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SIGTARP Warns of Second Housing Bubble

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The Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which oversees the federal government’s economic recovery program, called for reform to prevent government bailouts in the future and warned of a government-induced second housing bubble. “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,” SIGTARP wrote in its latest quarterly report (download here). “To the extent that institutions were previously incentivized to take reckless risks through a ‘heads, I win; tails, the government will bail me out’ mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions.” The report warns the government’s efforts to stabilize the housing market may create a second bubble. “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,” the report said. Included in the report was the above chart, which tracks the expanding percentage of mortgage flows attributable to the government-backed mortgage entities like Fannie Mae (FNM), Freddie Mac (FRE), and Ginnie Mae in the mortgage-related finance market. As the chart shows, during the housing bubble, government-sponsored enterprises (GSE)-sponsored lending was at extremely low levels, but has since increased beyond levels even seen during the government intervention during the Savings and Loan crisis 20 years ago. SIGTARP said while segments of the financial system are more stable than they were at the height of the financial crisis, many of TARP's stated goals “have simply not been met.” “Despite the fact that the explicit goal of the Capital Purchase Program (CPP) was to increase financing to US businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury,” the report said. The report also notes that despite TARP’s other stated goals — preserving homeownership and promoting jobs — nearly 16 months later, foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible loans, and unemployment is the highest it has been “in a generation.” “Whether these goals can effectively be met through existing TARP programs is very much an open question at this time,” the report said. “And to the extent that the government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP.” The report said many of the institutions considered “too big to fail” and that received extraordinary assistance have recovered, having repaid their debt to the federal government, but are now even larger. The report added institutions are incentivized to exit TARP to escape the program’s compensation restrictions, noting recent bonuses payments show some improvements in the form that bonus compensation takes for some executives, but “there has been little fundamental change in the excessive compensation culture on Wall Street.” At the end of 2009, 67 TARP recipients had paid back all or a portion of their principal or repurchased shares for an aggregate total of $165.2bn of repayments and a $5.0bn reduction in exposure, leaving $368.8bn, or 52.8%, of TARP’s allocated $698.8bn available for distribution. TARP’s collected $12.9bn in interest, dividends, and other income and made an additional $4bn from the sale of warrants and preferred stock received as a result of exercised warrants. But some TARP participants have missed dividend payments, and at the end of 2009, there was $140.7m in outstanding unpaid CPP dividends. In addition, three TARP recipients that received a combined $2.6 billion in TARP funds have filed for bankruptcy. Write to Austin Kilgore. The author held no relevant investments.

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