TARP Watchdog Says Treasury Misled Public on Bailouts

Neil Barofksy, the special inspector general overseeing the $700 billion financial-sector bailout [TARP] program, contends in a report that the Treasury Department mislead the American people about the health of the nation’s biggest banks receiving unfairly massive government cash infusions last year.

According to the report, released today by Mr.  Barofksy’s office, U.S. officials — while generally acting properly in Oct. ’08 to avert the collapse of the financial system —  ‘deliberately created’ the impression at the time that banks were healthier than was the case. The premise behind the claim was that confidence had to be restored and panic stemmed, even if this meant misleading the public about the real state of the nation’s financial institutions.

Former Treasury Secretary Hank Paulson said on Oct 14, ’08, for instance that the banks were “healthy”, and that they “have taken this step (accepting the money) for the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses. Paulson also said, together with the  Fed Chairman Ben Bernanke, that their $125 billion injection into nine banks in October 2008 was a program for “healthy” institutions.

The reality was that privately regulators believed several of those banks were less than healthy, the inspector general writes.

“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 report said.

Barofsky also states in his report that the fact that Citigroup (NYSE:C) and Bank of America/Merrill (NYSE:BAC) soon required billions in additional assistance underlines the inaccuracy of the “healthy institutions” claim and raises questions about the whole effort.

“Statements that are less than careful or forthright – like those made in this case – may ultimately undermine the public’s understanding and support,” the report said…”government officials should be particularly careful, even in time of crisis, of describing their actions in an accurate manner.”

Separately:  Barofsky’s report found no indication that government officials advised BofA to withhold information about losses at Merrill, which it bought in January, from shareholders.