Today’s must-read comes from Neil Barofsky, the TARP’s special inspector general, in a New York Times op-ed. He guts the Obama administration argument, via Tim Geithner’s Treasury Department, that the TARP has been a big success—a model bailout.

From the perspective of the largest financial institutions, the glowing assessment is warranted: billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish. These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed “too big to fail.”

That’s why Geithner thinks the TARP was such a big success. Geithner, incredibly, thinks our financial system isn’t big enough (or, at least, is just the right size).

Meantime, The Wall Street Journal’s Kathleen Madigan reports that financial-sector profits have returned to their pre-crisis chokehold on the economy:

… the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Felix Salmon, a contributing editor here, says this about the numbers:

…nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries. We’re back near boom-era levels of profitability now, and no one seems to worry that the flipside of higher returns is higher risk. Any dreams of seeing a smaller financial sector have now officially been dashed.

That’s the legacy of the TARP and how it was implemented.

It’s only been three and a half years since TARP passed in the last months of the Bush administration, but it’s easy to forget how the Bush administration pulled a fast one on the country and the Obama administration kept it going. It’s good to have Barofsky remind us:

The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.

But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions, a shift that came with the express promise that it would restore lending.

Treasury, however, provided the money to banks with no effective policy or effort to compel the extension of credit. There were no strings attached: no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request that banks report how they used TARP funds.

Barofsky, who like Elizabeth Warren when she headed the Congressional Oversight Panel, has been an essential watchdog of the bailouts, calls HAMP, the tiny sliver of TARP the Treasury used to actually bail out nonbankers, a “colossal failure.” Which it is.

I could quote the whole column it’s that good.

Say, Andrew Rosenthal has a couple of open spots on the Times’s op-ed page. He could do a lot worse (and he has!) than giving someone like Barofsky have a stab at a column.


TAGS: , , , ,

Ryan Chittum , a former Wall Street Journal reporter, is deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.