US watchdog: bailout plan doesn’t work

City A.M. Reporter
THE US taxpayer-funded rescue programme set up to save banks from collapse during the financial crisis makes future reckless behaviour more likely, the government’s bailout watchdog has warned.

A quarterly report to Congress on the $700bn (£437bn) Troubled Asset Relief Program, or Tarp, said financial firms seen as too big to fail before 2008 have only grown larger as they feasted on subsidies from the bailout program.

“To the extent that institutions were previously incentivised to take reckless risks through a ‘heads I win, tails the government will bail me out’ mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions,” the report from the Office of the Special Inspector General for the Troubled Asset Relief Program, said.

The office, headed by Neil Barofsky, acts as a watchdog for taxpayers over how Tarp money the Treasury Department administers is used.

The report said little has been achieved in terms of correcting underlying problems that helped create the financial crisis.

“Even if Tarp saved our financial system from driving off a cliff in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” it warned.

The report noted that Tarp, which was originally pitched to Congress as a way to help banks by buying toxic or unwanted assets and then, when Congress approved it, turned into a plan for injecting capital into banks, is changing again.

“Treasury has stated that, going forward, Tarp will focus on foreclosure mitigation efforts, small-business lending, and a continuation of support for the asset-backed securities markets,” the report said.

With some banks already repaying Tarp capital, it appears that taxpayers’ ultimate costs may be less than initially feared but many of the programme’s goals are not being met.

The report noted, for example, that while Tarp was supposed to encourage banks to increase financing for US businesses and consumers, lending is actually decreasing monthly.