The Following Article is from the Spring 2011 Newsletter
The financial crisis starting in 2007 was responded to with the government’s desire to quickly re-establish the status quo on Wall Street. The intent was to expedite the recovery of the broader economy. However, it was a case of the carrot without a stick.
The government’s strategy failed as unemployment remained high and corporations hoarded, rather than spent the trillions in cash on their collective balance sheets. The Troubled Asset Relief Program (“TARP”) failed in its most important goals. The largest financial players received billions in taxpayer funds enabling institutions on facing collapse not only to survive but even to flourish. There is no question that the nation benefited by avoiding a meltdown of the financial system. However, it is not the only measure of TARP’s legacy. TARP had far wider goals. TARP promised emphasis on preserving home values and ownership to be used to purchase up to $700 billion of mortgages, as well as modify mortgages to assist struggling homeowners. Treasury did not abide by the legislation as TARP quickly shifted from mortgage purchases to the infusion of hundreds of billions of dollars into the largest U.S. financial institutions. It was a move that promised banks would restore lending that never happened.
TARP gave money to banks with no mandates or incentives to loosen credit to increase lending to home buyers. Instead, the bar was set much higher by the banks on mortgages to the strongest home buyers. There was not even a request that banks report how they used TARP funds. Reports surfaced of loans originating from TARP funded mega banks to China and Dubai instead of to Main Street. The biggest banks are 20 percent larger today than they were before the crisis and control a larger part of our economy than ever with their unfair advantage over smaller, local institutions which continue to struggle.
TARP’s goal of helping struggling homeowners later emerged when the Home Affordable Modification Program was promised to help up to four million families with mortgage modifications. That program has been a failure, with far less permanent modifications (540,000) than modifications that have failed and been canceled (over 800,000). Foreclosures continue to mount, with 8 million to 13 million filings forecast over the program’s lifetime. Closer to home, the California Association of Realtors announced in March 2011 that 50% of Orange County California home sales in 2010 were considered “Distress Sales”
Is this what Washington was hoping would happen when it chose to recapitalize the banks in October 2008 with taxpayer money? Adding insult to injury is absurd levels of Wall Street compensation. Bonus payments in 2010 hovered close to $150 billion-clear evidence of not holding Wall Street fully accountable for their actions. Another lost opportunity. A once-in-a-century opportunity to reform the ways of Wall Street was lost.
The cascading bad judgment continued in the July 2010 passage of the 2,200-page Dodd-Frank Law which purports to tighten the reins on all aspects of the financial industries. This barrage of over regulation instead reinforced the longstanding cozy relationships of Wall Street who had a heavy hand in writing the laws. It has been estimated that the cost of compliance will be $1 Billion to implement which is passed onto the consumer.
In the final analysis, failed policies have turned the tables on saving the financial system at a relatively modest cost to taxpayers into Government mismanagement of epic proportions. This political calamity is the most lasting, and unfortunate legacy of the financial crisis.
The bottom line is that there has not been even the slightest inconvenience for Wall Street in the wake of the crisis. Is that the case for the rest of us?
Joseph Levy is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA. Mr. Levy received his MBA Degree in Real Estate Investment Finance from University of Connecticut and was formerly Investment Director of Aetna Life and Casualty.
The opinions expressed here are strictly those of AFFILIATED CAPITAL RESOURCES and are subject to change without notice. AFFILIATED CAPITAL RESOURCES is a mortgage banking firm which advises professional accounting and business management firms pertaining to residential and commercial real estate financing services for its mortgage clients.