Report: Officials Misled on Bank Bailouts; Institutions Not So Healthy

The Washington Times (Washington, DC), October 5, 2009 | Go to article overview
Save to active project

Report: Officials Misled on Bank Bailouts; Institutions Not So Healthy

Byline: Sean Lengell, THE WASHINGTON TIMES

Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson Jr. misled the public about the financial weakness of Bank of America and other early recipients of the government's $700 billion Wall Street bailout, creating unrealistic expectations about the companies and damaging the program's credibility, according to a report by the program's independent watchdog.

The federal government last October loaned Bank of America and eight other healthy financial institutions a total of $125 billion - the initial payout from the Troubled Asset Relief Program, or TARP - in an attempt to avoid a series of major bank collapses that would push the sputtering economy into a free fall or depression.

The rationale for giving money to stable banks and not failing ones, regulators said, was that such institutions would be better able to lend money and thus unfreeze tight credit markets - a major factor in last year's Wall Street losses.

But an audit released Monday by TARP Special Inspector General Neil Barofsky says senior government officials and Wall Street regulators, including Mr. Bernanke and Mr. Paulson, had affirmative concerns that several of the nine institutions were financially shaky.

By stating expressly that the 'healthy' institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions' condition and their ability to increase lending, the audit says.

Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events - the further assistance needed by Citigroup and Bank of America being the most significant examples - demonstrated that at least some of those institutions were not in fact healthy.

The report makes no recommendations but argues that Treasury, the Federal Reserve and other federal agencies should take more care in publicly characterizing the nature and objectives of their initiatives.

Mr. Paulson, in an Oct. 14, 2008, statement announcing the original nine TARP recipients, described them as healthy institutions that have taken this step for the good of the U.S. economy.

The Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) similarly described the companies in news releases issued the same day.

Yet government officials and federal regulators privately were concerned that some of the institutions were financially stressed, the report says. Two of the nine institutions - Bank of America and Citigroup - would receive billions of dollars more in separate bailouts later. Another institution, Merrill Lynch, was hemorrhaging money for months before the enactment of TARP and was bought by Bank of America in January.

Regulators told auditors that the firms' health was less important than their interconnectedness and their overall importance to Wall Street. They were chosen based on their size, the types of services they provided, and their collective importance to the overall economy, they said.

Executives at several of the nine institutions said they were reluctant to accept TARP funds - and the strings attached to them - but told auditors that federal officials forced them to take the money.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Report: Officials Misled on Bank Bailouts; Institutions Not So Healthy


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?