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May 12

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New Inspector General for TARP starts with a flair

Christy Romero has not held the top job at the office of Special Inspector General for TARP (SIGTARP) for very long. The Senate just confirmed her nomination on March 29, 2012. Before this, she was SIGTARP’s Deputy Inspector General. Ms. Romero’s April 25, 2012 report is her first, but it reads with the confidence of someone who has been on the job for a while.

The report starts out by criticizing the Administration’s claims that TARP is making a profit, and the program is wrapped up. Putting it charitably, such claims are simply not true. The current report details that some programs are scheduled to continue through 2018, and other programs have no expiration. The report summarizes this as follows:

It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost).”

But even worse than the losses, the report criticizes TARP’s long-term harm, as follows:

Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals and whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry, i.e., TARP 2.0. …

A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.” … A recent working paper from Federal Reserve economists confirms that TARP encouraged high-risk behavior by insulating the risk takers from the consequences of failure – which is known as moral hazard. The Federal Reserve economists reported how the large banks that received Government bailouts through TARP are now taking more risks than banks that did not receive taxpayer money. According to the Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts. … Many of the same large banks have greatly increased their executive compensation despite the fact that regulators have stated that compensation played a role in causing the crisis by encouraging risky behavior.”

The report also describes the Treasury Department’s inability to prevent TARP fraud. The report details numerous investigations of wrongdoing, and summarizes the problem as follows:

One enduring legacy of TARP is criminal activity associated with the program. SIGTARP investigates crime related to TARP and actively supports the prosecution of individuals it investigates. SIGTARP has over 150 investigations underway related to TARP. With hundreds of billions of dollars going out the door quickly, it should be no surprise that there would be unscrupulous individuals who would seek to steal it, exploit it, or otherwise use TARP for their own personal gain.”

SIGTARP’s quarterly report before the current one (released in January 2012), is summarized in this article.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/05/new-inspector-general-for-tarp-starts-with-a-flair/

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