04 March 2010

Back from the Brink with Bank Loans

Government’s program to shore up bad loans gets paid back

Neil Barofsky, special inspector general for the Troubled Asset Relief Program

By Phillip Kurata
Staff Writer

Washington — When the Troubled Asset Relief Program — TARP — was passed in October 2008, then-President George W. Bush said the TARP was needed to prevent the collapse of the U.S. banking sector, a collapse that could have brought down the entire economy. After President Obama captured the White House a few weeks later, he endorsed the TARP while ordering revisions to make it more transparent and broader to help other economic sectors. But pundits pointed out that Americans were very nervous about taxpayer money being used to shore up bad loans made by private companies.

Now, nearly a year and a half after its launch, the major banks that received more than $200 billion in TARP funds have repaid about $130 billion, and President Obama said the government soon will recover the entire amount that went to big banks. Congress originally provided $700 billion to fund the TARP. As of the end of 2009, the Treasury Department had created 11 TARP programs and committed nearly $550 billion dollars to fund them. Outside the financial sector, the programs included auto manufacturers, mortgage lenders and public works projects.

In his State of the Union address in January, President Obama was frank about how much he and others disliked using taxpayer money to save large banks from their own financial misconduct. “If there’s one thing that has unified Democrats and Republicans, and everyone in between, it’s that we all hated the bank bailout. I hated it. You hated it. It was about as popular as a root canal,” Obama said.

But, like a root canal that eventually improves dental health, the TARP has helped the U.S. economy start to regain financial health, according to the Obama administration. By the end of 2009, the economy had started growing again. The stock market posted impressive gains in 2009, after a steep slump that began in 2008, and some companies had started to hire again.

Nevertheless, the U.S. economy has a long way to go before recovering all its vitality. The high rate of unemployment, which appears to have stabilized around 10 percent, remains a problem. Seven million people have lost their jobs since the recession began in 2008, according to the administration. To keep positive economic momentum going, the president has called for recycling repaid TARP funds to increase lending to small and medium-size businesses, the sector of the U.S. economy that generates the most jobs.

REPORT FROM THE SPECIAL INSPECTOR GENERAL

Neil Barofsky, the special inspector general for the TARP, said the program undeniably helped stabilize the economy.

“The initial idea that we were going to lose hundreds and hundreds of billions of dollars, those projections have all come down,” Barofsky said in an interview with Bloomberg Television on February 1. “It’s unquestionable that the financial system is stronger today. … TARP was an important part of that.”

Similar to special prosecutors Archibald Cox in the Watergate years and Kenneth Starr during the Clinton administration, Barofsky holds federal powers that enable him to collect information related to the TARP and prosecute fraud.

In a quarterly report to Congress dated January 30, he said the TARP has not been a total success. The program stoked the firestorm of controversy caused by billions of dollars in bonuses that executives of rescued financial institutions paid themselves while millions of ordinary people had lost their jobs and homes, he said. Barofsky also pointed to the Treasury Department’s lack of oversight of the mammoth insurance company, American International Group Inc. (AIG).

“Treasury invested tens of billions of taxpayer dollars in AIG, designed AIG’s contractual executive-compensation restrictions … all without having any detailed information about the scope of AIG’s very substantial, and very controversial, executive-compensation obligations,” he said.

The Committee for a Responsible Federal Budget, a bipartisan group of prominent economists and former members of Congress, agrees in broad measure with the special inspector general’s findings that the TARP has helped the financial sector and economy. However, it worries that by bailing out the banking industry, Congress may have signaled to financial companies that there is an implicit government guarantee and thus may encourage future risky behavior.