Grading TARP

Tasked with overseeing the Troubled Asset Relief Program (TARP), Special Inspector General Neil Barofsky says the programs helped stabilize the economy, but at a cost.

“Notwithstanding TARP’s role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism, and distrust,” Barofsky said in a quarterly report to Congress. “These views are fueled by the lack of transparency in the program.”

These concerns are unlikely to be mollified by Barofsky’s contention that TARP funds will likely not be repaid in full. “Although several TARP recipients have repaid funds for what has widely been reported as a 17% profit, it is extremely unlikely that the taxpayers will see a full return on their TARP investments,” he said.

Worse still, Barofsky said that the example set by TARP increases the risk of moral hazard going forward. “Market behavior is bound to be impacted by the massive infusions of government capital into the very institutions that caused the crisis; by the modifications of mortgages for homeowners who may have borrowed irresponsibly; and by the provision of cheap, non-recourse loans to incentivize the purchase of the same volatile and over-valued asset-backed securities that were a major cause of the current crisis.”

Leaving aside the controversies surrounding the program, A. Mark Finkelstein, an equity analyst at Fox Pitt Kelton Cochran Caronia Waller, told the attendees of the American Council of Life Insurers annual conference that TARP did help put a floor under the life insurance industry. “Only two life insurers took TARP funds, but I believe it helped valuations industrywide,” he said.