From the Brink, but May Be Worse

Would Have Been Cheaper

We all knew the TARP was a joke.

When it was happening there were too many red flags. Today we know a primary reason for the bail out was to mask aid to Goldman Sachs. Funneling money through AIG to Goldman Sachs, loaning money to pet institutions interest free. We still do not know where the phantom 2 trillion went from the Fed. Do we?

Business News

US rescue ‘averted meltdown’ but problems remain
Posted: 21 October 2009 2340 hrs

WASHINGTON: The US government’s 700-billion-dollar rescue helped bring the financial system back from a near-meltdown, but the overall outcome of the programme is unclear, a report to Congress said on Wednesday.

The report also said it is unlikely taxpayers will get all their money back from the massive investments to stabilise the financial system and economy under the so-called Troubled Asset Relief Programme (TARP).

The quarterly report from the programme’s inspector general said that since the measure creating the programme was passed by Congress in October 2008, “there are significant signs of improvement in the stability of the financial system.”

“Although the causes for such improvement are many and complex, it appears that the dramatic steps taken by the US Department of the Treasury and other agencies through TARP and related programmes played a significant role in bringing the system back from the brink of collapse,” the report said.

“On the other hand, the risk of foreclosure continues to affect too many Americans, unemployment continues its rise, and the stresses on the commercial real estate market threaten to increase the pressure on banks and small businesses alike yet again.”

The measure was approved rapidly in Congress after the collapse of Wall Street giant Lehman Brothers caused a freeze-up in the global financial system and a massive flight from risk that sent the economy deep into recession.

The report by special inspector general Neil Barofsky said assessing the costs is complex because there are not only direct financial costs, but also the so-called “moral hazard” costs of bailouts and the cost to US government credibility.

“The past year has demonstrated that TARP’s costs, in each category, could prove to be substantial,” the report said.

“Although several TARP recipients have repaid funds for what has widely been reported as a 17 percent profit, it is extremely unlikely that the taxpayers will see a full return on their TARP investments.”

Speaking on US television, Barofsky said on Wednesday that while the many US banks and investment firms were rescued from the brink of disaster by the TARP programme, “I think some of these entities have gotten even bigger and the consequences of their failure would be even greater.”

And while some of the institutions have repaid their TARP bailouts, “they’re still reaping these profits based on cheap money and support that’s given to them by the federal government,” Barofsky told CNN.

“It is a system that is in need of reform,” he told the television network.

“There’s nothing to stop them from … (taking) bigger risks, knowing they have the government safety net, and then return huge profits and huge bonuses.”

His report said some 50 billion dollars used to help avoid foreclosures “will yield no direct return.” As for the investments in insurance giant AIG and auto giants General Motors and Chrysler, “full recovery is far from certain.”

On moral hazard costs, the report said that some of the funds may be bailing out “the very institutions that caused the crisis” and “homeowners who may have borrowed irresponsibly.”

“The firms that were ‘too big to fail’ last October are in many cases bigger still,” it added.

Without tougher regulatory reform, “TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behaviour,” the report said.

The report added that “the government’s capacity to address financial crises depends in no small measure on its credibility,” signalling a major problem, since many Americans view the TARP “with anger, cynicism, and distrust.” – AFP/de

ChannelNewsAsia.com