TARP's Most-Significant Legacy May Be `Moral Hazard' Risk, Watchdog Says

U.S. taxpayer-funded bailouts are “a study in contrasts” marked by both financial success and the risks involved in propping up companies deemed too big to fail, a government watchdog said.

The rescues prevented “a catastrophic financial collapse” in 2008, according to a report today from Neil Barofsky, special inspector general for the Troubled Asset Relief Program. The non-financial costs include “damage to the government’s credibility that has plagued the program” and “the failure of programs designed to help Main Street rather than Wall Street.”

The Congressional Budget Office, which at one point estimated TARP would cost $350 billion, has lowered its projection to as little as $25 billion. That figure is “too high in my judgment,” Treasury Secretary Timothy F. Geithner said last month. Of the $700 billion Congress authorized for TARP in 2008, $410 billion has been disbursed.

TARP’s “most significant legacy” may be “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail,’” the report said.

Barofsky made recommendations to the Treasury Department on how to ensure the financial soundness of participants in the Small Business Lending Fund, a Treasury program operating outside TARP. Tim Massad, Treasury’s acting assistant secretary for financial stability, said in a response included with Barofsky’s report that the department “has carefully considered the recommendations.”

‘Remarkably Effective’

Massad, in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform, said TARP “has been remarkably effective by any objective measure.”

The bailout program “helped bring the economy and our financial system back from the brink, and it helped pave the way for recovery,” he said.

Barofsky, also scheduled to testify, said bailed-out companies “are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts and bailouts.”

In a Jan. 13 report, Barofsky said the 2008 rescue of Citigroup Inc., once the world’s largest bank, was “strikingly ad-hoc” and “appeared to be based as much on gut instinct and fear of the unknown as on objective criteria.”

The oversight committee is chaired by Darrell Issa, a California Republican who has said he will hold hundreds of hearings to challenge the Obama administration.

“While the warning signs that led to the financial crisis were ignored or went unnoticed, right now we have a candid assessment warning of the potentially disastrous consequences of institutionalizing a ‘too-big-too-fail’ mentality that rewards risky behavior at the expense of the American taxpayers,” Issa said in an e-mailed statement today.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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