The Sad Truth about TARP

Today's New York Times has a damning opinion piece about the Troubled Asset Relief Program (TARP), Where the Bank Bailout Went Wrong.  (see, I don't always disagree with NYT editorials!).  Though the government declares that TARP has been "remarkably effective", the author, Neil M. Barofsky, who was the Special Inspector General of the program, strongly disagrees.  Yes, the program "saved" our big banks.

From the perspective of the largest financial institutions, the glowing assessment is warranted: billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish. These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed “too big to fail.”

But, as is painfully apparent to anyone, TARP failed in another goal, to protect home values.  

Treasury, however, provided the money to banks with no effective policy or effort to compel the extension of credit... not even a request that banks report how they used TARP funds.  ... It was therefore no surprise that lending did not increase but rather continued to decline well into the recovery.

Later, the Home Affordable Modification Program was announced, and has been a "colossal failure."  The housing bust means that (very roughly) 10 million homes could face foreclosure, and this program has modified only 540,000, about 5%.  Mortgage writedowns, where banks lower the principal on a mortgage (and take a big loss) were seen an "inevitable" in 2009.  But as of 2011 there haven't been many, as banks refuse to take the losses, and the government is still crafting proposals.


Even Treasury Secretary Timothy Geithner admits that the mortgage servicers are “still doing a terribly inadequate job.”  But Treasury Officials aren't fixing this.  Instead, Americans know that they were taken for a ride by "fat cat" bankers who exploited the crisis to save and enrich themselves, while many homeowners take a financial licking.  The last paragraph is chilling:

Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.