When the United States decided to risk $700 billion to shore up a faltering financial system, someone had to keep an eye on the money. That someone was Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. Most of the money has been returned to the U.S. Treasury, and now Barosky is stepping down.
He told Federal News Radio TARP is a great example of how a government program should be run – but wasn’t.
“If you’re going to have a government program, you need to start off with clear, articulate goals,” Barofsky said. “Then you need to measure the progress of your program against those goals and if you’re not meeting that progress, the progress isn’t helping to achieve those goals, you need change that program so you can ultimately have a successful program. Unfortunately, far too often in TARP, it was a different model. It was declare very, very lofty goals, then have no policy connected to actually achieving those goals. And when the goals failed, instead of changing the program, they just basically set new goals and said ‘mission accomplished, the program was a success.’ And that really isn’t a good, effective way to run a government program.”
TARP’s successes and failures
In terms of what has been accomplished, Barofsky said he sees TARP as a program of mixed results.
“On the one hand, one of TARP’s goals was, of course, to rescue the financial system and to restore the profitability of the largest banks so that they could continue to do business, and there TARP has certainly been successful,” Barofsky said.
But the program was intended to do much more than that, said Barofsky. “It was supposed to help preserve home ownerships. It was supposed to help assist in the recovery. It was supposed to help restore lending. And there, the program has simply not been successful but has failed.”
To be clear, Barofsky said the entire program wasn’t a failure. In terms of Wall Street, “and helping the largest banks recover, it certainly got an A. Just look at how well they’re doing.” However, said Barofsky, when you look at some of the other issues, “like preserving home ownership, again, a D minus, if not an F. No, probably an F.” He noted that with 13 sub-programs, “it’s hard to give a weighted average grade.”
Barofsky said Congress is behind one of the biggest disappointments for TARP: home ownership. In the beginning, “Congress basically understood how TARP was going to be implemented. They were going to buy $700 billion dollars in toxic assets, and what that meant at the time was mortgages – mortgages and mortgage backed securities, and as it was explained to Congress, Treasury was then going to modify those mortgages.” So buy the mortgages, modify them, then sell them back on the market, “hopefully for a profit.”
Barofsky said within weeks “that whole strategy was abandoned” when the decision was made to instead inject the money directly into propping up the biggest banks. Months later, the Home Affordable Modification Program (HAMP) was announced, “and the idea there was going to help 3 to 4 million people.” Now, Barofsky said, “we’re facing the cold and stark reality that that program’s never going to come anywhere close to three to four million. We’re right now sitting at about 540,000 ongoing and really no plan or way of ever coming close to that number.”
A legacy of too big to fail?
Even more worrisome for Barofsky, as he considers the future, is the possible danger that’s been done to the financial system in general as a result of that decision. One of TARP’s “biggest legacies,” said Barofsky, “is that when first Secretary (Henry) Paulson then Secretary (Timothy) Geithner guaranteed the nation’s largest banks against failure,…they achieved the goal of helping to preserve the system, but they also created the expectation that going forward that these largest banks will be bailed out again if there’s a problem. And right now, as we sit here in 2011, the market really perceives that these largest banks are still too big to fail and if they get into trouble the government is going to bail them out. And that really is a perversion on the market.”
In turn, said Barofsky, that perception “terribly distorts market. It screws up incentives. Executives have the incentive, rational incentive, to take on more risk with the assumption the government will bail them out if their decisions go awry, and that creates banks that are even larger, even more systemically important, and therefore makes the financial system even more vulnerable to the exact type of catastrophe, of crisis, that we experienced in 2008, so I’m very, very concerned about where we are going forward if something isn’t done dramatically and quickly to deal with these legacy issues.”
Well thought out, proactive changes would be very different from how the program started. Barofsky noted “when you go back into the belly of that beast in October of 2008, there was really a sense of panic, and there really was a sense of ‘let’s try anything and everything.’ And I’m sure they drew on the talented career government civil servants, who of course formed the backbone of so much of what we do, but …the decisions were made at the highest levels and they were driven by an understandable panic. The real question has been since then, what has been done? And I think when you look at things like the failures to acknowledge mistakes, the failures to sort of address those issues, those are more political decisions than the decisions I would say that typically fall on your GS or even your SESer, and that’s really the political appointees who are driving that train.”
Tom Temin is the host of The Federal Drive, which airs from 6-10 a.m. on 1500 AM in the Washington, D.C. region and online everywhere. Tom has 30 years experience in journalism, mostly in technology markets. Before coming to Federal News Radio, he was a long-serving editor-in-chief of Government Computer News and Washington Technology magazines.