No shock: TARP funds used by banks for expenses, acquisitions

Get ready for another IG to go under the bus.  Special Inspector General Neil Barofsky, who has recently made headlines in a squabble over his independence from Treasury for his mission on the TARP and bailout funds, reported to Congress that the banks receiving TARP funds did not use the money to loosen lending, as intended.  Instead, they used the money to buy other banks, pay off their own debt, and make other investments:

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Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government’s financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks. …

Officials have taken the view that the exact use of the federal aid cannot be tracked because money given to a bank is like water poured into an ocean.

“Although it might be tempting to do so, it is not possible to say that investment of TARP dollars resulted in particular loans, investments or other activities by the recipient,” Herbert M. Allison Jr., the assistant Treasury secretary who administers the rescue program, wrote in a letter to Barofsky.

Originally, the TARP bailout intended on having the federal government buy back the toxic assets on the books of major financial institutions, mortgage-backed securities created by mandate of Congress, in order to stabilize their balance sheets.  After winning approval for that from Congress, the Bush administration simply changed the rules and gave away the money (and at least in a couple of cases, strongarmed the banks into taking it) rather than alleviate the cancer at the heart of the financial system.  They claimed, as did the Obama administration afterwards, that the TARP funds would unlock lending and revitalize the economy.

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Surprise!  The banks have begun turning big profits, mostly by getting a lot more choosy about their borrowers.  They used the money to their own benefit, as one would expect, through acquisitions and debt pay-downs, which have undoubtedly stabilized the financial institutions but did little else for the economy.  Lending has returned to the basis on which it should have operated all along — lending money to low-risk borrowers with the means to pay off the loans on time.  But that is not what both administrations promised with TARP, and Barofsky’s data shows just how much of a waste the twisted TARP became.

Now, rather than brag about unlocked lending, the Obama administration wants to claim that we can’t tell how the banks used the money, because all cash looks the same in the money ocean.  Well, that’s only true as long as Treasury doesn’t do any diligence on TARP spending and lending, the very problem Barofsky reveals.  It’s a tautology; Barofsky says that there isn’t enough transparency on TARP distribution because Treasury doesn’t demand it, and Treasury says transparency isn’t possible because they’re not demanding that kind of reporting.  Accounting exists to provide that kind of transparency, but apparently Treasury and the White House simply have no interest in it.

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