Re­port: Fed­eral of­fi­cials mis­led on bailouts of big banks

The Washington Times Weekly - - National - BY SEAN LENGELL

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 Oct. 5 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.

Of­fi­cials at Trea­sury and the Fed­eral Re­serve and other fed­eral reg­u­la­tors said it was im­por­tant that all nine firms ac­cept the money in or­der to in­still in­vestor con­fi­dence in Wall Street and to show that the na­tion’s bank­ing sys­tem “can with­stand any near-term credit loss.”

Mr. Paul­son stepped down as head of the Trea­sury Depart­ment in Jan­uary. He was suc­ceed by Ti­mothy F. Gei­th­ner, who, as head of the Fed­eral Re­serve Bank of New York dur­ing TARP’s cre­ation, also played a key role in craft­ing the scope of the pro­gram.

The other ini­tial TARP re­cip­i­ents were JPMor­gan Chase, Wells Fargo, Gold­man Sachs, Mor­gan Stan­ley, the State Street Corp. and the Bank of New York Mel­lon.

The ini­tial nine in­sti­tu­tions col­lec­tively held more than $11 tril­lion in bank­ing as­sets as of mid-2008, or about 75 per­cent of all as­sets held by U.S. banks.

Trea­sury had dis­bursed about $361 bil­lion of TARP money to more than 650 fi­nan­cial in­sti­tu­tions as of July.

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