Wednesday, February 03, 2010

TARP: Just The Tip of the Iceberg

One of the government agencies that rises above the politics of the day and produces sober and well researched reports is the Inspector General system. Tuesday the Inspector General for the Troubled Asset Relief Program (SIGTARP) released a quarterly report for our friends in Washington for final quarter of 2009. There is a term used in crisis and/or project management called lessons learned. It is an exercise intended to review things that didn't go exactly right, how they were resolved and how to avoid them in the future. Washington likes to hash and rehash lessons learned in mock trials called congressional hearings, but then never heeds the conclusions. Thus the mistakes are repeated again and again.

The seeds of our current economic disaster go back to the late 70's via Carter's CRA (Community Reinvestment Act), through 80's with the first of the "too big to fail" bailouts under Reagan, sliding through the 90's with Clinton's revamped CRA legislation of 1993 and financial system regulatory reform of 1999. Usher in Bush II who played lip service to a looming housing bubble crisis and not only failed to act but rather accelerated it with weak dollar policies coupled with and cheap money policies from the Federal Reserve. Yes Virginia - a perfect storm.

What was Obama to do with this mess? Smart money would not be on doubling down, but that's of course exactly what he did. Bottom line according to the Inspector General is that we are going to see a replay of the 2007-2009 recession or worse.

Here are the bullet points from the report:

* To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

* To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, 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, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

* To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

* To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, 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.

When are we going to get responsible people in Washington who'll do the right things for the right reasons? This bull$hit has got to stop...