What Happened with TARP?
The Troubled Asset Relief Program (TARP) was passed by Congress in 2009 as the Bush administration’s response to the “subprime mortgage crisis”. It basically consisted of the US government (Treasury) investing in banks and other companies (like AIG and GM) in order to infuse money and stabilize their balance sheets.
The hope was that the improved balance sheets of financial institutions would encourage them the start lending money again, rather than “hoarding” it as a cushion against further losses from the bad mortgage loans they had made. This, it was hoped, would improve investor confidence, thus preventing the “economic meltdown” which was portrayed as being imminent.
As with most government programs involving very large $ amounts, it is difficult, if not impossible, to get a firm handle on the numbers actually involved. A fairly concise and well documented description of TARP can be found on Wikipedia.
The original authorized funding was $700 billion. The amount actually allocated was $388 billion, while the amount actually spent was $296 billion. After “repayments” from those receiving TARP funds (actually buying back the “shares” which the US Treasury had purchased), depending on who you believe, the total cost will end up at $25 billion or even less.
The current (January 2011) situation is that the banks and other financial institutions, which were considered to be on the verge of complete collapse in 2009, are now back to full financial health, they are making huge profits, their market values (stock prices) have improved dramatically, and their high level managers have (again) received record setting “bonuses”.
Therefore one could reasonably consider that TARP was a complete success, right?
This is the conclusion presented to the House Oversight Committee hearing on Wednesday (as reported by USA Today and available on C-SPAN), where both Neil Barofsky, special inspector general for TARP, and Acting Assistant Secretary Tim Massad, who has direct responsibility for TARP, concluded that TARP was successful.
Well, not so fast.
It is interesting to highlight the fact that the entire federal effort of TARP was focused on rescuing the financial industry, with not a single thought to the millions of individuals and families who have been cheated out of their dreams (home ownership) and in many cases cheated out of their life savings (the equity in their homes). This is not surprising coming from the then Republican Administration, since bailing out corporations at the expense of the citizens is in their DNA. What was surprising (and very disappointing) was that the incoming Democratic administration (with its majority in both houses) took over this big-business-centric approach without significant changes.
American homeowners have lost a very large proportion of their equity (and thus their real or perceived wealth). According to the Zillow Home Value Index, as of January 2011 they average home value has decreased by 26% from its peak in 2006. Again using Zillow statistics, the average value of a home in the US was about $240,000 in 2006 and has declined to approximately $180,000 by early 2011. This corresponds to a “loss” of $60,000. With the median household income in 2008 at about $52,000 (US Census Quick Facts) this essentially means that the average home owner lost the equivalent of two years worth on income in “wealth”
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As if loosing the equivalent of two years worth of income in wealth is not bad enough, a very large number of American families (about 1.3 million in 2010 and an estimated 2 million in 2011) have or will loose their home altogether through foreclosure. Take a minute to imagine what that means -- by the time the dust has settled from the bursting of this gigantic mortgage fraud perpetrated by banks and Wall Street investment firms, somewhere in the neighborhood of 5 million families will have been kicked out of their homes!
And the shockwaves from the disaster brought on by the greed and free-market self-interest of banks and Wall Street go even further. Once the housing bubble burst, the economy as a whole went into shock and in the typical reaction of our free-market capitalist system (where short term, quarterly balance sheet numbers are the deities to which Wall Street genuflects) massive numbers of employees were laid off. This, of course will only serve to worsen the situation. Like an inexperienced pilot reacting to an impending stall pulling back on the stick in hopes of keeping the plane in the air, which will only hasten the fatal spiral and crash, laying off employees will cause more people to fall behind on their mortgage payments, thus increasing the number of foreclosures, and so on and so on.
So, although a small number of Wall Street movers and shakers have increased their personal wealth by millions, millions of Americans have lost all of their equity in their homes, millions more have been kicked out of their homes, and still more millions of Americans have lost their jobs.
So here is the net effect of TARP:
A few thousand Americans have become richer by millions of dollars.
Many millions of Americans have lost their savings, lost their homes and lost their jobs.
So you decide: was TARP a success for America?
What Happened with HAMP?
The Home Affordable Modification Program (HAMP) made up to $70 billion available to help the expected 3-4 million homeowners thought to be at risk of foreclosure obtain modifications to their mortgages to allow them to remain in their homes.
This was a belated recognition of the one-sidedness of the original TARP program in helping only the banks (which caused the problem in the first place) and ignoring the actual victims, American homeowners.
Right off the bat, note the relative valuation our “representative” government places on perpetrators (banks and Wall Street) versus victims (American homeowners):
Perpetrators: $700 billion
Victims: $70 billion
HAMP basically allows eligible homeowners to adjust their mortgage payments to 31% of their pre-tax income or lower. The method to achieve this was through “incentives” to the lenders and investors (who purchased the securitized mortgages).
The idea was that the net “value” of mortgages, even when modified to make the payments affordable, would still be greater than the foreclosure value of that mortgage.
Thus, although the lenders and investors would have to take a write-down on the original “value” of the mortgage, on balance it would still be a win-win situation. Moreover, by reducing the snow-ball effect of defaults on mortgages and the resulting foreclosures (by further decreasing the value of neighboring homes, thus causing additional mortgages to be “under water”), the overall effect would be to end the continuing decline in the financial sector and the economy in general.
To cut to the chase, in the previously cited hearings of the House Oversight Committee, Neil Barofsky, the special inspector general for the government's bank bailouts, bluntly labeled the mortgage program a "failure".
Three Republicans immediately introduced a bill to kill the program in order to save up to $30 billion of unspent funds.
What could have been: Reversing TARP and HAMP
Given the set of “experts” who had been put into place by both the Bush and Obama administrations to deal with the financial meltdown, which came overwhelmingly from the same groups who were responsible for the disaster in the first place, it is no surprise that the immediate first reaction was to pump huge amounts of money into these corrupt banks and Wall Street firms.
When it comes to spending a few million dollars to directly help people who, through no fault of their own, find themselves in desperate situations, Congress discovers multitudes of concerns about “encouraging people to rely on government handouts”. However, when it comes to handing billions of dollars to corporations, any concerns about relying on government bailouts where quickly drowned out by hysterical shrieking about the “collapse for the world financial system”.
Just imagine that we actually had a government “of the people, by the people, for the people”, and that the overarching goal of government action was indeed to ensure the maximum good for the most people.
Without the immediate hysteria (one would almost think this was purposeful to prevent people from actually taking some time to analyze the issue and plan the optimal response), there might have been an opportunity to identify the true root cause and come up with a solution for the real problem.
The basic problem was not lack of liquidity of the financial institutions, because they suddenly needed to conserve their money to cover the write-offs they were forced to make on their bad investments. The basic problem was that misguided individuals who were conned into buying something they could not afford (the hallmark of the American consumer-based economy), were starting to default on their mortgages.
A rational response to that root cause would have been “HAMP on steroids”. HAMP contained all the right ideas: halt the spreading of mortgage defaults, thereby drastically reducing the need to remove liquidity from the financial markets as a hedge against further defaults; the reduced number of foreclosures would alleviate the decline of home values, which in turn would reduce the number of under-water mortgages, again contributing to a decline of foreclosures.
The “on steroid” part would mean that the mechanisms to prevent foreclosures needed to be implemented very rapidly, with a minimum of red-tape and bureaucracy, and with “teeth” to enforce the requirements to reduce the mortgage payments to affordable levels.
Obviously the banks and investors who held the carved up and tranched mortgages would have to absorb losses. In some cases these losses would be a reduced stream of income generated by the mortgages (for example by reducing the interest rate or extending the repayment period). In other cases it would mean a reduction in the book value of these investments because the underlying mortgages had been reduced to reflect the actual deflated property values. That, however, is or should be the risk in a truly “free-market” capitalist system.
We hear a lot about how “people” should not be encouraged to relay on “government handouts”, and that these “government programs” encourage “massive fraud”. However, little or no such concerns are voiced when the recipients of such government programs (such as TARP) are huge corporations, and the fraud by these corporations involves billions of dollars, rather than a few million dollars which might be lost to some individuals gaming a program like HAMP.
For both TARP and HAMP speed of response was of the essence. For TARP the lack of virtually any controls (and the resulting potential for fraud) in order to respond quickly was accepted with barely a whimper. For HAMP the complex eligibility criteria and the bureaucratic procedures, together with the lack of any enforcement capabilities, which resulted from the paranoia that a few people might misuse the system, killed the program.
It would be nice to think that our political leaders would actually take the time to learn from failed policies such as TARP and HAMP. For, although these exact circumstance are unlikely to recur, we can be sure that the next catastrophe brought about by unfettered corporate greed is just around the corner. But deep inside most of us knew that we do not have a government of the people, by the people, for the people, but rather a system of government designed to take from the people and funnel it to the rich and powerful.
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