03/18/2010 05:12 am ET Updated May 25, 2011

The TARP Travesty

Government reports seldom make for interesting reading. Typically the material is dry, the authors employ sterile English, and the findings are diluted into a mush of "possibly" and "probably." This, largely, is not the case with the most recent document issued by the Congressional Oversight Panel charged with monitoring administration of the Troubled Asset Relief Program (TARP). I would go so far as to argue the Panel's latest report is nothing less than shockingly clear...and brutally dismaying. The document, titled "Taking Stock: What has the Troubled Asset Relief Program Achieved?" strongly suggests the best answer to that question is -- for Main Street -- little to nothing.

Signed into law on October 3, 2008, TARP was intended to help prevent a meltdown of the American economy by authorizing the Secretary of the Treasury to purchase mortgage-related securities and "any other financial instruments" deemed "necessary to promote financial market stability." To accomplish this mission, the Secretary was granted access to $700 billion -- enough cash to fund the wars in Iraq and Afghanistan from initiation through the end of 2007.

At first, TARP funds were used as a means of propping up the largest U.S. financial know, Bank of America, Citigroup, J.P. Morgan. However, it quickly became apparent a wider net would have to be cast. In the ensuing six months, the American taxpayer became an investor in over 700 banks, purchased an 80% share of AIG, 61% of GM, and provided Chrysler $6.6 billion in "financing." "Finally," the Congressional Oversight Panel notes, "the TARP was used in conjunction with Treasury and Federal Reserve efforts to try to restart small business and consumer lending."

So, 14 months after going into effect, what have we received from our $700 billion investment? I'll let the Congressional Oversight Panel speak for itself:

-- The availability of credit, the lifeblood of the economy, remains low. Banks remain reluctant to lend, and many small businesses and consumers are reluctant to borrow. Even as new capital and earnings flow into banks, questions remain about whether this money is being used to repair damaged balance sheets rather than putting the money into lending.
-- Bank failures continue at a nearly unprecedented rate. There have been 149 bank failures between January 1, 2008 and November 30, 2009. The FDIC, facing red ink for the first time in 17 years, must step in to repay depositors at a growing number of failed banks. This problem may worsen, as deep-seated problems in the commercial real estate sector are poised to inflict further damage on small and mid-sized banks.
-- Toxic assets remain on the balance sheets of many large banks. Some major financial institutions continue to hold the toxic mortgage-related securities that contributed to the crisis, waiting for a rebound in asset values that may be years away. These banks may be considered "too big to fail," but at the same time, they may be too weak to play a meaningful role in keeping credit flowing throughout the economy.
-- The foreclosure crisis continues to grow. More than two million families have lost their homes to foreclosure since the start of this crisis, and countless more have lost their homes in short-sales or have turned their keys over to the lender. Foreclosure starts over the next five years are projected to range from 8 to 13 million, but more than a year after the TARP was passed, it appears that the TARP's foreclosure mitigation programs have not yet achieved the scope, scale, and permanence necessary to address the crisis.
-- Job losses continue to escalate. The unprecedented government actions taken since last September to bolster the faltering economy have not been enough to stem the rise of unemployment, which in October was at its highest level since June 1983.
-- Markets remain dependent on government support. The market stability that has emerged since last fall's crisis has been in part the result of an extraordinary mix of government actions, some of which will likely be scaled back relatively soon, and few of which are likely to continue indefinitely. It is unclear whether the market can yet withstand the removal of this support.
-- Government intervention signaled an implicit government guarantee of major financial institutions, and unwinding this guarantee poses a difficult long-term challenge. As yet, there is no consensus among experts or policymakers as to how to prevent financial institutions from taking risks that are so large as to threaten the functioning of the nation's economy.

I don't know about you, but as best I can tell, this is not a performance evaluation I would like to have in my personnel file. I would also observe this Panel is not composed of the standard political hacks. From the Democratic side of the aisle we have Richard Neiman, Superintendent of Banks for the State of the New York; Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); and Elizabeth Warren, the Leo Gottlieb Professor of Law at Harvard Law School. The Republicans anted up Representative Jeb Hensarling (R-TX) and Paul Atkins, former Commissioner of the U.S. Securities Exchange Commission. This august group adopted the findings above with a 4-1 decision -- Representative Hensarling voted against the report.

Unfortunately, the Congressional Oversight Panel fails to take its findings to the logical conclusion -- the taxpayer is getting a raw deal on this use of our money -- instead they lapse into bureaucratese. Here's how the Panel seeks to avoid the political fallout associated with bold conclusions: "The evolving nature of the TARP, as well as Treasury's failure to articulate clearer goals or to provide specific measures of success for the program, make it hard to reach an overall evaluation." Nah, the bullets above do the job nicely...TARP saved a few big banks and left the rest of us holding the bag.

What do I mean? Consider these grim news clips. Bank failures continue at a brisk clip, with a historically high cost. While more banks by number failed in the late 1980s and early 1990s, the total assets involved in that fiasco only came to $309 billion. The bank failures in 2008 and 2009 have now tallied $473 billion in total assets. In an equally grim development, bank consolidation continues at a worrisome pace. The big four now have over 35% of the market share and have captured over 30% of all U.S. deposits. Rather than solve the "too big to fail" problem so clearly demonstrated by AIG, TARP appears to have simply abetted a monopolization of the American banking industry.

As for the availability of credit ... well, the White House sure doesn't think TARP has worked. On December 9, 2009, the Obama administration announced it was summoning the chiefs of a dozen big banks to meet with the president. According to a White House spokesman, "The president is looking forward to meeting with members of the financial services discuss our shared interest in economic recovery, the need to increase small business lending and the administration's plans for financial reform."

Interesting agenda, but likely a waste of oxygen. We already know the bankers don't share Main Street's interest in economic recovery -- the bonuses scheduled for some firms, and others' struggle to escape the Administration's compensation czar, strongly suggest the financial industry robber barons are not paring back on this year's Christmas gifts or worrying about unemployment figures. More loans for small businesses? Right. Having been nearly singed by their own risky behavior, the bankers are not about to facilitate someone else's risk taking. And financial reform? Who is the White House kidding? If the health care debacle is any indication of how much reform we can expect from Capitol Hill, the bankers have nothing, nothing to worry about.

And what about TARP? Well, despite the Panel's report and popular outrage, on December 9, 2009 Treasury Secretary Geithner extended the program through October 2010. In a letter informing congressional leaders of his decision Geithner promised to "wind down" programs intended to assist the largest banks and instead focus on consumer credit revival and initiatives that aid small businesses. Sigh. Someone please tell Mr. Geithner there is no longer any need to focus on the major Wall Street players, they already have got theirs and are walking -- nay, running -- away from the recession and any social or moral obligation to extend the same level of effort to aid the common man.