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Barofsky: TARP Program Fueled Public Distrust

October 21, 2009 at 12:00 AM EDT
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The biggest cost of the TARP program might be the public's distrust of the government, according to inspector general Neil Barofsky. Ray Suarez reports.
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GWEN IFILL: The much-debated effort to save major banks from collapse drew praise and criticism today from its official watchdog. And President Obama said he plans to redirect some of that money to smaller banks and businesses.

Ray Suarez has our lead story.

RAY SUAREZ: Special Inspector General Neil Barofsky issued his report a year to the month since Congress approved $700 billion to rescue big banks and other financial institutions. Barofsky appeared this morning on CBS’ “The Early Show,” among others. He said, if he had to give the federal effort a grade, it would be an incomplete.

NEIL BAROFSKY: There have been some successes, in — as far as pulling us back from the brink of a financial collapse. But, as far as restoring lending, helping homeowners, helping small businesses, that hasn’t materialized yet. So, we still have to wait and see.

RAY SUAREZ: Barofsky is himself a Treasury Department employee. But he was blunt in his criticism of the department.

His report said taxpayers view the Troubled Assets Relief Program, or TARP, with “anger, cynicism and distrust.” He blamed a “lack of transparency” in the program and “less-than-accurate statements.” And he said Treasury should have made banks explain publicly how they used the rescue funds.

To date, the program has spent more than $450 billion, and banks have repaid $73 billion. Most of the major banks are now reporting profits again, but Barofsky said today it’s unrealistic to expect the government will ultimately get all its money back.

RAY SUAREZ: Against that backdrop, President Obama announced a new effort to refocus federal assistance toward community banks, smaller businesses and homeowners.

U.S. PRESIDENT BARACK OBAMA: Thank you.

RAY SUAREZ: He spoke in Landover, Maryland.

BARACK OBAMA: There are still too many entrepreneurs who can’t get the loans they need to open up their doors and start hiring. There are still too many who are struggling to make payroll and to stay open. And there are still too many successful small businesses that want to expand further and hire more, but just don’t have the capital to do it.

GOP questions small business loans

Rep. Mike Pence
R-Ind.
The president offering bailout funds to small businesses, while pushing a government takeover of health care, is like getting a Christmas bonus right before you get a pink slip.

RAY SUAREZ: The president asked Congress to allow the Small Business Administration to make larger loans. His plan also would funnel more money to small banks.

BARACK OBAMA: To spur lending to small businesses, it's essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on. These are the community banks who know their borrowers, who gave them their first loan, who have watched them grow from down the street, not from Wall Street.

RAY SUAREZ: But some Republicans in Congress were quick to question the president's plan.

Representative Mike Pence of Indiana said the government is already overextended.

REP. MIKE PENCE, R-Ind.: I just have to feel like the president offering bailout funds to small businesses, while pushing a government takeover of health care, is like getting a Christmas bonus right before you get a pink slip.

Republicans have a better plan. The Republican plan will create more jobs and more opportunity and more choices in health care, while containing costs and increasing access.

RAY SUAREZ: Meanwhile, new regulation of the nation's biggest banks moved closer to reality.

REP. BARNEY FRANK, D-Mass., financial services committee chairman: We will now go to a vote.

RAY SUAREZ: The House Financial Services Committee voted to let states impose their own rules on protecting consumers from fraud and abuse. And the U.S. Treasury reportedly planned to enforce 90 percent pay cuts for executives at seven companies that took the most TARP money.

For more on the rescue program's progress, I spoke to the inspector general, Neil Barofsky, earlier this afternoon.

Well, Inspector General Barofsky, thanks for joining us.

NEIL BAROFSKY: Oh, it's my pleasure to be here.

RAY SUAREZ: A year ago, billions, tens of billions, and, eventually, hundreds of billions were blowing out the door. Your latest report concludes, it's extremely unlikely taxpayers will see a full return.

But that was one of the assurances that were made at the time.

NEIL BAROFSKY: The TARP has changed so much since then.

You know, originally envisioned as a program just to buy troubled assets, it's now -- I was going to say a dozen programs, but, today, a new program was announced. It's now 13 different programs. And some of them, there is no possibility for return on the investment, like the mortgage-modification program.

That's $50 billion that is going out the door, without any hope or thought that the money is coming back. Also, bailout of the auto industries, there, I think we're looking at potentially tens of billions of dollars of losses, not part of the original intent of TARP.

But, as the TARP has evolved, it has made itself in certain ways more vulnerable to losses.

Too big to fail banks became bigger

Neil Barofsky
TARP, Inspector General
It looks like they're taking more risks than ever, as the market and perhaps the institutions themselves perceive this safety net.

RAY SUAREZ: I'm glad you used those two examples, because, at first glance, yes, I mean, the numbers won't add up for making homes affordable.

But, if you can quantify what would have happened absent the program, can't you balance the money that was spent in keeping people in their homes against the really severe repercussions of thousands more people foreclosed on?

NEIL BAROFSKY: No, no, absolutely. And that's why we say there is no direct return. There is no dollar-for-dollar return.

When we look at what the cost of the TARP is, when we look at it from a monetary point of view, certainly, the -- the impact -- if the mortgage-modification program is successful -- and I think it's way, way too early to declare it a success -- but, if it's successful, of course, that may very well be $50 billion that's very well spent.

But, from the perspective of cost of the program and return on investment, which was one of the original criteria set forth in the statute when TARP was enacted, it doesn't -- obviously, it doesn't fulfill that goal.

RAY SUAREZ: In the auto industry, we were talking about a meltdown in the job market if two of the Big Three closed their doors.

NEIL BAROFSKY: No, absolutely. And, again, from a policy perspective, that may be -- indeed be money well spent.

RAY SUAREZ: Let's talk a little bit about moral hazard, the idea that, if people have in mind that the government will bail them out, they're less likely to back away from risky financial dealings.

What effect has the TARP had on the way private business does its business with money?

NEIL BAROFSKY: I think, unfortunately, it's -- it's made it worse, moral hazard.

I think the banks that were too big to fail, which is -- usually, when we talk about moral hazard, we're talking about the banks that are too big to fail, and the competitive advantages they get from the fact that they have this -- this perception of a government backstop.

And I think, if you look at that, what has happened since the TARP is, one, they have gotten bigger. Government-sponsored, at times, mergers has made some of these financial institutions, like Bank of America, like J.P. Morgan Chase, bigger than they were before.

And -- and, secondly, what before was an implicit guarantee that the government would not allow these banks to fail has now become explicit. We said it. That was sort of the whole point of the TARP and the related programs, was saying the government is not going to allow these companies to fail.

Well, now what does that mean? It means they can borrow money cheaper. And it looks like they're taking more risks than ever, as the market and perhaps the institutions themselves perceive this safety net.

And that's dangerous.

RAY SUAREZ: Your report identifies, as a result, damage to the government's credibility on these questions.

Grading the Fed's transparency

Neil Barofsky
TARP, Inspector General
The American government, the Department of Treasury, has not met a suitable standard of transparency, hasn't delivered on some of its promises. The American people want to know what happened to their money.

NEIL BAROFSKY: I think that's our -- our third cost that we look at. And -- and the bottom line is that this program has generated a lot of anger, a lot of cynicism, a lot of mistrust of the government.

And, in part, we think that one of the reasons why this is happening is, the American government, the Department of Treasury, has not met its -- it -- a suitable standard of transparency, hasn't delivered on some of its promises.

The American people want to know what happened to their money. We made a recommendation back in December -- and we keep making it on a quarterly basis, on a monthly basis -- that Treasury require banks to report on how they're using their funds, so the taxpayers, so the investors know what is going on with their investment.

And the failure to do this and the failures to adopt other recommendations we have had to provide basic transparency fuels that anger, fuels that cynicism.

People think, well, if their government isn't requiring the banks to report on this information, maybe they're hiding something. And I'm sure you've heard, as I have, the various theories that are out there, and it's fueled by this lack of transparency.

RAY SUAREZ: That lack of transparency, you're saying, creates the impression that cheating is going on, even if there is nothing necessarily wrong with what's going on?

NEIL BAROFSKY: Exactly. And I'm sure you have heard it. Money is going into a black hole, transfer of wealth from -- from Main Street to Wall Street, that the secretary and other government officials are too cozy or too close to Wall Street.

The stories come out almost on a weekly basis. And it's all, I think, unfortunately, the lack of transparency contributes it to some of these theories. If we have the information, if we have a degree of transparency, people will at least have the facts before them and can make more informed decisions.

RAY SUAREZ: You make these reports quarterly. Your oversight will continue into the future. What do you need to know that you don't know yet in order to form a more solid conclusion about what the TARP has done, whether it's worked, whether it had its intended effect?

Future unclear

Neil Barofsky
TARP, Inspector General
It may be something that we live with for a long time, and which may be far more expensive than the dollars and cents that are lost in this program.

NEIL BAROFSKY: Well, I think the most significant that we're going to need is time.

You know, we're -- we have -- in addition to our quarterly reports, we do periodic audits. We have one coming out early next year on the -- on the housing situation, on the mortgage modification. And we're going to have to wait and see whether some of these other goals of the TARP, keeping -- keeping people in their homes, what -- the extent to get lending back started again, things that certainly have not happened to date.

Whether the TARP is helpful in help bringing back those results, we are going to have to wait and see.

RAY SUAREZ: Some banks have started to pay back their money. The government has gotten some return on the $699 billion, hasn't it?

NEIL BAROFSKY: No, absolutely. Some of the healthiest banks have repaid. We have made dividend interest return on that. Through the buyback of warrants, we have made -- that's -- I'm sure you have seen some of the published numbers of a 17 percent return.

And that is good news. And we don't mean to minimize that -- that good news, but we think it's important that people have realistic expectations down the line that we're not going to maintain this -- this type of 17 percent or high-percentage return.

RAY SUAREZ: Are we going to be living with the -- in the shadow of TARP for a long time to come? Is this a program that's going to be with us for a long time to come?

NEIL BAROFSKY: I think the program itself is going to wind down, as far as the authority to -- to make new investments.

I think the legacy of TARP may be with us for a long time, if we don't address some of the too big to fail and moral hazard, and if we don't address some of the credibility damage that's been suffered. These are addressable problems. But if they're not, it may be something that we live with for a long time, and which may be far more expensive than the dollars and cents that are lost in this program.

RAY SUAREZ: Neil Barofsky, thanks for joining us.

NEIL BAROFSKY: Thank you for having me.