TARP Hasn't Cured Financial Crisis

While the financial sector appears to have rebounded from its fall 2008 crisis, many tasks the Troubled Asset Relief Program (TARP) sought to undertake remain unfulfilled, leaving another possible financial crisis ‘within a two, five, or ten years time.’

The conclusion comes from the latest quarterly report released by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) on Jan. 30, 2010.

The report’s conclusions are startling: after a year in operation, and billions of taxpayer dollars lent or spent, the Special Inspector General concluded:

• the huge interconnected “too big to fail” banks are now larger because of the TARP bailout;
• to the extent that recklessness by the banks was motivated by what the SIG calls “a heads I win, tails the Government will bail me out mentality”, that motivation has been increased by TARP;
• that there have been some improvements in the risk-causes-big bonuses behavior, but little fundamental change; and
• government efforts to support home prices risks re-inflating the housing bubble.

The report emphasized that the much needed work for the TARP program ought to be effective and efficient. The program, it said, had fallen short of its financial goals.

The report questioned whether, in its current state, it can remedy the slumping financial sector and attempted to assess the government’s role in the solving the situation.

‘Whether these goals can effectively be met through existing TARP programs is very much an open question at this time,’ it said.

‘And to the extent that the Government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP.’

The program leaves U.S. businesses and consumers in a state of uncertainty, given that the explicit goal of its Capital Purchase Program (CPP) was to increase financing to businesses and consumers.

CPP was to purchase ‘directly preferred stock or subordinated debentures in qualifying financial institutions.’

The purpose of CPP funds was to, according to the report, ‘stabilize and strengthen the U.S. financial system by increasing the capital base of an array of healthy, viable institutions, enabling them [to] lend to consumers and businesses.’

The Treasury said that the CPP would eventually open a similar program of capital investments to stimulate small-business lending by financial institutions.   

The report indicated that the opposite occurred and said that ‘lending continues to decrease, month after month.’ The Treasury has not even implemented ‘the TARP program designed specifically to address small-business lending- announced in March 2009.’

According to Fox News on Feb. 2, President Obama is set to announce a $30 billion small business lending program that would be “separate and distinct from TARP.”

While the CPP was originally targeted for investments in healthy banks, the report said that some CPP participants have sought bankruptcy protection as of December 31, 2009.

These troubled banks included: UCBH Holdings, Inc., Pacific Coast National Bancorp, and CIT Group Inc.

Due to these failed institutions, the Treasury assessed that “it is unlikely that Treasury will receive any significant recovery on these investments.”

As a result of investments in banks that fail to pay back their TARP funds, taxpayers lose money. With the creation of TARP, taxpayers have become direct investors in aiding banks, elevating their exposure to bank failures.

There have been 140 bank failures in 2009 alone, according to the report. 

With the Emergency Economic Stabilization Act of 2008 (EESA), Congress authorized the treasury secretary the responsibility to oversee TARP operations. It aimed to tackle the reduction of house foreclosures and job losses.

However, the report notes that home foreclosures are still at record levels, few mortgages are permanently modified, and unemployment is the highest “it has been in a generation.”

Regarding principle repayments to the Treasury, 74 CPP participants have missed dividend payments.

The inspector’s report expressed concern for what will happen ‘absent well meaningful reform.’ TARP subsidies, it said, have fostered the mindset that banks can take reckless risks and that the government will bail out these banks.

The report noted the “executive compensation culture on Wall Street,” where executives use their risky behavior to justify “ever-greater bonuses.”

Many companies that the TARP program sought to help were on unstable ground after they exited the program.

When the government extended TARP until October 2010, banks exiting TARP programs demonstrated “questionable ability to return to profitability.”

Also at risk is re-inflating the housing market bubble, a factor that originally contributing to the 2008 crisis in the first place.  
Despite the possible financial crisis that lies ahead, a very small portion of the report took on an optimistic tone.

‘On the positive side, there are clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008,’ the report said.

The report cited many large banks as being able to again ‘raise funds in the capital markets.’ In addition, this includes institutions ‘that appeared to be on the verge of collapse.’

Nevertheless, the report maintained that problems remain and that severe consequences lie ahead if the government does not take an effective approach to reform.

The report compared not taking steps to reform to driving off a financial cliff similar to 2008, saying “we are still driving on the same winding mountain road, but this time in a faster car.”