Overseer Sheds Doubt on TARP Helping Small-Biz, Foreclosures

A somber and pessimistic assessment of the government’s bailout program has been issued by the official overseer of the $700 billion Troubled Asset Relief Program (TARP) – concluding that the fundamental problems in the U.S. financial system are still in place for another crisis.

The report also pointed out that TARP has yet to provide increased loans to small businesses, despite the announced creation of such a plan 10 months ago.

The TARP update is a quarterly report to Congress from the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Its role – established by the same federal law that created the bailout program – is to review its effectiveness. SIGTARP also has the power to conduct audits and investigations of actions taken under the bailout program.

The “too big to fail” institutions are even bigger, and financial giants are exiting TARP to maintain its “excessive” compensation programs, the report said. In the meantime, “moral hazard” still reigns – the concept that large financial institutions will continue risky behavior knowing that the government is ready to step in with a bailout rescue, the report concluded.

“The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time,” the quarterly report said.

“It is hard to see how any of the fundamental problems in the system have been addressed to date.”

The report also looks pessimistically to the re-focused future role of TARP funds for increasing small business lending and helping desperate homeowners avoid foreclosures as outlined in recent weeks by President Obama and U.S. Treasury Secretary Timothy Geithner. But the “leverage” U.S. officials had over the major banks is now gone, putting in doubt the effectiveness of a new lending pipeline to small businesses.

“Whether these goals can effectively be met through existing TARP programs is very much an open question at this time,” the report said. “And to the extent that the Government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP.”

The report reminds U.S. officials that the commitment to small businesses was suppose to begin last year – and it has not – under a TARP sub-program – the Capital Purchase Program.

“Many of TARP’s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury,” the SIGTARP report said.

Here are summary highlights from the report:

• The huge “too big to fail” institutions that contributed are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
• The market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010 …at the same time that banks have shown questionable ability to return to profitability are exiting TARP programs.
• The race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions. There has been little fundamental change in the excessive compensation culture on Wall Street.
• The Federal Government’s efforts to support home prices risk re-inflating the housing market “bubble” in light of the Government’s purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

For the full report, click here.