The great TARP bait-and-switch

The Troubled Asset Relief Program (TARP) was the massive $700 billion dollar bailout that was rushed through government with almost no public discussion in the fall of 2008, when everyone was being panicked by alarms that there was the danger of a massive meltdown of the financial system.

Neil Barofsky was the Special Inspector General of the program, tasked with overseeing it and so had an insider’s view on what transpired. In an interview on the radio program Marketplace report on July 23, 2012, he talks about his book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street which describes what happened with the $700 billion.

He says that in the beginning, the program was designed to help homeowners by buying up troubled mortgages. But along the way he says something happened [italics all mine-MS]:

There was a remarkable transformation as the bill made its way through congress, and it’s important to remember that this was part of the legislative bargaining. TARP doesn’t get passed just to help Wall St., the economists insisted that there be foreclosure prevention and homeowner oriented programs as part of TARP, and those promises were, of course, both subsequently abandoned. And part of it was there was never the same type of ferocious commitment to help homeowners, in addressing the housing crisis, as there was was to saving banks.

Well when the TARP money was exspended, hundreds of billions of dollars were provided to the banks under the Capital Purchase Program. We were told that it was for certain purposes, it was going to help restore lending, and one would assume since those were the goals of the program — that when providing the money in the contracts and the policies — there would be something to advance those goals. But, none of that was present, so essentially the money was given with a very low market interest rate and with no conditions to accomplish those goals, and the banks were pretty much allowed to do anything they wanted with it.

And when I started pushing back on that, when I suggested that we needed to have some additional conditions, I was told essentially that I was advocating something that would drive the banks out of the program that would end TARP. I was told that I was stupid, I was told that I was being political, and it’s just another example of this deference and defense of the banks over what were some pretty common sense policies to accomplish our goals.

Barofsky says that when he raised alarms at this lack of control over how the money was being spent, he kept getting reassured that the banks would do the right thing because their reputations depended upon it and they valued their good name more than anything else.

Well, over and over again, I heard that arguement, but I didn’t understand. Just that these banks would never, ever take advantage because it would harm their reputations. It was almost as if they didn’t realize there had been years preceeding the crisis in which banks proved their reputation was perhaps the least important thing when it came to the opportunity to make rapacious profits. I mean, it got so bad, Tess, that at one point in another TARP program a New York Fed official said to me, when they were describing the Treasury’s refusal to adopt some really basic concepts to reign in the TARP participants, he said to me, ‘you know, Neil, it seems as if Treasury’s lips are moving, but, the CEO of one of the investment houses, ‘Larry Fink’s words are coming out their mouth.’

This is, of course, a familiar story to anyone who follows the workings of government more than superficially. In their public statements, politicians always say that whatever they are planning is aimed at helping the middle-class, the small business, the family farmer, children, the individual entrepreneur, and maybe puppies. Whenever I hear that, my internal alarm goes off because I know that this is the prelude to a bait-and-switch in which the actual beneficiaries will be the wealthy and those instincts have not failed me yet. My suspicions become accentuated when I am also told that the matter is of great urgency.

Because of such suspicions, back in September 2008 I wrote a multi-part series titled Why the Wall Street bail out plan is bad. In one post, I wrote about my suspicions that this was a manufactured crisis:

I have been getting increasingly suspicious that this so-called financial crisis may be a bogus one to enrich this administration’s base of Wall Street cronies before Bush leaves office. While I am not an economist and do not have the inside knowledge that Henry Paulson (Treasury Secretary) and Ben Bernanke (head of the Federal Reserve) have, there is something about this mad rush to pass major legislation that strikes me as very suspicious. It reminds me too much of the way the administration flat-out lied about the danger that Iraq posed in order to get Congressional authorization for the invasion.

It gives me no pleasure when my cynicism about the rotten core of government is proved to be correct because it means we are being swindled left and right.


  1. plutosdad says

    There was a recent Frontline on PBS about the crisis and how TARP got passed, it is pretty good. It does not go into what happened afterward with the money though.

    I was with him until he started on his conspiracy theories at the end on how the crisis was “manufactured”. There was plenty of evidence there (even though a lot of freezing in markets was caused by Paulson himself bailing out Bear Stearns but not Lehman Brothers). He also seems to forget quite a few banks didn’t want to take the money.

    I was against TARP and the stimulus later, but it’s a tough sell to say “let everything to go hell and suffer” being better. Iceland did that and it seems like they already recovered, but they are very small and have a more or less homogenous culture and politically can sell it. When I tell people here they think I’m crazy, and maybe I underestimate how bad it could have gotten.

  2. plutosdad says

    oops sorry (quotes confused me) that was you, i thought that was Barofsky still saying even today that it might be manufactured.

    I think at the time, it was reasonable to believe something was really odd and do they really need that money? Even in Congress it was a tough sell.

  3. baal says

    I agree that Barofsky is veering a little into conspiracy theory area but I think that’s a problem of language more than a substantive error on his part.

    Good financial regulation seeks to keep everything financial on an even keel – not too hot or too cool. Financial sector pushes for ultra-low regulation or pro-boom & bust regulations. Why?
    The financial sector is in a position to control the flow of capitol and times of change allow them to impose wealth diversion tactics faster than regulators are willing or able to stop. Matt Taibbi of Rolling Stone has more than proven that the banksters know this better than I do and that they are willful in taking advantage of it.

    From the vantage of the general public (or someone writing to the general public) this level of self serving negligence or mendacity is kind of beyond belief – hence the near-conspiratorial language.

  4. Kimpatsu says

    Way back in 1997, when the economy was booming, an economist told me that no matter how badly the banks behaved, governments would always bail them out because it would be loss of face for a bank to go under on their watch; doubly so if the name of the country is in the bank’s name (e.g., Bank of America, Royal Bank of Scotland). The bankers know this, so they know that they can do whatever they like, and the government will always open the public purse to rescue them. About time this changed, methinks.

  5. Mano Singham says

    I am not saying that nothing should have been done. The point was that the government gave the big banks essentially free money. If they had also taken over the banks, fired the top executives, restructured them by breaking them up so that they were no longer ‘too big to fail’ and then returned them to private sector, that might have worked out better. This is similar to the way that the FDIC deals with troubled banks.

    But with TARP nothing really changed.

  6. says

    Iceland didn’t “let everything to to hell”. They had a managed restructuring of the economy, and punished a lot of the bad actors who caused the crisis. That’s the sensible way to handle serious macroeconomic problems, but it takes determination and moral fortitude.

    What the U.S. did in response to the crisis was more like letting the economy rot, to be honest. Flooding banks with cash in exchange for nothing is not sensible policy in any context. It completely fails to account for self-interest, let alone the level of greed that had been demonstrated in the expanding housing bubble.

  7. itzac says

    I agree completely. A bunch of people made wildly risky bets with huge sums of money and they turned out to be wrong. Regardless of what that meant for the rest of the economy, the right thing to happen was for those bankers to lose their shirts.

    The only role the government should have had was to make sure the little guys didn’t get crushed as the marble towers came tumbling down.


  1. […] Mano Singham writes: I am not saying that nothing should have been done. The point was that the government gave the big banks essentially free money. If they had also taken over the banks, fired the top executives, restructured them by breaking them up so that they were no longer ‘too big to fail’ and then returned them to private sector, that might have worked out better. This is similar to the way that the FDIC deals with troubled banks. […]

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