TARP Lessons for Iowa's Budget Cutters

October 23, 2009, 7:40 a.m.

Today's blog entry is another in a series devoted to Iowa's budget crisis and its impact on the University of Iowa. Prior entries included:

"How Many Administrators Does It Take? Administrators are Multiplying & Sucking Us Dry," July 16, 2009

"A University's Strategic Communication; A Modest Proposal to the Regents' University Presidents," October 7, 2009

"Iowa's Budget Cuts and the University; Economic Collapse Tests Moral Values," October 9, 2009.

"How to Cut Iowa's Budget; Fairness, Justice and Leadership by Example," October 15, 2009.

"UI Budget: Waivers Wave Goodbye to Savings; Consistency, Hobgoblins and Waivers," October 19, 2009

Barofsky: "Anger, cynicism and distrust [an] unnecessary cost of TARP"
(brought to you by FromDC2Iowa.blogspot.com*)
Iowa Governor Culver's axe has begun to fall. Jennifer Jacobs, "1,300 state jobs at risk in proposed cuts," Des Moines Register, October 22, 2009 ("Iowans could see fewer troopers on highways, less treatment for addictions, fewer prison guards, delays in new dental coverage for children, less child abuse prevention work, longer waits for state tax refunds, less aid for college and dozens of other impacts if the governor approves budget cuts his agency directors presented to him. State corrections and human services workers would see the brunt of the layoffs. Those departments account for nearly 600 of about 793 layoffs proposed statewide.").

Next Wednesday the Board of Regents will announce with a little more specificity how the three Regents' universities should respond to the Governor's order that they, too, are expected to further cut their state appropriations by another 10%. See Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.

What an awful, and thankless, responsibility. History records no occasion when a budget cutter's decision was greeted with a standing ovation. Usually the recipients' reactions are just the opposite. No applause; little understanding; just "anger, cynicism and distrust."

These are the public reactions the Department of the Treasury's Special Inspector General, Neil Barofsky, says the Treasury's handling of the TARP program have produced: "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP."

But note that while Barofsky acknowledges the public's "anger, cynicism and distrust," he says that reaction was not a necessary cost, and that it could have been avoided if the government officials involved had behaved differently.

It's a model Iowa's budget cutters would do well to study -- in order to avoid that reaction here, on the part of Iowans generally, and those associated with its universities in particular.

But first an update on another scandal and advice to Iowans on how not to do government programs, whether of largess or of budget cutting.

Wednesday I wrote about another example of Congress handing over taxpayers' money to generous campaign contributors from another sector of our economy -- the developers, contractors, home builders, real estate brokers and mortgage bankers. In addition to the trillions of dollars they already get, they are now pushing to expand and extend their version of "cash for clunkers" (without the need to come up with the clunkers): an $8000 grateful taxpayers contribution for each house sold (which they wish to expand from first time home buyers to all buyers, and from $8000 to $15,000). (Needless to say, there's no provision in this program to help those who are providing the houses through bankruptcy, foreclosure, and their willingness to live on the street.) "Housing for the Wealthy, Unemployment for the Poor," October 21, 2009.

Yesterday we learn of yet one more reason to oppose this program (a program that most economists agree is loony from their perspective as well). It turns out it's been riddled with fraud. Jackie Calmes, "Fraud Reported in Program to Help New Homebuyers," New York Times, October 22, 2009 ("Just as Congressional leaders are calling to extend a popular tax credit for first-time homebuyers, government investigators are reporting new findings that point to widespread fraud in the program. A previously undisclosed report from the Treasury Department’s inspector general said that as of Sept. 30, the Internal Revenue Service had identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations. In late July, the I.R.S. announced its first successful prosecution.").

That same Wednesday (October 21) PBS' "Frontline" revealed what those now advising the President were doing to beat back the calls for regulation during the 1990s, efforts that played a major role in creating our current economic crisis -- in the midst of which their Wall Street friends and former colleagues at Goldman Sachs are continuing to earn billions in bonuses.

"The Warning," PBS Frontline, October 21, 2009 ("'We didn't truly know the dangers of the market, because it was a dark market,' says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. 'They were totally opposed to it,' Born says. 'That puzzled me. What was it that was in this market that had to be hidden?' . . . Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. 'Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,' ["Frontline" producer Michael] Kirk says. 'Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.' Now, with many of the same men who shut down Born in key positions in the Obama administration, 'The Warning' reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one. 'It'll happen again if we don't take the appropriate steps,' Born warns. 'There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.'" From the "Introduction."). If you missed it, you can watch streaming video of the program from the "Frontline" site.

On October 5 the New York Times reported:

The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks. . . . A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.

The report also provides new insight into the way the Treasury allocated billions of dollars to nine of Wall Street’s largest players.

Louise Story, "Report on Bailouts Says Treasury Misled Public," New York Times, October 5, 2009, p. B2.













[Photo Credit: Larry Downing/Reuters; Time; "TARP recipients testify before the House Financial Services Committee on Feb. 11. From left: Goldman Sachs' Lloyd Blankfein, JPMorgan Chase's Jamie Dimon, Bank of New York's Robert Kelly, Bank of America's Ken Lewis and State Street's Ronald Logue."]

Jim Kuhnhenn, "Watchdog: Bailout Helped, but At a Cost," Associated Press/Time, October 21, 2009 ("[Treasury Special Inspector General Neil] Barofsky said [in his latest quarterly TARP report that] the Troubled Asset Relief Program has come at great cost to taxpayers, to the integrity of the financial system and to the public's perception of the federal government. 'Despite the aspects of TARP that could reasonably be viewed as a substantial success,' he wrote, "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP.' . . . The integrity of the industry: Many firms considered "too big to fail" last year, and thus in need of government assistance, are even bigger now. 'Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,' the report states."). (Time has also kindly provided us with "25 People to Blame for the Financial Crisis," Time.)

So now we have "Frontline" passing along former CFTC chief Brooksley Born's warning that "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience," and Neil Barofsky warning that "Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior."

And how is the Obama Administration and Congress -- Democrats and Republicans alike -- responding to this urgent need that their most generous campaign contributors be more effectively regulated in the public interest? With a wink and a nod and an outstretched hand.

As the Wall Street Journal reports,

Some of the biggest Wall Street firms are back in the political-spending game after hunkering down while they were getting government bailout funds. Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley and other large financial-services firms stepped up their political donations in September to members of Congress . . ..Most Wall Street firms stopped making donations to lawmakers when they were receiving government funds, and many lawmakers stopped accepting them. But now . . . they are making campaign donations again. At the same time, they are increasing their spending on lobbying . . ..

For the details on who has given how much see Brody Mullins and T.W. Farnam, "Wall Street Steps Up Political Donations, Lobbying; Firms Boost Outlays Amid Debate on Financial-Services Overhaul, After Slowing Spending While Getting Bailout Cash," Wall Street Journal, October 23, 2009.

Sadly, this includes as well the President of the United States, Barack Obama, who even personally went to New York earlier this week for another $30,400-a-plate fund raiser. David D. Kirkpatrick, "Wall St. Giants Reluctant to Donate to Democrats," New York Times, October 20, 2009, p. A1.

Ironically, the "reluctance" to which that headline refers is the Wall Street executives "fear of getting caught in the public rage over the perception that Wall Street titans profiting from their government bailout may use their winnings to give back to Washington in return. And the timing of the event, as the industry lobbies against proposals for tighter regulations to address the underlying causes of last year’s meltdown on Wall Street, has only added to the worry over public appearances."

This is not the most laudatory basis for reluctance, perhaps, but at least it's better than that of a President who seems to be either unaware of or unconcerned about "the public rage over the perception" -- what Barofsky identifies as the unnecessary public "anger, cynicism and mistrust" fomented by such fund raisers.

This is probably enough reference to stories for a blog entry. But here are a few more for those interested in pursuing this, The Crime of Two Centuries, before turning to the lessons for Iowa's budget cutters.

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program. . . . including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today. . . .

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs. . . .

Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”

As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report. . . .

The Treasury has spent $441 billion of TARP funds so far and has allocated $202.1 billion more for other spending, according to Barofsky. In the nine months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, he said. . . .

Barofsky said the TARP inspector general’s office has 35 ongoing criminal and civil investigations that include suspected accounting, securities and mortgage fraud; insider trading; and tax investigations related to the abuse of TARP programs.

Dawn Kopecki and Catherine Dodge, "U.S. Rescue May Reach $23.7 Trillion, Barofsky Says," Bloomberg, July 20, 2009.

"Watchdog: Treasury and Fed Failed in AIG Oversight," Associated Press/New York Times, October 14, 2009 ("Treasury Secretary Timothy Geithner is 'ultimately responsible' for regulators' failure to rein in massive bonus payments at American International Group because he led the agencies that provided AIG's lifelines, according to a bailout watchdog. Geithner was president of the Federal Reserve Bank of New York before taking over at Treasury in January. He has said he did not learn until March about the $1.75 billion in bonuses and other compensation promised to AIG employees. But Geithner's subordinates at the New York Fed learned of the payments in November, according to Neil Barofsky, the special inspector general for the $700 billion financial bailout.").

Pallavi Gogoi, "TARP report slams lack of transparency," USA Today, October 20, 2009 ("In a scathing report out Wednesday, a government watchdog blasts the Treasury Department for its handling of a $700 billion bailout program and for not adopting all of its earlier recommendations [and] Treasury's failure to provide more details about the use of TARP funds . . ..").

"Bailout watchdog Barofsky: Too early to say how much of $700B will be refunded to taxpayers," Associated Press/Baltimore Sun, October 21, 2009.

"U.S. 'unlikely' to recoup aid to banks; TARP watchdog's report is also critical of secrecy," Bloomberg/Washington Post, October 22, 2009.

William A. Barnett, "Who’s Looking at the Fed’s Books?" New York Times, October 21, 2009 October 22, 2009, p. A35.

And the meat-less, dry bone thrown the public's way turns out to be little more than public relations window dressing in front of what looks very much like same-old, same-old in the back rooms. Joe Nocera, "Pay Cuts, but Little Headway in What Matters Most," New York Times, October 23, 2009, p. B1. (They don't affect many people; for those they do affect, it only impacts their salaries for November and December of this year, then they can be renegotiated; stock options are exempted, so there's no limit to that continuing source of income, so long as they hold them for two to five years -- which they'd do anyway to ride up the price; and they can make more if things improve for their company, regardless of what they personally had to do with that. As the headline puts it, there's "little headway in what matters most."). See also, Editorial, "Symbolic Cuts Need to Set Tone for Real Cuts," Iowa City Press-Citizen, October 23, 2009 (regarding Governor Chet Culver's self-imposed salary cut).

As for Iowa's budget cutting, it's important for us to keep it in context. Take a look at this report prepared by one of the other Nicholas Johnsons (in addition to this one a couple of the others are the law professor at Fordham, and the literal rocket scientist). Nicholas Johnson, Phil Oliff, and Jeremy Koulish, "An Update on State Budget Cuts; At Least 41 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm," October 20, 2009 (with a link to the full report in pdf).

One of the consequences of the Washington-Wall Street Axis, described above, is that it really is tough all over. Those SOBs have harmed every single American -- except for themselves, their friends and colleagues, and others in the top 1% of the wealthiest. Iowa is even in some ways, such as unemployment, better off than many.

In terms of the universities all Iowans, not just the Board of Regents, Iowa Legislature, and the universities' presidents, need to do some serious and heavy thinking about the role of "public education."

I've written about this before, and undoubtedly will again. Here's a summary:

o A century ago or more the American people and their elected officials decided that a fourth- or eighth-grade education was not enough for our kids. If nothing else, our economy and our military required a minimum of 12 years of schooling (what is popularly referred to as "K-12"). We agreed this was so important that it would be provided free to all at taxpayers' expense, because we all benefitted.

o It is not a stretch to say that if K-12 was essential a century ago, K-16 (that is, a college education; or its equivalent for those in the trades, something similar to the German system) is equally essential for today's economy and military -- not to mention the "life, liberty and pursuit of happiness" of our citizenry and their self-governing democracy. This is also sufficiently important that it should be paid for by all.

o The GI Bill after World War II brought returning veterans to the University of Iowa and other colleges and universities throughout America, at little or no cost to the students, but with an economic return many times over for our post-War economy and the American people.

o An economic downturn is precisely the time when it makes sense to increase the number of citizens getting additional education. (a) Rockwell and other corporations are pleading with educators to help create a better educated workforce. What better time to do it than when there are fewer jobs available? (b) Isn't laying out money for public education better than laying out the same amount of money for unemployment compensation? (c) If we're looking for long term economic growth, and not just short term fixes, there's no better investment than education.

o As recently as 1981 the State of Iowa paid 77.4% of the cost of an Iowan's university education; the student, and his or her parents, paid 20.8%. Today that has dropped for the State from 77.4% to 42.8%, and increased for the student from 20.8% to 51.3%. (See the Register story and chart, below.)

o One can argue over the most appropriate allocation of the costs of education between those who benefit directly (the students, and to some extent their parents) and indirectly (every American taxpayer). But whatever that most appropriate relationship is thought to be, what is the rationale for the enormous disparity between the relationship for K-12 (0% for students; 100% for taxpayers) and the 13-16 of K-16 (51.3% for students; 42.8% for taxpayers)? Would we ever consider, as a budget cutting measure, going back to the days of K-8 -- providing free public education through junior high, and then charging parents 51.3% of the actual cost of providing high school education? Think about it.

For the Register's chart, and story, see Gunnar Olson and B.A. Morelli, "Tuition now top funding source for regents universities," Des Moines Register, October 23, 2009 (including a chart showing the relative percentage of costs covered by tuition vs. appropriations increasing from 20.8% vs. 77.4% in 1981 to 51.3% vs. 42.8% in 2010). And see the news this morning that Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.

I sympathize with you, Iowa's budget cutters. Yours is not an enviable task. But you can learn from the errors of Washington, and try to avoid them.

Be fair and just in your judgments. Be rational, and fulsome in your explanations. Be transparent and open in your process.

And keep in mind Barofsky's observation that the public's "anger, cynicism and distrust" -- while warranted and understandable -- is a dangerous thing, with long lasting consequences, and that it is, above all "unnecessary."
_______________
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
# # #