Bailout Watchdog Barofsky Sounds "Too Big to Fail" Warning

ABC News’ Matthew Jaffe reports:

In a new quarterly report to Congress, bailout watchdog Neil Barofsky warns that the problem of “too big to fail” has not yet been solved, even with the Wall Street reform law signed last summer.

“The continued existence of institutions that are “too big to fail” — an undeniable byproduct of former Secretary Paulson and Secretary Geithner’s use of TARP to assure the markets that during a time of crisis that they would not let such institutions fail — is a recipe for disaster,” Barofsky says. “These institutions and their leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts, and bailouts.”

Barofsky, the Special Inspector General for TARP (SIGTARP), also notes that in an interview that his office conducted with Geithner last month, the Treasury boss acknowledged that “in the future we may have to do exceptional things again” if the government faces a financial crisis as severe as the 2008 one.

“To the extent that those “exceptional things” include taxpayer-supported bailouts,” Barofsky says, “his acknowledgement serves as an important reminder that TARP’s price tag goes far beyond dollars and cents, and that the ultimate cost of TARP will remain unknown until the next financial crisis occurs.”

In addition, Barofsky also takes yet another shot at Treasury’s embattled mortgage modification program known as HAMP.

“Today, HAMP appears to be under siege, with a chorus of criticisms from all points on the ideological spectrum growing more insistent and calls for termination or a dramatic restructuring gaining traction. The numbers are remarkably discouraging,” Barofsky says, citing that 2.9 million homes received foreclosure filings in 2010, while Treasury’s “anemic” program only led to 522,000 permanent loan modifications.

On Wednesday Barofsky is set to testify before Rep. Darrell Issa’s House Oversight Committee.

“While the warning signs that led to the financial crisis were ignored or went un-noticed, right now, we have a candid assessment warning of the potentially disastrous consequences of institutionalizing a ‘too-big-too-fail’ mentality that rewards risky behavior at the expense of the American taxpayers,” Issa said in a statement today. “The SIGTARP believes we are running the risk of repeating the same mistakes that resulted in the American people footing the bill for the largest bailout in American history. The Committee looks forward to hearing from the Inspector General and from Treasury about what we can do moving forward to avoid the mistakes of the past.”

After Treasury refused to send Geithner to testify, acting assistant secretary for financial stability Tim Massad will head to Capitol Hill instead.

On a positive note, Barofsky says “on the financial side, TARP’s outlook has never been better. Not only did TARP funds help head off a catastrophic financial collapse, but estimates of TARP’s ultimate direct financial cost to the taxpayer have fallen substantially,” from $341 billion in August 2009 to $25 billion in November 2010.

“While Treasury’s ultimate return on its investment depends on a host of variables that are largely unknowable at this time, TARP’s financial prospects are today far better than anyone could have dared to hope just two years ago,” he says.

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