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Watchdog Reports TARP Fail

January 31, 2010

Neil Barofsky, Special Inspector General for TARP, has reported to Congress that despite the softened blow to the financial sector there remain many problems that could expose US taxpayers to even bigger problems. His report specifies trouble in several areas, including mortgage lending (and security of mortgage debt backed by taxpayers) and exacerbation of problems he sees with respect to the fundamentals of the system such as “too big to fail” and executive compensation.

The report points out that companies “too big to fail” have actually enlarged due to TARP. This is one of the ironies of the post-Massachusetts senate race as Obama has shifted focus from health care reform to a populist bashing of the banking industry. What the fuck is he thinking if in 2008 and 2009 an appropriate “solution” is to force one company to take over another as a matter of national interest (e. g., Bank of America’s take over of Merrill Lynch at the “suggestion” of Hank Paulson) and in 2010 the remedy is to break it back up? I know this clown lacks any real world work experience (and has assembled a team around him with little more than he has outside of community organizing or teaching), but doesn’t he at least pay attention to his own level of intellectual consistency about such things?

Barofsky also warns that government may have actually exacerbated the housing market bubble:

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.

The fact that government wanted to intervene in the markets was alarming enough to me, but I knew the only reforms that would be attempted would be window-dressing at best and re-regulation of private industry at worst. We’re getting both of those. Government has done nothing to change its policies — such as Community Re-Investment — which encouraged risky lending practices banks and other institutions never would’ve gotten into if not for laws and regulations requiring such. Government also hasn’t shown a willingness to stop underwriting losses of bad businesses at the expense of the good ones. Not every bank and mortgage company had to be bailed out because some were principled enough to know that it’s folly to make a business out of loaning sizable amounts of money to people who have no ability to pay; accordingly, they passed up on Fannie/Freddie and had smaller exposures to sub-prime portfolios. It’s possible to make money loaning to people who can afford to pay you back, but it’s hard to make money off those who shouldn’t be buying houses, cars, and other large items without first establishing the ability and creditworthiness to pay off loans.

The most fundamental reforms the government needs to take remains getting out of two things:

  1. Insuring banking and financial industry losses, and
  2. Creating incentives or requirements for lenders to take greater risks than they can stomach.

Instead, the government continues to look at ways to regulate banks into doing things elected officials think they should or shouldn’t do. The administration isn’t offering new solutions, it’s still disallowing banks to make valid risk analysis of every borrower (and encouraging lending to those who are too risky), strong-arming lenders into lending when there’s little or no demand for loans (hint: right now there’s an abundance of cash on the sidelines and not enough borrowers — it’s not exactly an environment conducive to writing lots of loans because of the uncertainty peddled by and resulting from this administration), and determining how much executives should be paid rather than letting boards and shareholders decide.

The government — speaking here of federal, state, and local — has a very serious issue about its own creditworthiness right now. It has made promises it simply cannot back up. That includes all these programs and attempts to “save” the very industries its policies and laws encourage lenders to make “risky” (or at least “riskier”) loans as well as entitlement programs which are becoming increasingly top-heavy (with more “takers” than “payers”) and public sector pension programs. Never mind a massive spike in the budget deficit thanks to the reckless spending habits the Democrats running Congress said they’d stop in 2006 and haven’t yet; now with a president from their party, they’re out of control and raising debt limits on a frequent basis.

How bad would things have gotten if institutions hadn’t been deemed “too big to fail”? Lehman was allowed to fail. Yes, it made things rather unpleasant. Surely things could’ve been more unpleasant had others faced bankruptcy (which didn’t kill Citi) or sale of assets — toxic or otherwise. But at least those in the strongest position would’ve been able to consume any of the weaker companies, or at least the parts of their businesses with actual worth, and the weak would’ve been displaced. Instead, the government has shored up the weak at the expense of the strong and thereby made the whole economy as fragile as its shored-up weak links. Shouldn’t be a surprise considering government is filled with too many lawyers bent on various forms of “justice” that have nothing to do with justice and idealists who lack actual business experience; in their collective milieu, it’s noble to take from the successful and give it to the unsuccessful and consider it public service — they don’t care about the results of their programs.

And that’s a systemic problem: government policy isn’t about actual results, it’s only about placating interest groups whether policies ever actually live up to their promises. Our binary party system only results in a pissing match between which one will live up to its promises before corrupting itself and bankrupting the nation in catering to its ever-increasingly polarizing partisan interests. What it’s shown is that neither party can be trusted with power over any branch of government, and the American people should dread when the Congress and White House are run by one party. Too often, the parties prove themselves to be two sides of the same coin.

Barofksy’s report lauds government’s actions to some degree but at least is honest enough to admit that the bailouts created more risk in the system. When will those in government look at their own handiwork and see that it’s more often than not made things steadily worse instead of better?

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