Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (that’s SIGTARP to you) has released his Quarterly Report to Congress, which you can read here in .pdf. The opening section of the Executive Summary is below, and frankly, it’s not the most comforting thing you’ve ever read. While some of the conclusions describe positive results, others qualify as downright scary, and I wouldn’t be surprised to see direct quotes highlighted at upcoming Tea Party rallies.

My own executive summary:

• The financial system is far more stable in parts than at the height of the crisis in fall, 2008. Banks can raise funds and many that were on the verge of collapse have made an early repayment of the emergency government loans. These have resulted in a profit for the U.S. Treasury on some TARP investments, decreasing the cost of the bailout to taxpayers.
• The TARP goal of increasing financing to U.S. businesses and consumers has not been met, as lending continues to decrease and home foreclosures remain at record levels. The repayment of government funds by banks and the exit of the U.S. as a major shareholderhave significantly decreased the government’s ability to influence the policies of these financial institutions.
• Fundamental problems in the financial system have not been addressed to date, and “too big to fail” institutions are even larger, thanks in part to TARP and other bailout programs. Incentives to take reckless risk are even greater, as the market is convinced government will step in to cover losses that could threaten the system. Executive compensation also remains an incentive to take big risks.
• The government’s efforts to support home prices risk re-inflating a housing bubble.

From the SIGTARP Executive Summary of the SIGTARP Quarterly Report to Congress

Well into its second year of operations, the Troubled Asset Relief Program
remains a vitally important part of the Federal Government’s response
to the economic crisis, and the formal extension of TARP by the Secretary of the
U.S. Department of the Treasury on December 9, 2009, makes it clear
that this role will continue well into 2010. The focus of TARP has begun to shift,
however, as the early TARP programs that invested huge sums in banks are now
closed to further investments and most of the largest bank recipients have repaid
their TARP funds. Treasury has stated that, going forward, TARP will focus on foreclosure
mitigation efforts, small-business lending, and a continuation of support for
the asset-backed securities markets.

This time of transition provides an opportunity to take a step back and examine
whether Treasury’s efforts in TARP thus far have met the goals of the program.
On the positive side, there are clear signs that aspects of the financial system are
far more stable than they were at the height of the crisis in the fall of 2008. Many
large banks have once again been able to raise funds in the capital markets, and
some institutions — including some that appeared to be on the verge of collapse —
have recovered sufficiently to repay their TARP investments years earlier than most
would have predicted. These repayments and the sales of the warrants associated
with them have meant that Treasury (and thus the taxpayer) has turned a profit on
some of the individual TARP investments; as a result of these repayments, among
other positive developments, it now appears that the ultimate cost of TARP to the
American taxpayer, while still substantial, might be significantly less than initially
estimated.

Many of TARP’s stated goals, however, have simply not been met. Despite the
fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase
financing to U.S. 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.
Notwithstanding the fact that preserving homeownership and promoting
jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008
(“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures
remain at record levels, the TARP foreclosure prevention program has only
permanently modified a small fraction of eligible mortgages, 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. 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.

As important as assessing the effectiveness of TARP programs is, in the final
analysis, TARP can truly only be a success if TARP is both managed well and its positive effects are enduring.

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 fundamentalproblems 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.