TARP Money…Where Art Thou

The Troubled Asset Relief Program, commonly referred to as TARP, is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector.

TARP allows the United States Department of the Treasury to purchase or insure up to $700 Billion of “troubled assets”, defined as “(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”

In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007 when they were hit by widespread foreclosures on the underlying loans. TARP is intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.

TARP does not allow banks to recoup losses already incurred on troubled assets, but officials expect that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from the hypothesis in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate.

With the passage of time, and world events, this has been relegated to the back of our conscious mind. Who has paid the government back? Where did this money go? Is it to protect companies?

The New York Times chronicled what banks received the TARP funds, and who has paid it back. Let me know if your blood pressure goes up after reading this list. Oh…look at the automobile companies, and the specialty lenders. Let’s not forget AIG who is partially owned by Goldman Sachs.

THE American taxpayer will lose a rare straight shooter when Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, leaves his post on March 30.

Neil Barofsky

Neil’s straightforward style has put him at odds with Timothy Geithner head of the Treasury, who continues to protect his cronies. Remember Timothy was the head of the New York Federal Reserve when the financial meltdown occurred on Wall Street.

In addition to his candor, Mr. Barofsky delivered a solid prosecutorial record. Since it was created in the fall of 2008, his office has won criminal convictions of 18 people, helped keep $555 million in taxpayer funds from being lost to fraud and provided the Treasury with 68 recommendations to protect taxpayers from losses in its programs. The office — known as Sigtarp, for special inspector general for the TARP program — continues to work on 153 civil and criminal investigations, including 74 involving executives and senior officers at financial institutions who received or applied for TARP money.

LAST week, Mr. Barofsky testified before the Senate for the last time as special inspector general. His comments were, typically, and refreshingly, straightforward.

“For all its help in rescuing the financial system from the brink of collapse, TARP may have left a truly frightening legacy,” he said. “It has increased the potential need for future government bailouts by encouraging the too-big-to-fail financial institutions to become even bigger and more interconnected than before, therefore increasing their ultimate danger to the financial system, while at the same time, Treasury’s mismanagement of TARP and the resulting deep unpopularity of the program have decreased the government’s ability to actually accomplish such bailouts in the future, even if necessary.”

I’m waiting for the next shoe to drop…maybe it will be sooner rather than later.