Former TARP Boss Comes Clean

"Sorry, Mr President, I don't dance."
--Jack Ryan (Clear and Present Danger)

Interesting interview snippet with Neil Barofsky, former boss of the TARP program. You remember TARP (the Troubled Asset Relief Program), don't you? It was one of the original bailout programs devised to stem the 2008 meltdown. TARP was initiated by the Bush administration and continued by the Obama administration. Treasury lifted $700 billion of stinking, illiquid securities, mostly related to mortgages and real estate, off the balance sheets of banks in exchange for T bills.

Barofsky was appointed to oversee the TARP program. He began getting into trouble by asking questions about just where the $700 billion in taxpayer-backed funds was going. He learned what was perfectly predictable prior to TARP. Rather than loaning the funds out, banks used the $700 billion to repair their balance sheets, to engage in carry trades with Treasury and the Fed, and to resume their bonus programs.

He also caught on to the perverse nature of bank bailout terms. Bagehot's Rule states that banks in need of emergency credit should only be offered loans at premium rates. That is what unhampered markets would do. Banks borrowing emergency credit would therefore pay dearly for their prior investment mistakes. In the early days of the Fed and prior, this is what generally transpired.

Barofsky observes that what we've been doing is the opposite. When banks get into trouble, credit backed by the sweat of the American people is offered at a discount. Perversely, healthy banks that did not get access to those emergency discounted funds have to pay more for credit than troubled banks do. Banks that make prudent decisions are therefore penalized relative to those banks that made poor decisions.

It takes no genius to grasp the unfairness of this situation--not to mention the moral hazard that this practice inspires.

He also estimates that in exchange for the $700 billion, taxpayers took on risk amounting to $23 trillion. Only government bureaucrats would deem such a trade worthwhile.

Barofsky's questions found him called on the carpet by the undersecretary of the Treasury. He was told in no uncertain terms that if he ceased with the questions and played along, he could have a nice career once the TARP appointment expired. If he didn't play ball, he would find it hard to find another job.

He decided not to play ball.

position in SPX, Treasuries