Auerback: TARP Was Not a Success – It Simply Institutionalized Fraud

By Marshall Auerback, a portfolio analyst, hedge fund manager, and Roosevelt Institute fellow

There’s a good reason why the Troubled Asset Relief Program (aka “TARP”) is “a success none dare mention”, to use the title of Ben Smith’s latest post at Politico. Put simply, it’s not a success. Calling the TARP a success is like claiming your wastrel son is getting his life together because he’s settled his gambling debts, while omitting that you are paying for his apartment, got him an overpaid job at your company, and are handing him $100 bills more than occasionally.

Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?

Virtually all of the goals of TARP could have been achieved via regulatory forbearance, rather than government bailouts. Money was “repaid”, not because the banks were accumulating massive profits as a consequence of their revival, but largely as an outgrowth of the accounting tricks sanctioned by Congress and the White House in the wake of the 2008 financial crisis. Why did the governments simply not temporarily suspend capital requirements? A government can always keep a bank in operation without bulldozing it. You can keep them functional via government control (i.e. the FDIC) and get rid of the corrupt management before you undertake anything else. There is no numerical limit to the amount of available bank capital. It’s about price, not quantity.

In any event, inadequate capital didn’t cause the financial crisis. Lying and corruption did.

Nothing in Basel III addresses the fundamental perverse incentives that cause recurrent, intensifying financial crises. The Enron era “control frauds” should have taught us that we can have financial crises without bank failures. We’ve kept all of the liars in power or paid them off with massive golden handshakes. At least with Enron, Jeffrey Skilling and Andy Fastow went to jail (although the way things are going, maybe Skilling will get released).

That aside, why doesn’t anybody mention the fact that the banks have basically been able to engage in perpetual backdoor bailouts via Fannie and Freddie? Because of the intense Congressional pushback on TARP, Geithner and Summers (who has a history of doing end-arounds Congress – see Mexico 1995), decided to continue the bailouts by using the GSEs as a dumping ground for the toxic junk.

There is a lot of anger directed at Fannie and Freddie in the wake of the meltdown, but the critics of the GSEs are never able to explain why defaults on home mortgages were so rare until the “free markets” took over the mortgage sector. As Randy Wray has pointed out,
Fannie and Freddie even survived the savings and loan fiasco of the 1980s, when thrifts were “freed” to pursue “free market” profit maximization that resulted in suicide for the whole industry. It was only after 2004 when Fannie and Freddie were directed to cater to control frauds like Countrywide that they got into trouble.

And Ben Smith seems to forget that Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments, which allowed them to raise the capital. Well, I guess you can say that this is good, but it basically entrenches lying as a legitimate tool for economic policy. When we lie about accounting and leave zombie banks in the hands of those that looted them and caused trillions of dollars of losses we eviscerate our integrity and our efforts at economic recovery. And lying does not work very well – look at Japan. As Bill Black has argued, it prevents markets from clearing, it leaves failed banks under the control of failed bankers, and it leaves banks twisting slowly in the wind and unable and unwilling to fund the recovery.

The late Senator Daniel Patrick Moynihan coined the memorable phrase, “defining down deviancy”. Journalists who seek to justify TARP (and Smith is not the first), are symptomatic of the way we have come to define down financial deviancy, even since the days of Enron, in the manner in which they are willing to attempt to justify an abomination like TARP. Both the Bush and Obama administration followed a three-part strategy towards our zombie banks: (1) cover up the losses through (legalized) accounting fraud, (2) launch an “everything is great” propaganda campaign (the faux stress tests were key to this tactic and Ben Smith perpetuates this nonsense in his latest piece on TARP), and (3) provide a host of secret taxpayer subsidies to the systemically dangerous institutions (the so-called “too big to fail” banks). This strategy is the opposite of what the Swedes and Norwegians did during their banking crisis in the 1990s, which remains the template on a true financial success.

The problem is that the policy was not shaped by finance or sound economics, but by politics. Both administrations have sought to keep the American people from knowing about these cover-ups and secret subsidies because they know that we would not tolerate either policy. The cover-ups and secret subsidies are not simply awful financial policies; they are also a betrayal of democracy. And our press has gone from clulessly enabling this treachery to actively promoting it.

Print Friendly, PDF & Email


    1. readerOfTeaLeaves

      And after they do that, they should take it to Kinko’s and have it blown up to the size of a 10 story building; send copies to every major metropolitan city in the US and have it plastered to the most visible 10-story building for public viewing.

      It should also be made into an iPhone-iPad app (with Android parallel).
      And it should be widely emailed, discussed, and highlighted.

      Thank you, Marshall Auerback (and Yves) for this gem of synthesis.
      Take a bow…

      1. Indigenous Centurion

        TARP a success is like claiming your wastrel son is getting his life together because he’s settled his gambling debts, while omitting that you are paying for his

        Marshall Auerback etched into the stone of Capitol Hill

        Sounds good to me. But how could The Crooks have gotten away with it so easily? Did they perhaps know that deep within the subconscious of each of us is a small whisper of a voice that reiterates, “Yes Virginia! There is a Santa. There is a free lunch! There is an economic stimulant that can easily make us all wealthy by paying us to sit at home as we make lucrative investments out of our deep-debt-mortgages. Yes, Virginia, a ponderous mortgage is a brilliant investment. An yes, Virginia, you are still a virgin when you live in Virginia and fly Virgin Atlantic. You are such a Puritan! Yes, Virginia, my seduction is good for your circulatory system. Have another shot of scotch straight up and another fantasy.”

  1. anon

    Accounting relief IS forbearance. It allows banks to earn their way out of capital inadequacy. That’s what forbearance does.

    You can’t have it both ways.

    1. Marshall Auerback


      Fraud is not tantamount to “accounting relief”. That’s part of the problem. All a depositor cares about is whether he/she can take his/her money out of the bank. You can replace management which engaged in the control fraud and continue to use the government to keep open the operations. That’s very different from TARP.

  2. Tom Hickey

    Good post, Marshall. Unfortunately, so far it is only the Tea Partiers that have taken up torches and pitchforks over the “bailout.” I suspect that the Establishment of both parties is feeling the heart. Hopefully, the outrage will spread as the numbers deteriorate and real conditions get worse. This stinks.

    1. anon

      I believe he meant relaxing capital standards rather than providing cash capital. Mosler favored a similar approach.

      Relaxing capital standards is forbearance. So is relaxing marked to market accounting forced on unmarketable assets. The first means banks can take their time in raising capital through earnings rather than raising it at once through either new issues or government cash. The second means the same thing – banks aren’t forced to get cash capital right away as a result of value “markdowns” on assets for which there is no market.

      You really can’t promote one and criticize the other with logical consistency.

      1. Jason Ray

        The idea behind relaxing accounting standards is to give time for un-marketable assets to gain the value they truly deserve. Sometimes market forces are such that banks might have to take massive losses when the assets are actually worthy absent market disturbances.

        However, this is not the case today. These “assets” are fraudulent mortgages; they arent worth anything because the underlying mortgages are for homes that are populated by people with insufficient income. Also, I believe that, traditionally, the relaxation of accounting standards is a temporary measure and it has been several years now with no end in sight; temporary it ain’t!

    2. KFritz

      The Tea Party has taken up cudgels solely fr/ discomfort and lack of understanding. Their anger is inextricably intertwined w/ amorphous, multidirectional paranoia. They’re not angry for the right reasons.

      1. ndk

        This is foolish, but I don’t especially care whether they’re angry for the right reasons or not. I want the oligarchs and corporatocracy out, and if the Tea Party is the most likely means, I’m headed to the harbor.

        And yes, I know full well that the dynamic environments of instability do not lend themselves to good outcomes. I think our current situation is sufficiently squalid on the governmental spectrum that I’m willing to take a chance.

        1. attempter

          That’s right. No matter what the risks of increasing radicalization as such, we have to see it as a good thing.

          Any prescription, out of cowardice or venality, to submit to the status quo and try to “reform” it in some wretched, miserable way, simply offers a 100% chance of staying permanently mired in deepening serfdom.

          On the other hand even the worst right wing radicalism is still pumping more energy into the already turbulence-crazed system. That has obvious risks, but it also increases unpredictability.

          Of course, none of that’s any good if we citizens aren’t also organizing for true direct democracy (which is also “radical” from the point of view of today’s kleptocracy and of all elitists). We need to provide an alternative for all that radical protest energy coursing out there. Otherwise the fascists are likely to win.

          1. Doug Terpstra

            “…even the worst right wing radicalism is still pumping more energy into the already turbulence-crazed system. That has obvious risks, but it also increases unpredictability.”

            I’m with you and ndk: instability seems the only hope to shake loose a manifestly corrupt system, but it’s also perilous. Yesterday’s elections seem to have upset the establishment with dubious winners, so it appears the GOP is reaping a whirlwind from the monster it created, and TPTB will undoubtedly attempt massive rigging in November. Thus your campaign for debtor-initiated jubilee, also very destabilizing, is a most compelling, morally-clear route to peaceful transformation.


          2. attempter

            Thanks for the link Doug.

            BTW, I should’ve clarified that by “right wing radicalism” I meant the feral tea party kind, the kind which the system is trying to control but isn’t drawing its vital energy from the system.

            But I didn’t mean to obscure the fact that Wall Street financialization and the system in general are radical themselves, by any democratic or public interest measure.

            In other words we should remember that the establishment is radical and not be lulled by any Status Quo Lie, even as we differentiate feral radicalism coming from outside.

          3. KFritz

            I assume that there will be some sort of implosion of this political-economic system after all the accounting legerdemain has reached its inevitable endgame. A defacto fascist government is one somewhat likely outcome.

            Your strategy makes an assumption: accelerating the process to endgame is worth any risk. Because turning a bunch of crazed infantile Ids loose on the machinery of our social order (Sarah Palin, Glen Beck, et al)is a huge risk. Think of all the other parts of the machinery they might effect, besides the economy.

            I believe that Psychohistorian is correct predicting that procrastination will worsen the economic endgame. But if letting the crazies loose is the only alternative….we’re in more trouble than I, for one, hope for.

          4. Jason Rines

            Debtor jubilee is when the American people once again have control over the government. But do not think that this will be peaceful. The blowback will come from overseas creditors that also now includes former citizens of America.

            Let’s put it this way, I am hedging to make sure I am self-sustainable in a small community 40 miles from any major metro.

            Sorry to add to the already palpatable fear but history shows us what happens as city-states went on to nation states. Also, the management paradigm of pyramid is in transition to circular, asymmetric. The elite may view it is geopolitics and a status quo but in essence, what they will be fighting against is evolution itself. This is going to get very messy.

  3. Tom Hickey

    anon, as I read Marshal he said that “forbearance” should have been the government stepping in to prevent a crisis, while also getting rid of the people responsible and instituting accountability for fraud and corruption.

    Government has the tools to prevent meltdowns, and it also has the tools to clean house at the same time. But neither the Bush administration nor the Obama administration wanted to take on the Street for a variety of reasons, some misguided, some self-serving, and some unprincipled and dishonorable. It was picking the people’s pockets and then looting the Treasury.

  4. tawal

    Why is Mozillo of Countrywide not in jail. He lied to shareholders while selling his shares. He bribed Senator Dodd, with preferred home loans. He put better qualified borrowers (by Countrywide’s own liquidity tests) into sub-prime loans, with usurious interest rates, that their own models showed could not be repaid. He paid loan brokers without reporting 1099’s, breaking IRS laws. What else have I forgotten?

    1. ndk

      “What else have I forgotten?”

      Connections, mostly. But I’ve never believed in prosecution of figureheads as a remedy. While Mozilo ought to be in jail and barred from tanning salons for life, and I would chortle as much as anyone if it happened, that really won’t fix anything. We have much deeper issues that need to be addressed more urgently.

  5. callingnew

    Our economy is controlled by sociopaths in pin stripe suits. These sociopaths owe allegiance to no country. They create nothing of value. On the contrary, they scheme to get more and more loot, diverting funds from the great flow of money passed through them by the Federal Reserve. They support reform only so much as it strengthens their power such as financial reforms that limit competition and cap and trade legislation that gives them power over industry. They have no ideals save the ideal that nothing should interrupt their right to pursue more and more loot. When there position of supremacy comes under serious threat they will threaten catastrophe.

    1. readerOfTeaLeaves

      Agree in the sense that — despite their ‘smarts’ — these loons don’t have the judgment to realize they’re killing their Golden Goose. Short term greedy = long term moronic.

  6. chas

    Many of the elites behing the scheme to rob America’s working people actually have psychiatric conditions. They’re mentally unstable. They’re delusional.

    “de•lu•sion [di l’n]
    (plural de•lu•sions)
    1. false belief: a persistent false belief held in the face of strong contradictory evidence, especially as a symptom of a psychiatric condition
    2. mistaken notion: a false or mistaken belief or idea about something”

    Bernanke’s positions on subprime prior to the crash were definitely delusional.

    Giethner’s beliefs on the Federal Taxes he owed was definitely delusional.

    How can we make any progress in this country with these mentally unstable individuals (elites) in charge?

  7. ndk

    I find it very admirable that you have it in yourself to continue caring so much at this point. I wonder whether there will be a point at which you give up, as so many of us evidently have.

    The damage done to the faith in the basic fairness and equality of the system is going to be permanent in many minds. People have been seared by many of the actions that you describe in your writings, and those scars will not fade.

    I had long ago believed that the generation of disbelief in the honesty of the system and the value of its currency was a deliberate ploy. By affecting expectations about the future value of money and the fairness of the system, the Fed may have believed that it could scare currency into circulation and spark inflation.

    I’ve started to question myself, though. Not only because it has failed to do what I thought it was intended to do — other than spawning legions of goldbugs, Cocoafinger, and other zeitgeists — but because even here, at the point where so many are genuinely losing faith altogether, the foolish policies continue. I know very few who think further monetary policy action, as opposed to fiscal action, will be effective, or even non-malignant. But there is a uniform consensus that it will be done anyway.

    So now, I start to wonder whether the system really is as corrupt as you describe. But if it is, I don’t see why you bother inveighing at it as such. It’s pissing in the wind. I’m beginning to wonder whether the most paranoiac amongst us have also been the most keen.

    Anyway, please keep your fighting spirit alive. It’s about all we have left — particularly those of us who traded in the belief that sanity would prevail, and were bankrupted as a result.

    1. Skippy

      A quick study of criminal sociology / psychology in gang culture starting with bootleggers (prohibition) to the modern day drug cartels would fill in the gaps for you ndk…I KID YOU…NOT.

      Just because they ware nice suits w/absurd hair cuts, and pedal structured financial instruments rather than mood changing chemicals, it does not change the underling ethical or moral tableset.

      Skippy…been there, done that.

      PS. would have liked to hear your voice on the China / EU posts…sigh.

      1. ndk

        Sorry, I’ve been bumming around at other sites a bit during the season of summer reruns here. I’ll try to add my worthless 2 cents a bit more often. :D Good to hear from you again, man.

      2. Bates

        Interesting article at Calculated Risk about the TARP banks…

        “TARP Deadbeat list grows to more than 120 banks”

        ‘From Brady Dennis at the WaPo: More banks missing TARP dividend payments

        The latest report … shows that more than 120 institutions … have missed their scheduled quarterly dividend payments … a record six banks each missed six dividend payments. Saigon National Bank in Southern California has missed seven.

        In addition, five banks that received capital injections from the controversial $700 billion Troubled Assets Relief Program have failed altogether, making it highly unlikely that taxpayers will recover the nearly $3 billion poured into those institutions.’

    2. Psychoanalystus

      My friend, the system is rotten to the core. We’re talking putrid here. Major stinker. Hopelessly beyond redemption. Right now, the best thing to do is lay low, gold in pocket, gun in hand, and wait for the whole thing to come crashing down. Just make sure you stack up on blank DVDs, because you want to tape every gory detail. And don’t forget the popcorn. I say, the circus will start after the elections.


    3. Jason Rines

      Just make sure you have the means to keep yourself alive without the aid of “the government”. Don’t expect any assistance as things escalate to a point from anybody but those in small groups you are hopefully forming now.

  8. KFritz

    What’s really daunting about events since 2007 is that the endgame has yet to begin. It will be unpleasant, to say the least of it. Much luck to all of us.

      1. Skippy

        Silly me, I thought it was just one psychotic endorphin blast off / crash / blastoff internal merrygoround, hence Rupert Murdoch’s private blackjack rooms in Vegas with tens of millions in play_at_one_time_, all on multiple tables.

        I still wonder if the scuttlebutt about him flipping a coin for a yanks MM company, being asked to settle down with the hyperboles whilst playing when the yank was trying to change his company’s fortune’s at the tables was true.

        This is why the commons need to shout “Respica te, hominem te memento” and “Memento mori ” at every daybreak and sundown, and if need be with the look of a lunatic. Bring it down brinkmanship they say, well that does work both ways don’t it.

        Skippy…endgame…we don’t need no stinking endgame, bawwhahahaha.

  9. Bates

    I find it humorous in a morbid way that some commenters here believe that the equities markets are sending any sort of signal about the underlying economy. When 255 stocks account for 60% of trading on any given day, high frequency trading for the most part, what sort of signal can be gleaned from the trailing P/Es?

    Outflows from equities have been large and continuous for months. Occasionally Zero Hedge updates the outflows. We are witnessing lots of robots trade the markets, some sample rates, bid/sale offers are running 15,000 hits per second. Meanwhile, liquidity remains very thin and it takes little buy/sell action to move the markets. Good luck to any individual that attempts to trade against the bots. Good luck to any individual that thinks that these equity markets can be traded on technicals…or, fundamentals.

    Auerback is right about the banks. They have been kept on life support and remain a giant squid sucking on the real economy of Main St. They should have been liquidated along with Lehman Bros…and their at risk counter parties should have been allowed to fail. I said this long before TARP passed and was ignored…but, I was in good company.

    By propping up Wall St the dollar is increasingly at risk. The 30 yr bond auction of Sept 9 was a near disaster, with primary dealers (Wall St Banks) taking down 62% of the offer. These actions do not go unnoticed by our competitors, who are increasingly calling for a move out of the dollar as the world reserve currency.

    If the Fed goes ahead with another round of QE and it is a very large number (I have heard $5 Trillion dollars) it could be a stake through the heart of dollar hegemony. As more trading around the world is settled in currencies other than the dollar, new confidence is being found by those traders using alternate currencies. Once new trading patterns are established in other currencies I see no reason that a return to dollar settlement would happen.

    US citizens are forced to settle in dollars when doing business. Can the US force other soverigns to continue to use the dollar? Without more wars I see no way the US maintains the dollar as the world reserve currency. The move out of the dollar is slow, but is proceeding. For those that do not think this is a big deal…you need to do some homework.

  10. Dr. Pitchfork


    That’s my fear — that coming up on the 2nd anniversary of Lehman, with MSM tools trumpeting the “success of TARP,” many of us will just give up. But I’m not sure that’s what’s happening. In fact, I think most of us “paranoid” folks are just exhausted from playing Cassandra, meanwhile “normal” people are starting to wake up. As we flag, the normal people — Tea Partiers and such ;-) — will pick up the slack. That’s my hope, anyway.

  11. craazyman

    Excellent post.

    Thank you Marshall Auerback.

    I am convinced the truth will eventually prevail, although
    God only knows what will transpire before it does. There’s a kind of victory in repeating it, clearly and openly, even if it seems futile (it has to do with morphogentic fields as described by the Cambridge biologist Rupert Sheldrake, but I don’t have time to elaborate right now).

  12. castironstrawbreaker

    How long does regulatory forbearance take? Will it stop a worldwide run on the banks? Just asking!

  13. castironstrawbreaker

    Didn’t the GSE’s already have toxic junk? Most of the products received by Fannie and Freddie were supposed to be guaranteed by the for-profits. Their lying and corruption caused great harm to the GSE’s (taxpayers). No need to create a toxic bank for toxic assets, the for-profits already did that for us, and then bet against it. And on losing the bet turn around and gets #TARP. No names mentioned, just do a stress test for goodness sakes. We’re all useful fools to the Great Financial Empire.

    1. Yves Smith Post author

      No, serious delinquencies on Fannnie/Freddie paper, even after their walk on the wild side in Mozilo land, is 4%, defaults ~ 2%, v. serious delinquencies of something like 40% on private label paper.

  14. Doug Terpstra

    Thank you, Marshall Auerback, for an important post, clear documentation of crimes for the post-mortem autopsy. This too shall pass, but the longer the zombie is propped up and reanimated, the more rank its stench and the more thorough its eventual destruction and repudiation will be. The new paradigm will then rise from an entirely new, reinforced foundation.

    As DownSouth observed, we are witnessing “the Mexicanization of the United States”, where only a thin veneer of pretense obscures the corruption. But here, we have no Timmy to bail us out. Maybe, as in the movie “Day After Tomorrow”, we’ll be one day sneaking south across the Rio Grande, hoping for hospitality and amnesty.

    Habla Espanol?

  15. warren mosler

    the economy can readily prosper without the financial sector. In fact, the financial sector is predominately parasitic.
    No financial sector and no lending means for a given size govt taxes can be that much lower to sustain aggregate demand and employment without causing inflation

    1. jcmccutcheon

      Isn’t North Dakota ( or South?) kind of an example here as they have a state bank and the economy is doing very well.

  16. MarcoPolo


    Re: “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it.

    Hellllloooo. Government (TARP) is part of the control (fraud). They are on the payroll. Complicit.

    At some point it breaks. I don’t know when or what the trigger is. But eventually there will be a loss of confidence in the dollar and perhaps in fiat currency altogether. It will be impossible to make a deal. Trade breaks down. Commerce drys up. Call it hyperinflation as Gonzolo Lira does if you like. The details don’t matter. It will create a space to be occupied by fascists who will endeavor to maintain the status quo by diktat (as is pretty much already the case) and we’ll all go along because we’ll all see it as in our interest.

    Haven’t kept up with this blog. Like this post, Marshall.

Comments are closed.