While less than two weeks ago, the Congressional Oversight Panel said that it had found no "significant flaws in Treasury's implementation" of TARP bailout programs, on Tuesday, Special Inspector General Neil Barofsky (pictured) questioned why AIG counterparties were paid 100% of the values of their contracts, costing the U.S. taxpayers $62 billion, most of which may not get repaid. Also on Tuesday, the The Wall Street Journal analyzed enforcement actions filed by federal regulators and found that at least 27 troubled banks got TARP funds even though government officials knew they were in trouble. The Journal estimates this will result in another $5.1 billion in lost taxpayers' money.
These two stories point to $67.1 billion in taxpayers money spent on troubled institutions that may never get paid back. Some consider the AIG payoffs to have been "backdoor bailouts." When you consider who got the AIG payoffs, you too may wonder why the government didn't negotiate discounts. Recipients included Goldman Sachs (GS), Merrill Lynch, Deutsche Bank (DB), UBS (UBS), Barclays (BCS) and Bank of America (BAC).
What the government did by jumping in to save AIG rather than let it run through a normal bankruptcy was guarantee 100% payouts. Without the backing of the government, a bankruptcy action would likely have resulted in significant reductions in what those counterparties received for their contracts. And, as Barofsky notes, by making it clear in advance that AIG would not be allowed to fail, the government gave away most of the leverage it had to negotiate payment reductions with the AIG counterparties. One may argue that the banking system was about to collapse and without this backdoor bailout of big banks, we would be in serious trouble today. No one will ever know the truth, but the AIG payoffs certainly point to the need for a change in how "too big to fail" institutions are regulated.
What Did it Take to Get TARP Money?
The revelation that TARP funds, which were intended to aid otherwise healthy and viable institutions, ended up in the hands of troubled banks also leads to questions about who got help and who didn't. With 123 bank failures already this year, one can only wonder how many of the 690 financial institutions that received money from TARP will actually pay it back and return to health. So far, $204.68 billion in capital injections have gone to banks as of Nov. 10, and $70.88 billion has been repaid. In addition, the Treasury Department has collected $10.1 billion in dividend, interest and fee payments from TARP recipients.
Looking at those numbers, and leaving out the AIG fiasco, one might say that the dividends, interest and fees being collected will more than offset the Journal's estimate of $5.1 billion in losses. Certainly that looks like the case with the facts as we know them today. But the bigger question is: What don't we know?
As more questions get raised about how the TARP funds were divvied out, one can only wonder whether it was more a matter of whom one knew than any other deciding factor. Clearly, the closely connected banks on Wall Street walked away with most of the bailout money, and based on the Journal's research, it appears that even a troubled bank could get help if its executives knew the right people.
These stories do appear to point to a significant flaw in Treasury implementation of TARP, and it's time for a deeper investigation by the Congressional Oversight Panel. While we can't go back and change what has been done, we must find out where the mistakes were made and who made them, and make sure they never happen again. The comprehensive financial reform legislation making its way through the House and Senate must be drafted to deal with whatever problems were revealed by the TARP bailout. Congress can't draft a proper plan for repairs it doesn't know everything that needs to be fixed.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.
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