The problems that led to the last crisis have not yet been
addressed, and in some cases have grown worse, says Neil Barofsky,
the special inspector general for the trouble asset relief program,
or TARP. The quarterly report to Congress was released Sunday.
"Even if TARP saved our financial system from driving off a
cliff back in 2008, absent meaningful reform, we are still driving
on the same winding mountain road, but this time in a faster car,"
Barofsky wrote.
Since Congress passed $700 billion financial bailout, the
remaining institutions considered "too big to fail" have grown
larger and failed to restrain the lavish pay for their executives,
Barofsky wrote. He said the banks still have an incentive to take
on risk because they know the government will save them rather than
bring down the financial system.
Barofsky also said his office is investigating 77 cases of
possible criminal and civil fraud, including crimes of tax evasion,
insider trading, mortgage lending and payment collection, false
statements and public corruption.
One case concerns apparent self-dealing by one of the private
fund managers Treasury picked to buy bad assets from banks at
discounted prices. A portfolio manager at the firm apparently sold
a bond out of a private fund, then repurchased it at a higher price
for a government-backed fund. A rating agency had just downgraded
the bond, so it likely was worth less, not more, when the
government fund bought it. The company is not being named pending
the outcome of Barofsky's investigation.
Barofsky renewed a call for Treasury to enact clearer walls so
that such apparent conflicts are less likely.
Treasury said it welcomed Barofsky's oversight but resisted the
call to erect new barriers against conflicts of interest. The new
rules "would be detrimental to the program," Treasury spokeswoman
Meg Reilly said in a statement. The existing compliance rules "are
a rigorous and effective method of protecting taxpayers," she
said.
Much of Barofsky's report focused on the government's growing
role in the housing market, which he said has increased the risk of
another housing bubble.
Over the past year, the federal government has spent hundreds of
billions propping up the housing market. About 90 percent of home
loans are backed by government controlled entities, mainly Fannie
Mae, Freddie Mac and the Federal Housing Administration.
The Federal Reserve is spending $1.25 trillion to hold down
mortgage rates, and millions of homeowners have refinanced at lower
rates.
"The government has stepped in where the private players have
gone away," Barofsky said in an interview. "If we take government
resources and replace that market without addressing the serious
(underlying) concerns, there really is a risk of" artificially
pushing up home prices in the coming years.
The report warned that these supports mean the government "has
done more than simply support the mortgage market, in many ways it
has become the mortgage market, with the taxpayer shouldering the
risk that had once been borne by the private investor."
Barofsky's report echoed concerns raised by housing experts in
recent months, as home sales and prices rebounded. They warn that
the primary reason for the turnaround last year has been billions
of dollars in federal spending to lower mortgage rates and prop up
demand.
Once that spigot of cash is turned off, they caution, the market
will be vulnerable to a dramatic turn for the worse. Daniel Alpert,
managing partner of investment bank Westwood Capital, wrote in a
report that national home prices are bound to fall 8 to 10 percent
below the lows of last spring.
"The lion's share of the remaining decline will occur in markets
that saw sizable bubbles but have not yet retrenched," he
wrote.
Officials from the Obama administration counter that massive
federal intervention has helped the housing market stabilize and
prevented more dire consequences.
Barofsky's report also disclosed that, while the Obama
administration has pledged to spend $75 billion to prevent
foreclosures, only a tiny fraction — just over $15 million — has
been spent so far. Under the Making Home Affordable program, only
about 66,500 borrowers, or 7 percent of those who signed up, had
completed the process as of December.
He said the key to preventing future crises is to reform Fannie
Mae and Freddie Mac, create and improve loan underwriting and
supervision of banks. He stopped short of endorsing specific
proposals for overhauling financial regulation, but said many of
the proposals would go far to improving the system.