US bank bailout was 'critical': Congress watchdog

WASHINGTON (AFP) – The US government’s multi-billion-dollar bank bailout helped avert a second Great Depression and cost taxpayers much less than expected, but was far from perfect, a congressional watchdog said Wednesday.

The Congressional Oversight Panel said the controversial $700 billion dollar bailout, launched in 2008, provided “critical” support for financial markets at a key time and will cost $25 billion — a fraction of the original estimate.

The Troubled Asset Recovery Program (TARP), which was signed into law by then president George W. Bush and taken up by Barack Obama, “provided critical support to markets at a moment of profound uncertainty,” it said in its final report.

The comments come nearly three years after the government stepped in to oil the wheels of the financial markets after Lehman Brothers’ collapse prompted vital inter-bank lending to dry up, leaving many household names in jeopardy.

TARP’s main success, according to the report, came not just through the massive sums injected but “by demonstrating that the United States would take any action necessary to prevent the collapse of its financial system.”

“Through a combined display of political resolve and financial force, the TARP quelled the immediate panic and helped to avert an even more severe crisis.”

“TARP will cost taxpayers $25 billion — an enormous sum, but vastly less than the $356 billion… initially estimated,” it said.

The Treasury Department, according to the panel, deserved credit for lowering costs through the “diligent” management of assets and “careful restructuring” of AIG, Chrysler, and GM.

But the oversight panel was not wholly supportive of the policy.

“Although this much-reduced cost estimate is encouraging, it does not necessarily validate Treasury’s administration of the TARP,” it added, citing poor transparency and the failure of some programs.

The policy was a dangerous gamble with taxpayers’ money, the congressional watchdog concluded.

The panel detailed how 18 large financial institutions at one stage received a staggering $208.6 billion in TARP funding almost overnight as the government tried to prop up the system.

“At one point, the federal government guaranteed or insured $4.4 trillion in face value of financial assets.

“If the financial system had suffered another shock on the road to recovery, taxpayers would have faced staggering losses.”

TARP was also criticized for compounding the sense that some “too-big-to-fail” banks can get away with wildly reckless trading.

“By protecting very large banks from insolvency and collapse, the TARP also created moral hazard,” the report said.

“Very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss.”

But whatever the report’s verdict, the bailout is unlikely to become popular among US taxpayers and voters.

With nearly 14 million workers unemployed, it is widely seen as a Washington sop to vested interests on Wall Street that did little to help Main Street.

“Because the TARP was designed for an inherently unpopular purpose — rescuing Wall Street banks from the consequences of their own actions — stigmatization was likely inevitable,” the report noted.

It added that the Treasury Department’s failure to clean out failed executives and clamp down on high salaries added to the stigma.