Thursday, January 31, 2013

Bailout Costing Taxpayers Billions, TARP Watchdog Warns

Guess what, American taxpayer: More than four years after the financial crisis started, you are still on the hook for a nearly $15 billion investment in a subprime mortgage lender.
That's just one of a litany of troubling facts in a new report by Christy Romero, the Special Inspector General for the Troubled Asset Relief Program, which pumped more than $600 billion into failing banks and other companies during the crisis. The report details the many billions of taxpayer dollars still sunk into hundreds of struggling banks, some of which are still failing, and the risks still festering that could create a future crisis.
The report is a striking reminder that, even as the stock market comes close to cruising to record highs, led by skyrocketing bank stocks, the crisis still haunts us.
In fact, the bailout could arguably have made a future crisis more likely, by encouraging big banks to take on even more risks, in the widespread belief that they can always turn to the government for more cash in the event they crash the Hindenburg, again.
"The people taking those risks are insulated from the consequences -- that's moral hazard," Romero said in a telephone interview. "It continues to exist, and it must be dealt with."
The government is still mopping up the mess from the last crisis, as Romero's report makes clear. Its portfolio of pain includes a 74 percent stake in Ally Financial, formerly known as GMAC, which was rescued repeatedly during and after the crisis, with little or no plan for ending the rescue, according to Romero.
Ally still owes the government $14.6 billion and might ultimately cost the Treasury Department $5.5 billion in losses, according to the White House Office of Management and Budget -- part of a total long-term TARP cost that could exceed $60 billion.

Ally is widely known as the financing arm of General Motors (which was also bailed out). Less well-known is that Ally is hauling around a struggling subprime-mortgage lending unit called Residential Capital, or ResCap, which Romero calls "a millstone around taxpayers' necks."
Treasury bailed out Ally without making the lender prepare a plan for unwinding its subprime mortgage portfolio. The government then pumped more money into Ally on two separate occasions, again without any conditions or plans for dealing with its toxic mortgages. And even as taxpayers took an increasing stake in Ally, the lender was getting into trouble for its mortgage-foreclosure practices: Last year Ally agreed to pay $310 million to settle "robosigning" charges.
"There are these liabilities and issues surrounding GMAC mortgages that caused massive losses and federal enforcement actions like the robosigning settlement," Romero said, "but there is no real requirement in TARP to address these issues."
The Treasury Department, in a response letter, says there are "a number of inaccuracies" in Romero's report. The agency says the government is working on a plan to restructure ResCap's debts and then spin off its ownership in the "good" parts of Ally in a public stock offering.
Ally is just one of 291 troubled institutions in which the government is still invested, according to Romero's report. Treasury has warrants to buy stock in 47 others, including the insurance giant American International Group.
Many of the banks the government owns are still struggling to make ends meet. Nearly 200 institutions participating in a TARP program supposedly aimed at "healthy, viable institutions" have skipped dividend payments to the government, costing the Treasury Department an estimated $506.2 million, according to Romero's report. By the end of last year, 22 of those supposedly healthy banks had failed.
Another 137 banks in that program simply refinanced their TARP debts through other government loan programs designed for small banks and businesses, according to Romero.
In another point of contention, Romero says that the government is ultimately going to lose billions of dollars on the bailout, not turn a profit as Treasury claims. By her office's count, the government has already written off investment losses of $27.1 billion on TARP and is still owed $67.3 billion. The White House Office of Management and Budget recently estimated that TARP will ultimately cost the government $63.5 billion -- though that figure includes $45.6 billion in housing-relief programs that were never meant to be paid back.
Treasury, on the other hand, says taxpayers may ultimately realize a net gain on all of the government and Federal Reserve programs created to stop the bleeding during the crisis.
But these accounting quibbles mask more significant and lingering problems. The biggest and most interconnected banks are bigger and more interconnected than ever before, and the government has no idea whether it will be able to safely wind down a too-big-to-fail bank in the event of another crisis, Romero warns.
Meanwhile, these banks are no closer to figuring out the risks on their own balance sheets, as evidenced by JPMorgan Chase's $6 billion in credit-derivatives losses caused by one trader known as the "London Whale." And the prospect of future bailouts may embolden banks to take still more risks.
"It's up to regulators," Romero said, "to make clear that there is not going to be another government bailout."

 




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