Lessons From the TARP Mess

4 Sep

Neil Barofsky, SIGTARP In another installment of “reconsidering President Barack H. Obama’s first term” on IW before the DNC kicks off in Charlotte, Neil Barofsky and Russ Roberts talk about TARP, the Troubled Assets Relief Program. Two lessons Barofsky, the SIGTARP, or Special Inspector General for TARP, brings up stand out for me.

The first lesson has to do with offering the wrong incentives to banks:

Barofsky: And ultimately Treasury justified its use of the money in the way that it did by buying shares of the banks to prevent them from collapsing, essentially. Justified it under the idea that the banks were going to take it and use it to increase lending. So part of our job was to track that policy goal and point out the failures that Treasury had in trying to accomplish that goal. And as you said, one of the failures was a complete absence of conditions or requires or even incentives, carrots. Often the banks, to try to get them to deploy that money back into the financial system. And the other aspect of that, which we spent a lot of time, was to try to get more transparency. And the idea that we should know as American people and Treasury should want to know, as the people running this program, what it was precisely the banks were using the TARP money for. And we ran into a real brick wall in the form of Treasury of just refusing to have the banks report on that. And our idea of doing that was one general goal of good government and transparency. But second, it would help Treasury measure implementation against this goal, which was supposedly to get money back into the system. But I think you are right: One of the reasons they fought us so hard on this sort of very basic requirement of getting the banks to behave about how they are using TARP funds is that they didn’t want a public record of where it was going. Because they kind of knew that was never really the intent. As we later found out, as we started doing our audit function, our investigative function, at the time that that TARP money was going out, even though Ben Bernanke and Hank Paulson were issuing Press Releases saying how healthy and viable the banks were and they would use this to deploy the capital into the system, privately they confessed to us that they had real doubts about the survival of several of these banks. Bernanke mentioned that Goldman-Sachs was soon to go, and Paulson thought that Morgan-Stanley would have been the next one to go, absent TARP.

Roberts: Well, the less cynical part of me says that they desperately needed to prop up these banks to keep a meltdown from occurring, and this was the politically attractive way to do it. You pretended it was to encourage lending and credit, but what it really did was to salvage the books of the banks in ways that would keep them afloat. The cynical part of me comes back, though, and says: Well, how do you know Goldman Sachs was next? I mean, who told you that? Well, Goldman Sachs, I’m sure. A lot of banks told the Fed and people at Treasury how perilous these times were. There’s an event you don’t mention in the book that I think about way too often, which is I think it was 24 phone calls between Hank Paulson and Lloyd Blankfein, the head of Goldman Sachs, the week before, or two weeks before the American International Group (AIG) bailout. And we don’t know what they talked about. But I don’t think it was their kids’ summer vacation. I think it was why this was crucial for the future of mankind. I don’t think it was a conspiratorial–I hope it wasn’t a conspiratorial–corrupt thing where Blankfein said: Hey, we are going to lose $15 billion dollars if AIG goes under; we are expecting $15 billion. I assume he explained how desperately Western Civilization needed this to happen.

The second lesson is, that Washington needs successes.

Roberts: So, I’m sure many people have heard that the auto bailout paid for itself; the government’s broken even; we made all the TARP money back–there’s a few small banks that haven’t paid back. And some of these statements might be true; some are not true. Why is there a gap between these public statements–which should be checkable? And transparent as can be? It’s our money; why is it that some of the government’s statements about these amounts are not accurate?

Barofsky: The program became more and more politicized during my time there. If you can believe that. Politicized as it was when it first started. But over time, I started seeing Treasury’s announcements started becoming more and more deceptive. A lot of half truths, a lot of sort of very thinly slicing things so that they would be literally true but really when looked in a broader context were potentially misleading. So, for example, you’d hear a lot about how they made money on the banks, and they would give a number by slicing a few of the TARP programs; but it’s not always clear whether they are including, like, Allied Financial, which is a giant bank for which Treasury is going to lose a lot of money; but the response would be: No, that’s in the auto program, because that was formerly GMAC, so that doesn’t really count. Or they would ignore the bailout of AIG, which was really done to save the banks by paying them out huge amounts of money on money that AIG owed them and otherwise wouldn’t have been able to pay. But they’d say: Well, that wasn’t really a program about the banks. Or they’ll change their accounting method, which was something that they did with AIG, to make it look like the potential losses were going to be a lot less than they ultimately turned out to be. And in 2010, shortly before the midterm elections, Treasury put out this document and secretary Geithner wrote and op ed, and they hit all the cable TV shows talking about how the numbers had gotten so much better for AIG; but didn’t disclose that that was mostly the change in accounting methodology. And really, there are so many things that are bad about this, for what it does about how Americans perceive their government and how we perceive the Treasury Department, which is now with almost zero trust, as polls indicate. But it was also so entirely unnecessary. Because in this area of potential losses from TARP, it is one of the few areas of success. When you compare to where we thought we were going to be, back in 2008, and where we were in 2010, 2011, and today, the losses are far, far less. I think the total most recent estimate is about $60-$70 billion that Treasury estimates to be lost from TARP. Which is a lot of money, but compared to the $350 billion that we anticipated back then, this is good news. But there’s this need in Washington, over and over again, from the White House, from the political arms of Treasury, to take something that looks good and make it look great, even though that isn’t necessarily true. And that’s just part of Washington.

I don’t blame Washington, or even the banks, so much as I do ourselves, for not keeping a closer eye on the crooks.

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