TARP Bailout’s Failures: $60B Loss, Risky Loans Persist

The official watchdog over the nation’s $700 billion bailout known as TARP said the program has failed to meet its goal of reaching enough struggling homeowners while it stands to lose $60 billion – despite previous reports from the Treasury that it would make a profit.

Moreover, the bigger banks that were bailed out continue risky lending – a symptom of so-called “moral hazard” – when institutions see no motivation to reduce risk when a possible bailout looms, said Christy Romero, Special Inspector General for the Troubled Asset Relief Program (TARP), in her quarterly update to Congress released today.

The shortcomings of TARP, approved by Congress 3 ½ years ago in a controversial act to save the U.S. financial system, “should not be focused alone on money in and money out.”

There is also the issue of struggling homeowners who have failed to receive sufficient lending benefits from TARP, Romero’s report said.

“During a crisis of record numbers of foreclosures and high unemployment, TARP is not reaching homeowners as was originally intended by Congress,” the report said. “TARP goals have not yet been met while foreclosure filings have remained high.”

The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion, including $14 billion written off or otherwise lost.

Romero said that TARP did manage to prevent a collapse of the financial system and the auto manufacturing industry, but there has been a tradeoff involving long-term consequences, including:

  • Increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.”
  • The impact on consumers and homeowners from the failure of large banks to lend TARP funds.
  • The affect on community banks which are facing an uphill battle to exit TARP because they cannot find new capital to replace TARP funds.
  • A new wave of white-collar crime that the special inspector general over TARP is uncovering and stopping.

A recent working paper from Federal Reserve economists reported that TARP “encouraged high-risk behavior by insulating the risk takers from the consequences of failure – which is known as moral hazard,” the report on TARP said.

Large banks that received bailouts through TARP are now taking more risks than banks that did not receive taxpayer money.

“According to the Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts,” said Romero’s report.

The focus should be on “whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry, i.e., TARP 2.0,” the report said.

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