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“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.”

Where the Bailout Went Wrong



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.

Neil M. Barofsky was the special inspector general for the Troubled Asset Relief Program from 2008 until today.

11 Responses

  1. […] View the original article here LikeBe the first to like this post. […]

  2. […] Barofsky: HOW TARP FAILED HOMEOWNERS EDITOR’S ANALYSIS: It’s really simple. Wall Street banks got away with financial equivalent of murder and the administration either doesn’t get it or doesn’t want to get it. The deal with AG offices around the country is going to split apart into meaningless drivel just like the HAMP or any other modification process. The banks want the houses, pure and simple. It is the only way they make money for the 4th time in this merry-go-round of financial farce. They know how to pretend to offer modifications, lose the paperwork and otherwise stall, delay and obfuscate and now they are doing the same thing with the AG offices. […]

  3. […] Barofsky: HOW TARP FAILED HOMEOWNERS EDITOR’S COMMENT: The Federal Reserve is a hazy system whose ownership and management is about as clear as mud. About the only thing you can say for sure comes from their conduct. This mess could have been cleaned up with homeowners, investors, and investment banks at the table — addressing the reality of the historic economic fraud perpetrated by Wall Street under the names of derivatives and securitization. As the New York Times and many economists have pointed out, the FED is simply not doing the job is was created to do, and as a result, the problems and facts of the fraud continue to accumulate and multiply. […]

  4. @ neidermyer what is ahsmi??? i read a post where the bank actually hires companies gives them pass words and has them moved files. i got a call in dec 2010 from a woman that had been working on my file from oct (3 months late eminent default) frantic that someone hacked her pass code got into her file and it was moved to the net “cog” and if cant get it back i will not be approved. well that was the last time i heard from her and guess what i have not been approved. now they have someone else workong on my file and guess what= happened in feb when i sent my fiancials all lost?? so what happens from here?/////

  5. welll if any one is IN my position how can i calm down no one is doing a g-d d-m thing to help us we are wallowing in our disgust daily. i am totally yes i am in florida either there is so many foreclsoures and i am last on the list ot these foreclsoure . i called weidner, wayslick and stoppa and no return call in 3 weeks. i retained a lawyer in jacksonville i didnt let this fiasco get me down. i am still in my home and still fighting. i would short sale just fo r this to be over but what the banks do not realize most of us worked all our lived for our homes and i cant just walk away. although i am petrified about the future i am also sad this has happened to my family. the reason i moved TO north tampa bay in 2006 from south florida was to remove my children from a gang, drug, weapon, infeasted high school. with my older one grad in 3 months glad to say drug / alcohol free but his is comming at a price to my family. i am the poster chikld for high credit score and onetime payments. sad to have to know fraud has been committed and no way to fix this mess.

  6. losing my home in florida …

    Calm Down … Do you actually have WF contacting you or is it AHMSI? Option One is defunct so it shouldn’t be them … With most of the foreclosure mills shut down due to fraud WF (and all the others) are moving slowly on foreclosures for the moment..

    They purposefully lose docs (no surprise) to flunk you out of their system.. If you’re in south Florida contact ICE LEGAL ,, If you’re in Tampa contact Matt Weidner … if you’re outside his area he’ll refer you to someone he trusts..

    Good Luck! And never stop fighting.. that’s the key.. the banks want the easy wins.

  7. HELLO!!!!!!!!!!!!!!!!!is there anybody there?????????????
    I have 4 Departments yes 4!!!!!!!!!! from wells fargo trying to contact me :
    1 want my pay check stubs
    2 wants the entire obama plan application
    3 wants the package they resent they lost feb 3rd sent fed ex i have a tracking # and signee from wells fargo which i was denied a mod because they did not receive and……..
    4 the fore closure wants to foreclose

    so talk about MASS confusions
    HELLO!!!! is there anybody in there,

  8. Whoa….that was a scathing analysis….makes me loathe Geithner even more….I didn’t think that was possible.

    This administration has failed at every level. Time to look to 2012 and some other “fix what ails us” fraudster. There’s no shortgage of them flocking towards D.C.

    Vote for anyone besides democrat or republican. They’re all lying thieving rat bastards. Voting down Obama will get rid of that pack at the top now, who have done way more damage than nuclear meltdowns could ever do.

  9. Barofsky for President!

  10. When the government calls a program a “success”, that was an out and out failure in terms of how much money was actually allocated to homeowners, I believe fraud has occurred.

    When one factors in that homeowners were actually lured into a taxpayer funded program that accelerated the loss of their home and also harmed their credit rating, it is possible that a Federal Hobbs Violation, the extortion clause, could be charged against the present administration.

    Of course the irony of that is the only group of people I trust less over this manner than the white house, are the republican politicians who did nothing, and said even less about the entire housing issue over the past two years.

  11. […] Source: Livinglies’s Weblog […]

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