The government’s top bailout cop said Sunday that more than a year after the financial crisis hit, many of the goals of Washington’s $700 billion bank rescue program remain unmet and that policymakers still have not addressed fundamental problems that triggered the crisis, leaving the financial system vulnerable to another collapse.
In a 224-page quarterly report to Congress, Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP), acknowledged that TARP had stabilized the financial system. But he said that it has so far failed to restore consumer and business lending and to significantly prevent home foreclosure.
And in a slap at Congress and the Obama Administration, Barofsky said that “it is hard to see how any of the fundamental problems in the system have been addressed to date.”
He said the bailout “will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.”
The top Republican on the Senate Homeland Security and Governmental Affairs Committee, Sen. Susan Collins, (R-MA), said she was “deeply troubled” by the report.
“It appears that ‘too big to fail’ institutions are even larger and possibly more interconnected as a result of TARP assistance,” she said. “The market mentality now seems fixed that the U.S. government will continue to step in and bail out giant financial institutions.”
But Barofsky warned that in his view, little had changed to head off another financial crisis:
• “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.”
•” To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
• “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been
little fundamental change in the excessive compensation culture on Wall Street.”
• “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the federal government’s concerted efforts to support home prices…risk re-inflating that bubble in light of the government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.” (Fannie Mae, Freddie Mac, the Federal Housing Administration and other government agencies now insure more than 90% of all mortgages from the risk of nonpayment.)
Barofsky also said that TARP goals to increase bank lending and prevent home foreclosures “have simply not been met” – “lending continues to decrease, month after month” and “foreclosures remain at record levels (and) the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages.
“To the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP,” he added.
from Yahoo Finance:
WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.
The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.
"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," Barofsky wrote.
Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.
