The federal government's $700 billion bailout program has helped big banks but hasn't done much for the little guy, a key official said Tuesday. While the Troubled Asset Relief Program, as the plan is called, is "getting Wall Street back on its feet, it is not meeting its goal of getting Main Street back on its feet," TARP Special Inspector General Neil Barofsky (pictured) told the Senate Finance Committee.

Barofsky was speaking at a hearing on President Obama's proposed "Financial Crisis Responsibility Fee," which seeks to recoup TARP money by levying a tax of $90 billion over 10 years on banks with more than $50 billion in assets. Barofsky said the tax would mostly hit companies that will have repaid their TARP money.

"Those that are most able to repay will have repaid and there wouldn't be a loss associated with it," Barofsky said. But for companies that are doing poorly including American International Group, General Motors and Chrysler, "It will be more difficult to impose a tax on them," he said.

The Tax Faces Criticism

The Senate is to take up financial service reform legislation this week and some are calling for including the President's tax proposal in the legislation. But not everyone is a fan of the tax. "Corporate entities don't actually bear the burden of taxes; people do," said Finance Committee Ranking Member Charles Grassley, R-Iowa.

But Sen. Charles Schumer, D-N.Y., favors the tax. "The administration's proposal is a common-sense way to make sure that taxpayer money is repaid, and I believe it should be included in the financial reform legislation soon to be debated on the Senate floor," he said.

Talk of holding financial services firms responsible comes as the U.S. Securities and Exchange Commission pursues Goldman Sachs in a high-profile case for allegedly failing to adequately disclose the risk of certain investments to investors. During the hearing, Senate Finance Committee Chairman Max Baucus, D-Mont., described the financial crisis as "a fire that spread through our entire economy" and he blamed the origin of the blaze on the financial industry. The industry was faulted for writing bad mortgages and then in turn selling the bad mortgages to investors as collateralized debt obligations.

More to Help Broad Economy

Barofsky made it clear that he believes the Treasury Department needs to do more to ensure the TARP program helps the broader economy beyond just the financial services industry. Long-term unemployment remains at the highest rates in memory and small community banks are failing at an alarming rate, with 50 failures so far this year, he said. The goal of preserving home ownership has "fallen horribly short," with 2.8 million foreclosures last year and estimates this year that will eclipse that, Barofsky testified.

The Home Affordable Modification Program, Treasury's TARP-funded mortgage modification program, was originally intended to keep 3 million to 4 million homeowners in their homes by modifying mortgages to sustainable levels, Barofsky noted. "But it appears that it may never come close to meeting that goal," he said. There have been fewer than 230,000 permanent modifications more than a year into the program.

Failings of the program include problems with transparency, Treasury's execution of the program and problems with the program's design, Barofsky said. In many cases, borrowers who receive modifications are still unable or unwilling to continue to make payments because they're too high or their homes are "hopelessly under water," meaning the properties are worth far less than what is owed, he told the committee.

TARP Losses Revised Downward

As the economy recovers, many of the larger banks that received TARP funding have been able to repay the funds in advance of what had been anticipated, Barofsky said. As a result expected losses in the TARP are going down. The Office of Management and Budget estimates losses will be $127 billion while the Congressional Budget Office estimates losses at $109 billion. Both agencies estimate that the concentration of losses are from support to AIG, the automobile industry and to struggling homeowners.

During the hearing, Barofsky says his office has investigated fraud related to the program, citing the Securities and Exchange Commission's $150 million settlement with Bank of America over charges connected to the TARP. Meantime, the inspector general's office is conducting three different audits that touch on the extensive role of BlackRock Financial Management throughout the financial crisis, Barofsky said. One audit is looking at potential conflicts of interest connected with a $40 billion public-private investment program.

Barofsky was highly critical of an administration plan to take $30 billion out of the TARP program to set up a separate program to support small business lending. The plan would be "tremendously dangerous and wasteful to the taxpayer, if this $30 billion program is taken out of the TARP without our oversight continuing," Barofsky said. The TARP program and the proposed small business lending programs are virtually identical, and the inspector general's office already has built up auditing and investigative expertise, which is crucial to prevent fraud, Barofsky said.

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