So you know what your government is doing? If you only listened to the mainstream media you’d think we were almost out of the woods. But the SIGTARP’s quarterly report to Congress was released this morning. And in direct contrast to President Walking Eagle’s tingle-tales about the program’s effectiveness in saving America from the mess he inheirited because of the actions of his predecessor and the Congress of which he, himself, was a part, Neil Barofsky, the special inspector general for TARP, didn’t have anything good to say.

The long story short is that TARP has provided little more than a taxpayer-funded safety net and basically nothing has been done to curb the underlying causes of the recent financial meltdown. The program is fraught with abuse and fraud and bailouts have, as many of us predicted, simply encouraged the continuation of the wrong kinds of risk-taking and, in Mr. Barofsky’s educated opinion, even more dire straits lay ahead.

“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.”

Some highlights from the report itself:

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

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. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation. Whether these goals can effectively be met through existing TARP programs is very much an open question at this time. 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.

• 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.

…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.

Treasury’s failure to discover the scope and scale of AIG’s executive compensation obligations, in particular at AIGFP, potentially resulted in a missed opportunity to avoid the explosively controversial events surrounding the AIGFP retention payments and the considerable public and Congressional concern that followed. Although SIGTARP saw no indication that Secretary of the Treasury Timothy Geithner (the “Treasury Secretary” or “Secretary Geithner”) had personal knowledge of the AIGFP bonuses until shortly before they were paid, this too suggests a failure of communication. In light of the political sensitivities associated with the bailout of AIG, in his role both as then-President of FRBNY and subsequently as Treasury Secretary, it was necessary that Secretary Geithner be informed by his staff, in a timely manner, of such sensitive and significant information so that he could have sufficient time to explore possible solutions.

Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstructionof justice, money laundering, and tax-related investigations.

On October 22, 2009, the Special Master, who was appointed without the advice and consent of the Senate, made determinations concerning executive compensation within AIG, Bank of America, Chrysler Financial, Chrysler, Citigroup, GM, and GMAC. …on November 2, 2009, SIGTARP requested from the Chief Counsel of OFS an explanation of Treasury’s legal position regarding the constitutionality of the position of the Special Master. A copy of that request is included in Appendix G: “Correspondence.” Treasury has not yet responded.

Although Treasury has projected an overall profit from CPP , any such profit will be diminished by billions of dollars in losses in certain CPP investments in which the banks have closed or reorganized. Three TARP recipients — CIT , UCBH, and Pacific Coast National Bancorp — have declared bankruptcy. Although there were two different paths to the organizations’ bankruptcies, the result for taxpayers appears to be the same — total or near-total loss of their investment.

As detailed in prior quarterly reports to Congress, one of SIGTARP’s most important recommendations with respect to PPIP has been that Treasury require strict information barriers or “walls” between the PPIF managers making investment decisions on behalf of the PPIF and those employees of the fund management company who manage non-PPIF funds trading in the same kinds of securities. For various reasons, Treasury has decided that requiring such walls “is simply not practical in the context of PPIP,” and has refused to adopt this recommendation. …a series of unusual trades undertaken in one of the PPIFs just weeks after trading began has highlighted the problems that can arise in the absence of a robust conflict-of-interest wall.

Of the $84.8 billion invested in Chrysler, GM, and their finance companies, $3.3 billion has been repaid. …According to the TARP Financial Statements, Treasury projected that, as of September 30, 2009, the AIFP investments will result in a $30.5 billion loss to U.S. taxpayers.

On November 9, 2009, the Federal Reserve announced that, of the 10 bank holding companies identified through its stress testing as needing additional capital, only GMAC failed to raise enough funds to meet the requirement.

From its inception, SIGTARP’s most fundamental recommendation with respect to basic transparency in the operation of TARP has been that Treasury should require all TARP recipients to report periodically on their use of TARP funds. …For the first time, Treasury will be collecting and publicly reporting this data on an institution-by-institution basis. Although regrettably delayed, SIGTARP believes that Treasury’s decision to provide this basic transparency will give meaningful information to the public and to policymakers on whether the TARP programs have met their goals and, as a result, may enhance the credibility of TARP. If implemented as described, Treasury’s plan on this front will constitute an adoption of SIGTARP’s recommendation and will finally give the American people the basic transparency they deserve in these investments.

On December 30, 2009, Treasury announced that GMAC met its SCAP capital requirement upon receipt of an additional $3.8 billion from AIFP. Treasury received $2.5 billion in trust preferred security plus $1.3 billion in MCP in exchange for this investment. Treasury also received warrants to purchase $127 million of trust preferred securities and $63 million of MCP, which it exercised immediately. In addition, Treasury is converting $3 billion of the MCP it acquired under previous TARP investments to common stock. As a result of these transactions, Treasury’s ownership of GMAC’s common stock increased from 35.4% to 56.3%, and it holds an additional $2.5 billion in trust preferred securities and $11.4 billion in MCP.

…infusions to AIG are linked inextricably: more than half the total amounts paid to counterparties in connection with the CDS portfolio retired through Maiden Lane III did not come about through the Maiden Lane III CDO purchases, but rather from AIG’s earlier collateral postings that were made possible in part by the original FRBNY loan, which was, in turn, paid down with TARP funds. Because of this linkage, the ultimate costs to the Government and the taxpayer cannot be measured in isolation. Stated another way, regardless of whether FRBNY is made whole on its loan to Maiden Lane III, the ultimate value or cost to the taxpayer cannot be calculated until the likelihood of AIG repaying all of its assistance can be more readily determined. Treasury’s recent suggestion to the contrary is, at best, incomplete.

…simply by purchasing comparatively tiny thrifts, Hartford and Lincoln [insurance companies] — companies whose primary businesses (unlike other CPP participants) have little to do with lending to consumers and businesses — gained access to more than $4.3 billion in taxpayer funds, an amount that is many multiples of the thrifts’ total assets.

It’s time to throw in the towel here. Oops. I mean, the TARP.