NYT/Barofsky: Where the Bailout Went Wrong; [Op-Ed]

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Mar 30, 2011, 3:15:54 PM3/30/11
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Where the Bailout Went Wrong; [Op-Ed]

Neil M. Barofsky. New York Times. (Late Edition (East Coast)). New
York, N.Y.: Mar 30, 2011. pg. A.27

Washington

TWO and a half years ago, Congress passed the legislation that bailed
out the country's banks. The government has declared its mission
accomplished, calling the program remarkably effective "by any
objective measure." On my last day as the special inspector general of
the bailout program, I regret to say that I strongly disagree. The
bank bailout, more formally called the Troubled Asset Relief Program,
failed to meet some of its most important goals.

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."

Though there is no question that the country benefited by avoiding a
meltdown of the financial system, this cannot be the only yardstick by
which TARP's legacy is measured. The legislation that created TARP,
the Emergency Economic Stabilization Act, had far broader goals,
including protecting home values and preserving homeownership.

These Main Street-oriented goals were not, as the Treasury Department
is now suggesting, mere window dressing that needed only to be taken
"into account." Rather, they were a central part of the compromise
with reluctant members of Congress to cast a vote that in many cases
proved to be political suicide.

The act's emphasis on preserving homeownership was particularly vital
to passage. Congress was told that TARP would be used to purchase up
to $700 billion of mortgages, and, to obtain the necessary votes,
Treasury promised that it would modify those mortgages to assist
struggling homeowners. Indeed, the act expressly directs the
department to do just that.

But it has done little to abide by this legislative bargain. Almost
immediately, as permitted by the broad language of the act, Treasury's
plan for TARP shifted from the purchase of mortgages to the infusion
of hundreds of billions of dollars into the nation's largest financial
institutions, a shift that came with the express promise that it would
restore lending.

Treasury, however, provided the money to banks with no effective
policy or effort to compel the extension of credit. There were no
strings attached: no requirement or even incentive to increase lending
to home buyers, and against our strong recommendation, not even a
request that banks report how they used TARP funds. 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 my job as special inspector general I
could not bring about the changes I thought were needed -- I could
only make recommendations to the Treasury Department.)

Meanwhile, the act's goal of helping struggling homeowners was shelved
until February 2009, when the Home Affordable Modification Program was
announced with the promise to help up to four million families with
mortgage modifications.

That program has been a colossal failure, with far fewer permanent
modifications (540,000) than modifications that have failed and been
canceled (over 800,000). This is the well-chronicled result of the
rush to get the program started, major program design flaws like the
failure to remedy mortgage servicers' favoring of foreclosure over
permanent modifications, and a refusal to hold those abysmally
performing mortgage servicers accountable for their disregard of
program guidelines. As the program flounders, foreclosures continue to
mount, with 8 million to 13 million filings forecast over the
program's lifetime.

Treasury Secretary Timothy Geithner has acknowledged that the program
"won't come close" to fulfilling its original expectations, that its
incentives are not "powerful enough" and that the mortgage servicers
are "still doing a terribly inadequate job." But Treasury officials
refuse to address these shortfalls. Instead they continue to
stubbornly maintain that the program is a success and needs no
material change, effectively assuring that Treasury's most specific
Main Street promise will not be honored.

Finally, the country was assured that regulatory reform would address
the threat to our financial system posed by large banks that have
become effectively guaranteed by the government no matter how reckless
their behavior. This promise also appears likely to go unfulfilled.
The biggest banks are 20 percent larger than they were before the
crisis and control a larger part of our economy than ever. They
reasonably assume that the government will rescue them again, if
necessary. Indeed, credit rating agencies incorporate future
government bailouts into their assessments of the largest banks,
exaggerating market distortions that provide them with an unfair
advantage over smaller institutions, which continue to struggle.

Worse, Treasury apparently has chosen to ignore rather than support
real efforts at reform, such as those advocated by Sheila Bair, the
chairwoman of the Federal Deposit Insurance Corporation, to simplify
or shrink the most complex financial institutions.

In the final analysis, it has been Treasury's broken promises that
have turned TARP -- which was instrumental in saving the financial
system at a relatively modest cost to taxpayers -- into a program
commonly viewed as little more than a giveaway to Wall Street
executives.

It wasn't meant to be that. 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.

[Author Affiliation]
NEIL M. BAROFSKY Neil M. Barofsky was the special inspector general
for the Troubled Asset Relief Program from 2008 until today.

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