TARP: Government Bailout Failed in Many Ways, Says Watchdog

WASHINGTON, Jan. 31, 2010 — -- The government's controversial $700 billion bailout program has failed to achieve many of its objectives, a watchdog tells Congress in a new report out Saturday night.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), says in the report that the financial system is stronger today than in the fall of 2008, but he concludes, "Many of TARP's stated goals...have simply not been met."

Consumers and businesses are still struggling to get loans, he says. Small businesses are still waiting for an aid program to start. Homeowners are still grappling with record levels of foreclosures. Unemployment is still 10 percent.

A case in point, says Barofsky: the administration's housing aid program "has only permanently modified a small fraction of eligible mortgages." To date, only 66,000 homeowners have finalized better mortgage terms to help them avoid foreclosure; the administration's program was designed to help 3 to 4 million.

Moreover, Barofsky cautions, the nation remains as vulnerable as ever to flaws in the financial system.

"It is hard to see how any of the fundamental problems in the system have been addressed to date," he says.

'Too Big to Fail': Getting Bigger

So-called too big to fail institutions are now "even larger" than before, the market is "more convinced than ever" that the government will bail out failing firms, Wall Street bonuses this year reveal "little fundamental change" in pay plans compared to past years, and federal efforts to support the housing market "risk reinflating that bubble," says Barofsky.

Voicing concerns about federal aid to the housing sector, he adds, "The government has done more than simply support the mortgage market; in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor."

Government Bailout: Unemployment, Foreclosures Still High

On Capitol Hill, meanwhile, financial regulatory reform has been crawling along, overshadowed by the health care push and beaten back by industry lobbyists.

"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," the report warns.

Despite the litany of problems cited with the program, Barofsky does highlight a number of TARP's achievements.

"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," he says. "Many large banks have once again been able to raise funds in the capital markets and some institutions -- including some that appeared to be on the verge of collapse -- have recovered sufficiently to repay their TARP investments years earlier than most would have predicted."

Due to these repayments and the sales of stock warrants received as part of the bailout, Barofsky echoes the administration's predictions about the program's cost, saying, "It now appears that the ultimate cost of TARP to the American taxpayer, while still substantial, might be significantly less than initially estimated."

TARP Extended to October

In a report last summer, Barofsky had forecast that the total federal government support from a slew of programs to prop up the financial system could potentially total a staggering $23.7 trillion.

As of the end of last year, the Treasury Department had $368 billion in TARP funds available to distribute. Going forward, the department has said TARP – extended early last month until Oc. 3, 2010 – will focus on halting the rash of foreclosures, boosting lending to small businesses, and continuing to support the asset-backed securities markets.

Troubled Assets Relief Program: a Report Card

Earlier this month President Obama proposed a fee on approximately 50 banks with assets of $50 billion or more. It was described as an effort to raise at least $90 billion over the next decade and recoup possible losses from TARP.

Barofsky, who issues quarterly reports to Congress, conducts audits and investigations, and has the power to issue subpoenas, notes that as of the end of last year, his office had 77 ongoing criminal and civil investigations.

In the 16 months since TARP's enactment, Barofsky has released a series of scathing reports about the bailout. In a report last October he concluded that Treasury Secretary Timothy Geithner was "ultimately responsible" for AIG, the recipient of $182 billion in taxpayer aid, paying out $165 million in retention payments in early 2008.

Barofsky also said in another report last October that the Treasury Department and the Federal Reserve had misled the American public and Congress in the days leading up to the bailout's enactment one year earlier.

Treasury Department Response

Asked for a response to Barofsky's report, the Treasury Department offered the following comment.

"Over the past year, we have taken unprecedented steps to make this Treasury the most transparent in history -- with easily accessible information online of not only TARP, but also Recovery Act programs, and many more," said spokeswoman Meg Reilly.

"We welcome [Barofsky's] attention and remain committed to working with all of the oversight bodies to maximize transparency for the American public."

The watchdog's work last summer landed him in a dispute with Treasury over his probe into AIG, a dispute ultimately resolved last fall when the department revoked its request for a Justice Department ruling on Barofsky's independence.

On Wednesday , Barofsky testified on Capitol Hill at a contentious hearing on AIG's controversial rescue by the government.