SIGTARP reports (and he's not happy)

Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.

These words are from the latest quarterly report to Congress by SIGTARP Neil Barofsky, the Special Inspector General for TARP, the Troubled Asset Relief Program. TARP is the $700 billion bank bailout approved by Congress in the fall of 2008 at the height of the financial crisis. The “too big to fail” banks are now even bigger, Barofsky writes, and therefore are even more dangerous. They still have no incentive to restrain their risky behavior because they know the government still will rescue them rather than risk the collapse of the financial system.

Barofsky’s report also raises serious concerns about the federal government’s massive intervention in the home mortgage market. The government "has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor." Ninety percent of recent home mortgages have been backed by government controlled entities like Fannie Mae and Freddie Mac. What the government calls a stabilizing of the housing market, Barofsky says is a potential re-inflation of the housing bubble.

The Federal Reserve has spent an unprecedented $1.25 trillion dollars purchasing mortgage backed securities (MBS) to keep mortgage rates low. Those purchases are about to come to an end with an inevitable jump in interest rates. Home purchase will then almost certainly drop, as will prices—by as much as 10 percent by some estimates.

Barofsky’s report raises the same concerns as those of many economists. Are the hundreds of billions of taxpayer dollars spent since the financial crisis began actually improving things or just postponing inevitable market corrections, “kicking the can down the road”? Are we actually dealing with underlying problems or just treating symptoms?

From the start the reaction to the financial crisis has had an air of unreality and denial. The hope still seems to be to go back to the way things were before, despite universal recognition that the previous economy was unsustainable. For example, markets are looking for a rebound in new home construction as a “real” sign of economic recovery. Yet there remains a significant oversupply of new houses and the previous high rate of home construction was possible only because of the artificial demand of the housing bubble.

The SIGTARP report goes on for over 200 pages and detailed summaries are available here and here. Included in the report is the information that 77 criminal and civil investigations are underway, including cases of fraud, money laundering, insider trading, and tax evasion. It also describes numerous instances of questionable negotiations between government agencies and private firms and favorable government actions on their behalf.

Obviously SIGTARP has been very busy and he looks to continue to be so for some time to come.