Report: Federal officials misled on bailouts of big banks
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.