Not with a Bang

By James Kwak

In the Times, Neil Barofsky, Special Inspector General for TARP, performed the admirable feat of fitting a clear, comprehensive, sober critique of how TARP was implemented and what its long-term impact will be in fewer than 1,000 words. It’s a perspective I mainly agree with,* and it highlights the different priorities that the administration put on aid to large banks and aid to homeowners, even though both were goals of the bill.

Back in late 2008 and early 2009, there was a lot of talk about how a true solution for the problems of the banking system would require a solution for the problems of homeowners, since the banks’ losses were largely the result of mortgage defaults. One of the major technical achievements of the administration was showing that it was possible to stabilize the financial system and restore the banks to short-term profitability without doing much for homeowners. As Barofsky says, and as the Times reports in yet another article today, the administration’s programs to help homeowners obtain loan modifications had little impact on the behavior of the banks that service mortgages and foreclosures continue unabated. Real housing prices have fallen below the previous lows of 2009 and now look likely to overcorrect on the downside.**

Housing modifications are admittedly more difficult than bailing out banks. It’s administratively easier to write a few $25 billion checks and create unlimited low-interest credit lines for a few of the Federal Reserve’s existing customers than to intervene in millions of mortgages. But the financial crisis was a time of bold action on other fronts. Treasury and the Federal Reserve were willing to push the limits of the law, for example in J.P. Morgan’s takeover of Bear Stearns. (See the chapter in Steven Davidoff’s book Gods at War for the details.) Henry Paulson threatened to declare the nation’s largest banks insolvent if they didn’t agree to sell preferred stock to the government. By contrast, as law professor Katherine Porter says in the Times article, “The banks were so despised, and TARP was so front and center, you could have actually done something. In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.”

The lesson we learned learned is that homeowners were only a priority insofar as their health mattered to the banks’ health. When those two things became unmoored, the administration was willing to declare victory.

* The main thing I don’t agree with is Barofsky’s implied criticism of the Bush administration for using TARP money to buy preferred stock from banks rather than buying mortgage-backed securities directly. While I have often criticized various aspects of the preferred stock purchases, I think it was a more direct way to stop the panic of September-October 2008, and at that point a program to purchase MBS would probably have been an even more blatant transfer to the banks.

** I’m all for prices falling from bubble levels, but the policy goal should have been preventing them from falling through the long-term trend.

27 responses to “Not with a Bang

  1. As a comment to Barofsky’s NYTimes piece reads, why didn’t he speak up at the time? Here’s that comment:

    “sunny
    ny, ny
    March 29th, 2011
    11:31 pm
    Did I miss Mr. Barofsky’s investigations and reports and critiques during the entire time he held his paid position? What’s the point of this piece, as the door was hitting his derriere? Besides, we taxpayers with brains already knew everything he describes, despite the efforts of govt. and media to pull the proverbial wool.”

    Indeed, what is it with public figures that we get to learn the different angles into a situation (not necessarily the truth) long after they get out of office?

  2. It is a hard fact — we can never fix the banking system until we fix the political system. I like BS but all this bank control talk is just punditry until we control our representatives. Washington is for sale and we have NO hope of controlling the financiers and corporations unless that changes. All efforts to implement good ideas will dissolve into charade laws, loopholes and doubletalk.
    I’m outa here — gonna go read some political sites.

  3. “I’m all for prices falling from bubble levels, but the policy goal should have been preventing them from falling through the long-term trend.”

    I’m not sure about that… do you think their might be some psychological neccessity for that below-trend price in order to somehow close out the bubble? To kill the speculative urge?

  4. Mr. Kwak, please clarify which “administration” you’re referring to. Some of this is plainly Bush Admin., but some of it probably slops over into Obama Admin. Please clarify who gets credit/blame for what.

  5. one way or the other, the banking behemoth needs to be beheaded.

  6. Desi Girl - Doing God's Work

    1) Kwak’s lie for the day: “The lesson we learned learned is that homeowners were only a priority insofar as their health mattered to the banks’ health.”

    The truth: TARP was followed by a massive $1.25 Trillion asset purchase program and a rate easing to keep mortgage rates low to support the housing market to keep American homeowners solvent. With no Asset Purchase program the mortgage rate would have been 8% and housing prices would have dropped over 50% instead of the current 30%.

    In taking the mortgage lending rate from 6% to 4%, the government bailed out the American population. It is just easier and politically acceptable to blame 4-5 remaining banks that stand today.

    2) Porter’s lie for the day: “In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.”

    The truth: Of the 13 banks that were invited to the White House and FORCED to accept Billions of $, only 3 Banks needed them. Harsh, punitive, TARP strings attached would have been flat out rejected by the Banks, invalidating the very purpose of the TARP. About 10 banks did the Sovereign state of America a big favor by accepting TARP. If 10 Banks had walked away from a punitive TARP, Citibank and BoA would have collapsed within a matter of a few weeks.

    Also, if the 10 large banks had been 30 smaller banks, the 2008 Crisis would still have happened.

  7. I agree with both of you.

  8. I disagree with Kwak.

    1. The banks should not have been bailed out, period. They should have been restructured, with losses going to the bondholders and shareholders.

    2. There is no long term up trend line in housing. When housing finally falls below the Case Shiller “100″ level, then we will start to see a recovery in housing.

    3. Housing needs to become affordable, without props from government, which do nothing to help savers, taxpayers, and potential home buyers. With wages in retreat and higher prices for food and energy, housing prices will – and should – decline further.

    Obama and Kwak apparently prefer to help lenders and borrowers, instead of the fiscally responsible.

  9. @btraven: “3. Housing needs to become affordable, without props from government…With wages in retreat and higher prices for food and energy, housing prices will – and should – decline further.”

    In my area, housing prices were not inflated, yet Cleveland was the epicenter of mortgage fraud before its effects became evident in the rest of the country, and long before the financial “crisis.”

    Now, in my neighborhood, houses are going for a song. My paid-off house actually might not fetch the price I paid for it in 1986, and I have spent over $100,000 on property taxes and more than that on upkeep in the last 26 years.

    So even though we never had the bubble, we are suffering and will continue to suffer from the crash.

    You say, “Obama and Kwak apparently prefer to help lenders and borrowers, instead of the fiscally responsible.” Well, yes. This whole society is headed straight for debt-slavery; perhaps we are there already.

    I suggest folks really investigate and question the fractional reserve banking system; I think it hurts all of us, not only debtors, and I cannot see how it is sustainable.

  10. CBS from the West

    1) is a matter of interpretation–not truth vs. lies. The mortgage rate dropped from 6% to 4%, benefiting those who refinanced a mortgage or purchased a new home during this period. But home sales were in the doldrums (to put it mildly) during this period. So perhaps you can see that not everyone would see this as a big deal–it benefited some people. Given that banks really tightened up consumer credit during the same period, those who benefited were probably disproportionately among the most well off in the first place. If you have data to the contrary, I’m sure everyone who reads this blog would like to see it.

    2) You have misunderstood Porter’s reference, I believe. The “timid, soft, voluntary conditional program” he is referring to is, as I read him, the mortgage modification program. I have heard from others that some of the larger banks were strong-armed into accepting TARP money–I’d be interested in knowing more about just how that was done, but I’m willing to believe it. But it is abundantly clear that no serious pressure has been applied to the banks to modify mortgages (or if it has, it has been a dismal failure)–and thus Porter’s statement, properly understood, is quite true.

    If you want to advocate a position and influence opinions on this blog, you should consider refraining from impugning the integrity of our hosts or commenters. There is a remarkable diversity of political and economic views among the readers of this blog. A different approach would be more effective.

  11. CBS from the West

    Me, too. The fundamental problem is our dysfunctional, corrupt political system.

  12. With no Asset Purchase program the mortgage rate would have been 8% and housing prices would have dropped over 50% instead of the current 30%.

    Patience, patience.

  13. But no way to fix that unless we dilute (nay, destroy?) the power that big business has over government.

    And meanwhile we need to figure out what kind of government we want, how to achieve it, and how to preserve it in the face of the big, bad Lobbyman. Soon many will be yearning for the Prussia of old.

  14. Stephen A. Boyko

    “*I’m all for prices falling from bubble levels, but the policy goal should have been preventing them from falling through the long-term trend.”

    Mr. Kwak, are you advocating equality among analysts’ price discovery? In a world of financial innovation and bubbles, it is uncertainty — not risk — that should have been the randomness component of focus. The mischaracterization of the underlying economic condition lead to flawed pricing that created “vapor assets”.

    Collateralized debt obligations (CDOs) and credit derivative swaps were the subprime boom’s vapor assets where NINJA mortgagors were given property rights in order to enable questionable securitizations at even more questionable AAA-ratings prices to take place. But when the bubble burst, “questionable” became “improbable” as deterministic metrics lacked robustness to manage uncertain investments.

    Were you willing to put your capital to support a stabilization bid? Furthermore, would such stabilization bid provide incentives for a moral hazard?

  15. Just a pretty face

    I love that term, “overcorrect.” It’s overorwellian.

    “The lesson we learned is that homeowners were only a priority insofar as their health mattered to the banks’ health.”

    You got a mouse in your pocket, James? I can not see how anybody did not realize this from inception. Yet so many complained incredulously then, less now, that all TARP and then Obama were doing was helping the banks. Like it or not that was the whole point and I don’t think it was intentionally or even negligently obscured by the policymakers.

  16. I think Barofsky has been speaking up for some time. That was his job, after all.

    Here’s a video with him on the giant moral hazard we have simply reinforced:

  17. Lucy Honeychurch

    Federalize all election campaign funding.

  18. Lucy Honeychurch

    Ha! That’s like the Fed worrying about inflation at this point. WHAT speculative urge? If you see alot of speculation going on in RE, I’ve got a house I’d like to sell ya.

  19. Moses Herzog

    I’ve tried to stay away from the site for awhile ’cause I can’t stop myself from expressing some very blunt opinions sometimes. It’s been awhile since I commented. These issues touch a certain nerve in me. Mainly the slow implosion of what could still be the greatest country in the world. But I have to step out on this one.

    Normally I think James Kwak is very insightful and selective in his readings. The one area where I think he would be better off saving his valuable reading time (as I know James values his time wisely) is ignoring anything written by Andrew Ross Sorkin or Steven Davidoff.

    Firstly Andrew Sorkin is way too cozy, snuggly, and complimentary with the TBTF banksters and/or broker dealers involved in proprietary trading. His interests (interests in the way of media access) are too strongly aligned with broker dealers for him apparently to do his job properly, as all he can seem to manage is a smug smart *ss looking grin every time he’s on TV talking about how they cheated the American taxpayers out of billions of dollars. So anyone closely tied with Sorkin would nearly be guilt by association in my book. I don’t think Sorkin performs journalism in the proper way–that is by digging and scraping for exclusives, not massaging and fondling the subjects for exclusives.

    My main problem with Davidoff is his smear campaign on short-sellers, specifically David Einhorn. See here: http://seekingalpha.com/article/80997-nyt-smears-david-einhorn-again
    and here:

    http://seekingalpha.com/article/81205-david-einhorn-lehman-brothers-another-nyt-hatchet-job

    I think it’s fascinating how Sorkin and Davidoff find those who have cheated taxpayers out of billions creating bubbles in the market are such “fascinating” guys, but they find taking cheap shots at short-sellers who have cost taxpayers zero dollars, have helped to clean the system, and exposed fraudulent outfits like Lehman such an avid pastime.

    The fact is, if corporate boards, broker/dealer analysts, the SEC, and “journalists” actually did their jobs the way they should, there would be much fewer “market inefficiencies” for people like David Einhorn to make so many millions off of.

    Fascinating how dogged certain media members and the SEC get on short-sellers activities, but those going long the market can shove fraud in the their face, and they see nothing.

  20. Although I still disagree with TARP, both its implementation and its intention, I think that what was done with the funds was its only essential option. I, too, disagree with Barofsky. The issue of rotting dervivatives, bonds, etc. should have been dealth with by splitting up or winding down the banks that were temporarilly bailed out, and should have been a condition of doing the TARP abovo. Without the WallStreet Vampire billionaires sucking the blood out of the economy, recovery could have happened much sooner, and the FED could have far more appropriately used its various funding mechanisms to support a recovery, instead of supplying a continuous stream of millions to the casino operators still in business and sapping everything away from Main Street. Let’s face it, with what the FED has put out, almost every underwater mortage could have been refinanced without the massive dislocations that continue to occur and will continue for months if not years.

  21. Bruce E. Woych

    http://www.nytimes.com/2011/03/15/business/15mortgage.html?_r=1

    Not with a Bang, but a whimper…
    ONE down, …several thousand to go?

    Guilty Plea in Fraud Case Tied to TARP
    By BLOOMBERG NEWS
    Published: March 14, 2011

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    Raymond E. Bowman, the former president of Taylor, Bean & Whitaker Mortgage, pleaded guilty on Monday in connection with a $1.9 billion fraud that included trying to deceive the federal bank bailout program.

    Mr. Bowman, 45, of Atlanta, admitted to one count of conspiracy to commit wire fraud, bank fraud and securities fraud and one count of making false statements. Mr. Bowman also agreed to cooperate with prosecutors’ investigation of the company.

    Federal prosecutors filed a criminal case against Mr. Bowman last week before United States District Judge Leonie Brinkema in Alexandria, Va. Judge Brinkema has presided over cases resulting from a scheme that the prosecutors said sought to defraud the government’s Troubled Asset Relief Program and contributed to the failure of Colonial Bank, based in Montgomery, Ala.

    Mr. Bowman, … is expected to be sentenced on June 10…

  22. Bruce E. Woych

    We need MORE BANG for our Buck!

    http://www.bloomberg.com/news/2011-03-30/ex-taylor-bean-official-ragland-to-enter-plea-in-1-9-billion-fraud-case.html

    Ex-Taylor Bean Official Will Enter Conspiracy Plea in TARP Bailout Case
    By Tom Schoenberg – Mar 30, 2011 2:04 PM ET

    “A former Taylor, Bean & Whitaker Mortgage Corp. official reached a plea agreement on a conspiracy charge in what prosecutors said was a $1.9 billion fraud that targeted the U.S. bank-bailout program.

    Sean Ragland, 37, is scheduled to appear tomorrow for a plea-agreement hearing in federal court in Alexandria, Virginia, according to the case docket. Ragland, identified in court records as having worked in Taylor Bean’s finance and accounting department, is accused of one count of conspiracy to commit bank and wire fraud.

    Ragland, of San Antonio, is the sixth person charged in what the government called a scheme to deceive financial firms and the Trouble Asset Relief Program by covering up shortfalls at the lender. Ocala, Florida-based Taylor Bean was once the largest non-depository mortgage lender in the U.S., according to the U.S. Securities and Exchange Commission.”

  23. Bruce E. Woych

    http://money.cnn.com/2010/10/08/news/economy/TARP_conviction/index.htm

    First TARP scammer convicted
    By Charles Riley, staff reporter
    October 8, 2010: 6:28 PM ET
    NEW YORK (CNNMoney.com) — Government prosecutors got their first conviction of a person accused of defrauding the Troubled Asset Relief Fund Friday.

    Charles Antonucci, the former president of the Park Avenue Bank, pleaded guilty in federal court to defrauding the TARP fund, securities fraud, self-dealing, bank bribery and the embezzlement of bank funds.

    “Today’s plea marks an important chapter and demonstrates that SIGTARP and its law enforcement partners will ensure that would-be wrongdoers who seek to profit criminally from this historic program will be caught, charged, and brought to justice,” Special Inspector General Neil Barofsky said in a statement.

    Barofsky heads SIGTARP, the watchdog group charged with prosecuting those who waste, steal or abuse TARP funds

    They are on a Roll !!!

  24. Bruce E. Woych

    http://www.sigtarp.gov/investigations.shtml

    SIGTARP, through its own investigative resources and through partnerships with other relevant law enforcement agencies, is committed to robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds. SIGTARP has rapidly developed into a sophisticated white-collar law enforcement agency and as of December 31, 2010, SIGTARP had 142 ongoing criminal and civil investigations. These investigations concern suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, theft of trade secrets, money laundering, and tax-related investigations.
    SIGTARP Hotline

    One of SIGTARP’s primary investigative priorities is to operate the SIGTARP Hotline, thus providing a simple, accessible way for the American public to report concerns, allegations, information, and evidence of violations of criminal and civil laws in connection with TARP. From its inception in February 2009 through December 31, 2010, the SIGTARP Hotline has received and analyzed more than 24,000 Hotline contacts. These contacts run the gamut from expressions of concern about the economy to serious allegations of fraud involving TARP. A substantial number of SIGTARP’s investigations were generated in connection with Hotline tips. The SIGTARP Hotline can receive information anonymously, and the confidentiality of whistleblowers is protected to the fullest extent possible. SIGTARP honors all applicable whistleblower protections. SIGTARP urges anyone aware of waste, fraud, or abuse relating to TARP programs or funds, whether it involves the Federal Government, state and local entities, private firms, or individuals, to contact its representatives at 877-SIG-2009 or http://www.sigtarp.gov.
    Investigative cases

    Although the majority of SIGTARP’s investigative activity remains confidential, below is a summary of individual cases in which there have been significant public developments.

    go here for briefs on investigations:

    http://www.sigtarp.gov/investigations.shtml

    Last updated: February 18, 2011

    If you are aware of fraud, waste, abuse, mismanagement or misrepresentations affiliated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline!

    Image for Hotline phone Phone: 1-(877) SIG-2009
    Online SIGTARP Hotline Form

  25. Bruce E. Woych

    Shouldn’t Hank Paulson and a few of the early birds be on that list???

  26. Bruce E. Woych

    So, if you are wondering where all your bailout and stimulus tax dollars have gone, it is a fair bet to think that a good chunk of it has gone to the growing list of billionaires. Forbes, compilers (and cheerleaders) of the annual rich list, has announced that the number of billionaires has increased by 214 to a record 1,210.

    http://www.economywatch.com/economy-business-and-finance-news/the-10-richest-people-on-the-planet-where-all-that-stimulus-money-went.11-03.html

    The 10 Richest People on the Planet: Where All that Stimulus Money Went

    The Top 10 alone are now worth US$406.1 Billion. Stunningly, their combined worth is more than the GDP of most of the countries in the world.

    Only 26 countries are worth more, and on current growth rates the 10 richest people in the world will soon be big enough to join the G20. Think about that the next time Forbes complains about striking unions.

    also see:

    http://www.economywatch.com/in-the-news/michael-moores-call-to-arms-america-is-not-broke.10-03.htm