Watchdog says federal bailout tack invited anger, mistrust

In recent months, a newconsensus has emerged -- at least among elites in Washington and New York -- that the federal bailouts under the Toxic Assets Relief Program, far from being an enormous and corrupt transfer of wealth from taxpayers and Wall Street, was in fact a bargain that saved the economy and ended up costing much less than once feared.

But in a stinging new report (PDF) released Tuesday, the inspector general for TARP charges that the program has failed to meet some key goals, costing the public in ways that go well beyond the price tag.

In a quarterly report that comes at the two-year anniversary of TARP's passage into law, Inspector General Neil Barofsky agrees that TARP was "a success for Wall Street," producing "a swift and striking turnaround, accompanied by a return to profitability and seemingly ever-increasing executive bonuses."

But for Main Street, the picture is far more complicated. Barofsky, who has been a frequent critic of the Treasury Department's handling of the bailout, acknowledges that by preventing "a complete collapse of the financial industry and domestic automobile manufacturers," and "the ripple effects such collapses would have caused," TARP benefited Main Street too.

At the same time, though, he points out that TARP also has fallen short on several crucial measures. It has "failed to increase lending", Barofsky writes: "Even now, overall lending continues to contract, despite the hundreds of billions of TARP dollars provided to banks with the express purpose to increase lending."

He also says TARP has failed to promote jobs and economic growth:

[While] job losses may have been far worse without TARP support, unemployment continues to hold at roughly 9.6%, 3% higher than at the start of the program. While large bonuses are returning to Wall Street, the nation's poverty rate increased from 13.2% in 2008 to 14.3% in 2009, and for far too many, the recession has ended in name only.

And the program has "woefully" failed to preserve homeownership, Barofsky argues:

[The] most specific of TARP's Main Street goals, "preserving homeownership," has so far fallen woefully short, with TARP's portion of the Administration's mortgage modification program yielding only approximately 207,000 (out of a total of 467,000) ongoing permanent modifications since TARP's inception, a number that stands in stark contrast to the 5.5 million homes receiving foreclosure filings and more than 1.7 million homes that have been lost to foreclosure since January 2009.

Barofsky also says TARP has generated costs beyond what turns up on taxpayers' tab. For instance, he says, the program has "increased moral hazard and concentration in the financial industry":

The biggest banks are bigger than ever, fueled by Government support and taxpayer-assisted mergers and acquisitions. And the repeated statements that the Government would stand by these banks during the financial crisis has given a significant advantage to the larger "too big to fail" banks, as reflected in their enhanced credit ratings borne from a market perception that the Government will still not let these institutions fail, although the impact of this cost may be blunted by recently enacted regulatory reform.

Another major cost, says Barofsky, is the "potential harm to the government's credibility that attended this program." He criticizes TARP's "lack of transparency, program mismanagement, and flawed decision-making processes":

When Treasury refuses for more than a year to require TARP recipients to account for the use of TARP funds, or claims that Capital Purchase Program participants were "healthy, viable" institutions knowing full well that some are not, or when it provides hundreds of billions of dollars in TARP assistance to institutions, and then relies on those same institutions to self-report any violations of their obligations to TARP, it damages the public's trust to a degree that is difficult to repair.

The government's decision to bail out AIG and its counterparties, says Barofsky, invited "public anger, hostility, and mistrust," and in doing so, "dangerously [undermined] its ability to respond effectively to the next crisis."

So, who's right? The government officials and independent analysts who have lately been noting that the bailout cost much less than first expected and played a crucial role in stabilizing the economy? Or bailout critics such as Barofsky and Elizabeth Warren, now the head of the new Consumer Financial Protection Bureau, who see myriad failures and costs?

Well, perhaps both. It may be true that had Congress and the Bush administration not acted in the fall of 2008, the financial sector would have collapsed, which could in turn have triggered a full-scale economic collapse, producing misery on a scale not seen since the Great Depression. But it's also true that the way the government structured and implemented the program has left plenty to be desired -- including a persistent lack of transparency and the program's apparent dedication to addressing Wall Street's concerns, often at the expense of the interests of ordinary Americans.

(Photo of Barofsky: AP/Lauren Victoria Burke)