The Truth Behind the Bailouts

The Troubled Asset Relief Program (TARP) bailouts helped people avoid foreclosure and saved the economy, right? Neil Barofsky invites us to consider again in his new book, Bailout – An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.

Neil Barofsky was the Special Inspector General in charge of TARP. He witnessed the implementation of the $700 billion bailout rushed through by Congress soon after the financial crisis. A self-declared Democrat, he makes it clear that he speaks against the current administration not from political bias but experience.

Reading the book, it is absolutely stunning to see the dismissiveness present in many members of the Treasury Department (mostly Obama’s administration, but also for the last few months of the Bush administration). Barofsky blatantly pointed out opportunities for fraud and waste while handing out government money, but his recommendations were almost completely ignored by the Treasury Department. As a result, the government refused to force banks to report on how they were using TARP money, refused to take steps to make sure the law was giving money to the right people, and refused to help homeowners.

In fact, as Barofsky points out in his book, TARP was nothing more than a hand-out to the big banks.

The proposed $700 billion bailout program was opposed by constituents on both sides, allegedly at a ratio of 99-1. Yet, as Barofsky describes, the program ended up costing much more than originally thought:

“We found that the programs had maxed out at $4.7 trillion. As loans were repaid and programs were successfully wound down, the amount outstanding by the time we conducted our review was $3 trillion…

The following year, we updated our research and found that the total amount outstanding had increased from $3 trillion to $3.7 trillion.” (pg.162 & 165)

One could argue that the added $3.7 trillion to the national debt would be justified if it would truly help “3 to 4 million homeowners avoid foreclosure,” as President Barack Obama stated. However, as Barofsky reveals, the bailout actually increased foreclosures as the government refused to regulate mortgage servicers that were taking advantage of homeowners. For millions of applicants, papers were “lost” multiple times, and “trial modifications” never became permanent:

“Once we discredited Treasury’s stated HAMP goal of 3 to 4 million modification “offers”, it continued to move the goalposts and seemingly adopted a new HAMP goal every month. In its “Two Year Retrospective,” released in early October, 2010, for example, Treasury declared that the nearly 700,000 failed trial modifications (compared to just 467,000 successful ongoing permanent modifications at the time) were successes because “every person” who had received a trial modification was “getting a significant benefit” through temporarily reduced payments.” (pg. 198)

The “struggling” banks received 100 cents on the dollar for their bad mortgage debts from the government, essentially allowing them to increase their size and influence. As Barofsky summarizes,

“The top banks are 23 percent larger than they were before the crisis. They now hold more than $8.5 trillion in assets, the equivalent of 56 percent of our country’s annual output, up from 43 percent just five years ago.” (pg. 229)

What about the bailout of the auto industry? Barofsky demonstrates how the government actually pressured Chrysler and GM to close more dealerships, destroying jobs.

“The auto team [of the Treasury Department] had pressured the companies to close the dealerships, and as a result, both companies had dramatically accelerated their terminations… According to several analyses, those decisions had put up to 100,000 dealership jobs into jeopardy… Treasury ignored one of the few non-Wall Street sources that it consulted, a representative from the nonprofit Center for Automotive Research who warned that deep cuts could actually do more harm than good… Finally, it appeared that GM and Chrysler’s termination process had been done completely without oversight, resulting in arbitrary terminations.” (pg. 177-178)

Bailout by Neil Barofsky offers a thoughtful exposure of the politics behind the bailout, revealing how our taxes were used primarily for political payoffs, with little benefit to the American public.

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7 responses to “The Truth Behind the Bailouts

  1. You sure do your homework. Thanks for bringing these facts to bear.

    I’m a bit confused though on TARP vs the “bailouts,” are they synonymous? When I see TARP, I think of the original $700 billion that Bush expressly authorized to prop up banks “too big to fail.” While unpopular, I understand them as necessary to the preservation of the global financial system. This portion I believe has been repaid and very successful.

    However, President Obama’s additional programs, the HAMP and auto bailouts, were unneeded and have a mixed record. From what you’ve read, is this about right?

    • Partly correct- the HAMP, TALF, and auto programs were additional expenses created later by Treasury. I grouped them together.

      But Barofsky’s book also makes the point that the original TARP programs overspent the 700 billion allotment, and they were used in ways that ignored the fraud prevention techniques. The bailout was supposed to be used for banks to encourage lending, but there was no significant increase.

      Playing devil’s advocate, one could argue that even the banks using bailout money to shore up their balance sheets allowed them to more confidently lend money later. However, the later programs only rewarded banks for failed risks, at times even using the credit agencies (the same ones who rated the worst CDOs as AAA) to provide rankings on the government-backed money.

      Barofsky makes it clear that he doesn’t oppose bailouts, just the horribly wasteful way in which this one was distributed. Thanks for the question!

    • Because anyone in the world with Internet access can edit Wikipedia – this is why none of my teachers nor professors have allowed it as a source for any essay or paper.

      This book, on the other hand, is written by the one person who was right there for every step of the TARP implementation. If you disagree with my re-telling, check out the book!

      • I understand Wikipedia’s reputation. I also know it has checks to insure facts are not manufactured. Whose bias gives those facts the truest color? Granted Wikipedia is not a primary source, granted one should not quote it for a scholarly paper. However, the stark difference in the story told does give one pause.

        • I highly recommend that you read the book and see if you really trust all that you’ve been told about the bailout. If there’s one thing that we can all agree on, it’s that the media and politicians have a habit of lying about the success of their programs. If there are specific criticisms or disagreements about the facts Barofsky cites, make them on a factual basis.

          Contradicting the “Wikipedia tells otherwise” argument is exactly the point of the book. That’s why this post is called “The Truth Behind the Bailouts” not “The Generally Accepted (Even if Incorrect) Opinion About the Bailouts”.

          • Sorry, I don’t have enough interest to read the book or pursue information on this matter any further. My area of interest is theology. For now, I’m receiving this as an ‘insider’s account.” At this point, I’ll reserve the word ‘truth.’

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