Sunday, April 3, 2011

A Watchdog's Final Assessment

Neil Barofsky was until yesterday the special inspector general for TARP, President Bush and Treasury Secretary Paulson's $700 billion Troubled Asset Relief Program.  Barofsky's comments about the overall efficacy of the bank rescue program before the House Oversight and Government Reform subcommittee were less than a ringing endorsement.
"TARP's most significant legacy may be the exacerbation of the problems posed by 'too big to fail,' particularly given the manner in which Treasury executed the bailout, largely sparing executives, shareholder, creditors and counterparties, reinforcing that not only would the government bail out the largest institutions, but would do so in a manner that would do little harm to the responsible stakeholders," Mr. Barofsky said.

Treasury's acting assistant secretary for financial stability, Timothy Massad, saw it differently.
"TARP was necessary to respond to the worst financial crisis we faced in decades," he said in his remarks. "Its most significant legacy is that it, combined with a variety of other government actions, helped save our economy from a catastrophic collapse and may have helped prevent a second Great Depression."
TARP was signed into law on October 3rd, 2008 after a calamitous month for financial institutions.  In the preceding 30 days, the federal government had taken over Fannie Mae and Freddie Mac (Government Sponsored Entities/public companies), which between them owned or guaranteed $5 trillion worth of mortgages; allowed legendary investment bank, Lehman Brothers, to fail; bailed out AIG, the world's largest insurer, and counter-party on the short end of tens-of-billions of dollars worth of credit default swaps; engineered the sale of Merrill Lynch to Bank of America; engineered the takeover of Wachovia Bank by Wells Fargo; seized Washington Mutual, which was then sold to J.P. Morgan; guaranteed the $3.5 trillion of savings in the nation's money-market funds; converted investment banks Goldman Sachs and Morgan Stanley into bank holding companies; and more.

Secretary Paulson, Federal Reserve Board Chairman Ben Bernanke and President of the NY Federal Reserve Bank Tim Geithner conceived of the fund as way of getting ahead of the crisis instead of scrambling to keep up with it.  The idea was to convince credit markets, which had frozen with fear, that the federal government would spend whatever it took ($700 billion) to protect creditors and financial companies.  In selling the program to Congress, Secretary Paulson said that he needed the money to buy toxic assets from banks.  Upon approval, he immediately changed direction and (forcibly) purchased bank shares in order to infuse financial institutions with capital.  TARP money was used shortly thereafter to bail out automobile manufacturers General Motors and Chrysler.  When all was said and done, the program likely cost taxpayers less than $19 billion.

Noman revisits this painful history merely to comment upon what he thinks the program's true legacy was: the election of Barack Obama and overwhelming Democratic majorities in both houses of Congress.  It's historical significance was mostly political, and ironically worked wholly in the favor of the Democratic party, which had provoked the sub-prime crisis by insisting for decades that banks lower their lending standards.  When Hank Paulson told the American people in late September 2008 that unless Congress appropriated close to a trillion dollars along with nearly unlimited authority to do whatever he wanted with it, the world's financial system would collapse, he sealed the nation's fate.  The result has been a $1 trillion dollar slush fund for transfer payments to Democratic constituencies and blue states; ObamaCare; Dodd-Frank; an end to the institution of marriage as we've known it throughout human history; Cap-and-Trade via stealth regulation; a massive increase in estate tax rates; the erosion, if not demise, of American influence in world affairs; and more.  Should liberals ever construct a pantheon in America for useful idiots who paved the way for government hegemony over the American spirit, the statues of Hank Paulson et al. should enjoy pride of place.

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