TARP cannot be considered a success

Commentary

Two and a half years ago, Congress passed legislation that bailed out the country's banks.

The government has declared its mission accomplished, calling the Troubled Asset Relief Program remarkably effective "by any objective measure."

On my last day as the special inspector general of the bailout program, I regret to say that I strongly disagree.

From the perspective of the largest financial institutions, the glowing assessment is warranted: Billions in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish.

These banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed "too big to fail."

The country benefited by avoiding a meltdown of the financial system, but this cannot be the only yardstick.

These Main Street goals were a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide.

Congress was told that TARP would purchase up to $700 billion of mortgages, and the Treasury Department promised that it would modify those mortgages to assist struggling homeowners.

But little has been done to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury's plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation's largest financial institutions, a shift that came with the express promise that it would restore lending.

Treasury, however, provided no effective policy to compel the extension of credit -- despite our strong recommendation, not even a request that banks report how they used TARP funds.

It was only in April of last year, in response to recommendations from our office, that Treasury asked banks to provide that information, well after the largest banks had already repaid their loans. It was therefore no surprise that lending did not increase but rather continued to decline well into the recovery.

That program has been a failure, with far fewer permanent modifications (540,000) than modifications that have failed and have been canceled (over 800,000).

This is the well-chronicled result of the rush to get the program started, of major design flaws like the failure to remedy mortgage servicers' favoring of foreclosure over permanent modifications, and of a refusal to hold those abysmally performing servicers accountable for their disregard of program guidelines. As the program flounders, foreclosures continue to mount.

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.

This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.

They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, providing them with an unfair advantage over smaller institutions, which continue to struggle.

Treasury's mismanagement of TARP -- whether born of incompetence, timidity or a mind-set too closely aligned with the banks it was supposed to rein in -- may have so damaged the credibility of the government as a whole that future policymakers may be politically unable to take the necessary steps to save the system the next time a crisis arises.