Too Big to Fail: Bigger, Failer.

Neil Barofsky says gub’mint bail-out is not only a big fat fail, but has exacerbated the risks:

from the SIGTARP Executive Summary, pdf

The substantial costs of TARP – in money, moral hazard effects on the market, and Government credibility – will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.  It is hard to see how any of the fundamental problems in the system have been addressed to date.

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

• 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. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses – and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions – the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices – as discussed more fully in Section 3 of this report – risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, 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.

Congrats, Bush, Obama & The Rubinites!  This one is going platinum.  What was once just “Bigger and Deffer!” is now “Biggerer and Defferer!”

The lessons to be learned here are obvious.

Nobody could have seen this coming…

Nobody could have predicted…

Nobody could have anticipated…

Even in retrospect, there was nothing to suggest…

Warren Buffett, March 2003

Buffett warns on investment ‘time bomb’

The rapidly growing trade in derivatives poses a “mega-catastrophic risk” for the economy and most shares are still “too expensive”, legendary investor Warren Buffett has warned.

“Derivatives are financial weapons of mass destruction.”

FBI, September, 2004

WASHINGTON (CNN) — Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an “epidemic” of financial crimes which, if not curtailed, could become “the next S&L crisis.”

Eliot Spitzer, April 11th, 2005

New York Attorney General Eliot Spitzer has turned up the heat on American International Group and its former chairman Maurice “Hank” Greenberg.

Speaking on the Sunday television show “This Week,” Spitzer accused the executive who had built the largest insurance company of committing fraud. “That company was a black box run with an iron fist by a CEO who did not tell the public the truth,” said Spitzer, according to Reuters. “That is the problem.”

“We have powerful evidence, we will proceed with it,” Spitzer added, referring to the probe of Greenberg. Spitzer did not say whether the investigations would result in indictments, according to accounts of the interview. And he dismissed suggestions from Greenberg’s lawyer that the key issues in the investigations were the result of accounting errors.

“The evidence is overwhelming that these were transactions created for the purpose of deceiving the market.  We call that fraud,” Spitzer reportedly asserted. “It is deceptive. It is wrong. It is illegal.”