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August 27, 2012

Neil Barofsky: TARP Was a Failure

While we agree with some of what Barofsky has to say, we have a different take on why TARP was a failure.

Last week, Barofsky appeared on CNBC and stated that TARP failed because the culture at the Treasury Department was to look out for the interests of big banks and ignore important corporate ethics items such as conflict of interest.  Barofsky faced stiff opposition on set from reporters who claimed that TARP has saved the world while generating a profit.

The problem we have with TARP is that it created a backstop for big banks while not protecting the smaller banks.  So, as a result, small banks failed and assets continued to be consolidated in America's biggest banks.  Meanwhile, the risk trade was distorted for big banks (ie. the London Whale) so the potential for future losses related to irresponsible risk remains real.

The end result is a banking industry that is made up of only the world's biggest banks, and constantly needing capital each time a recession occurs.  It's not this TARP that I'm worried about, it's the fact that we may have created a future TARP2, TARP3, etc that could cost the taxpayer trillions!



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