do with economic reality. The assumption in the article is that the basic problem is risky behavior that produced high profits so the managers could get bigger bonuses and therefore if we reduce bonuses they won't do that anymore. Does anyone believe that? Has everyone forgotten the "risky behavior" of granting risky loans to homeowners not only had the blessing but the mandate of Congress before Bush was elected? Is isn't as though they all went out and invested in Happy Jack Uranium and the stock went down. Mortgages are bundled and traded as securities and when the loans are granted sensibly it has the effect of increasing the supply of mortgage money and driving down interest rates. When Fannie and Freddie (whose execs are collecting huge bonuses for driving their companies into bankruptcy) bought and traded these bad debts it brought the system to near collapse when the mortgages started to default. And somehow all this will go away if we concentrate on bonuses and private jets and trips to Vegas all the while banks are forced to continue to buy and make irresponsible loans? If this class envy claptrap doesn't stop rather than extend itself from financial institutions to the tax code there is no hope.
Must read info.
Good reporting, Morgen.
Can we stick a fork in JM Keynes NOW?
[...] Richmond, at Big Government, Inspector General: TARP has created a looming disaster, provides a public service by breaking down the TARP report to the level of a DANGER! sign for [...]
Heckuva job, Barry.
Fix everything except for what's really broken.
China won;t ask for the money back. But they will ask for favors and other things. The FedGov willl happily comply…
More to the point, who cares which specific individual (if any such can actually-factually, be identified) "caused" it?
The insanity of constantly playing the school yard game of "who started it" accomplishes what? If President Bush were to publicly state that he now realizes that TARP was a mistake, and takes complete "blame" for the entire TARP debacle, as well as everything that led to it's 'need', what would that change?
We would STILL have the Federal purse far to involved in owning/backing financial 'products' that most of us can't begin to understand. We'd still have Freddie and Fannie holding current and future generations of taxpayers hostage to unsecured debt that should NEVER have been risked. (As far as I am concerned, any mortgage that is worth more then the home it is on, upside down/under water as it were, is an unsecured debt!)
So long as the Government is not only seen by many as the financial 'backstop', but indeed the starting catcher, the pitcher is going to keep throwing that fast ball right down the middle of the plate!
The point of fixing blame is to identify the type of ideology which got us into this mess, which is not small government, fiscal conservatism. It is not a partisan game, but the idea that infects both parties that big government can step in with other people's money and take care of special interest group is what brought us down and will keep us down.
I am waiting for a real leader to say this federal government is twice as large as it should be and that he or she will spend his first term ensure the safety of the country, while pushing congress to wind down the size and scope of the Federal Government. There is no other way.
Cowboy – Not only is there the commercial bubble coming but another round of home loans ready to go upside-down. And from what I can figure, it is a bigger dose than the first.
Sure they will but only reasonable measures. GWB does not get the chops for it but he made many, many calls for Congress to do something about Fannie and Freddy in 2007 & 2008 and was ignored by the Democratic controlled Congress. Specifically Barney Fwank said over and over that there was nothing wong. (SIC on purpose)
So try and sell that line of BS elsewhere.
If you want to get Wall Street out of the government, you have to get the goverment out of Wall Street. If the Wall Streeters know that the government will not bail them out of any messes they get themselves into, they’ll be a hell of a lot more careful. This will be most difficult as it is a symbiotic relationship. The Wall Streeters get favorable legislative and regulatory treatement while the poiticians get re-election campaign money. During good times, they’re both happy. During bad times, they blame each other while denying blame themselves.
Everything that the federal government touches(ed) for the past 100 years has brought to the precipice of disaster. Please speak to you friends and neighbors and tell them change needs to happen this year and 2012 or we may not have a republic.
Your global friends mirror the thoughts of mine. I have a close friend in Beijing and he is worried because not only is the Chinese govt. trying to "cool down" real estate, it is always because he knows if more bad things happen here, it will be double bad. He owns prime real estate not far from the international airport in Beijing and could be in a world of hurt if the market there tanks.
Vote them ALL out in the next election that each one faces. Let's get ALL new people in office and then instruct our new employess to STOP SPENDING MONEY WE DON'T HAVE AND THE CHINESE WON'T LEND US!
Obama is ourt to destroy the American economy and take over as dictator-in-chief because "we can't let a good crisis go to waste".
Government created our current economic condition. Gov is what needs overhauling!
Yes, TARP was just plain stupid. Look where it got us… higher unemployment and continued economic downturn. Our great One is playing with us and our future. He's playing with us because he (and his team) are too socialist to see the path to excape this predicament. I'm actually wondering if this is what he wants… create an emergency so he can take more power…???
As I saw on Beck last night, China owns us, but it's unsustainable debt! If America can not KICK-OUT all these politicians in November, it's OVER for America economically! I mean it's too late!
It is my understanding that most of the money left in TARP and what has been paid back will be used by Obama for the Democrats in the upcoming elections. Watch for this folks. I surely hope the Republicans in Congress fight this.
The free market (Capitalism) did not cause this crisis, the government (Socialism/Communism) did.
The free market did not create Fannie Mae and Freddie Mac, the government did.
The free market did not pass laws that force banks to lend to those who do not qualify for a loan, the government did.
The free market did not take us off the gold standard, the government did.
The free market did not dump trillions of dollars of cheap money into the system, the government did.
The free market did not create multiple multi-trillion-dollar unfunded entitlement programs, the government did.
The free market did not write a 60,000+ page tax code that punishes work, rewards sloth and buys the votes of special interest groups, the government did.
The free market did not destroy our public school system and graduate (or fail to graduate) generations of civically and financially illiterate citizens, the government did.
The free market did not drive our jobs overseas and kill our entrepreneurial spirit with over-taxation, over-regulation and frivolous lawsuits, the government did.
The free market did not ban drilling for oil, vilify coal and block the building of nuclear power plants in the United States, thereby transferring hundred of billions of dollars of American wealth and many thousands of energy-industry jobs to foreign countries, the government did.
This crisis is the result of a giant social engineering experiment and vote-buying scheme gone tragically wrong.
The free market does not try to engineer society or buy votes, the government does.
The government caused this crisis, the free market did not.
The government cannot fix the crisis, the free market can.
I shouldn't be surprised – what do you expect from people that can't explain free market principles in two words or less.
oh – yeah, = VOLUNTARY CONSENT (not government forced extortion) that's the basis of free markets
What we are witnessing is no different than a large company swirling toward bankruptcy. All kinds of financial slight of hand is employed, robbing Peter to pay Paul. In the end, the numbers don't lie like the liars that use them. We are in for a massive monetary restructuring. I read a book years ago called A Distant Crossing. The plot line revolved around a financial meltdown in this country. It was riveting. Now it's not so distant.
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