‘Moral Hazard’ as TARP Legacy Is Unfair Criticism, Treasury Official Says

Criticism that “moral hazard” is the main legacy of U.S. taxpayer-funded bailouts is unfair, a Treasury Department official said.

“We recognize that moral hazard is a real and significant concern” in the Troubled Asset Relief Program, Timothy Massad, acting assistant secretary for financial stability, said in a hearing before a House Oversight Committee panel today. “But to suggest that it is TARP’s main legacy is to ignore the facts, and to confuse the response to a crisis with the need to address the causes of the crisis.”

Massad was responding to criticism from Neil Barofsky, special inspector general for TARP. Barofsky told the House panel’s TARP subcommittee today that the program’s “most significant legacy may be the exacerbation of the problems posed by ‘too big to fail,’ particularly given the manner in which Treasury executed the bailout.”

TARP largely spared “executives, shareholders, creditors and counter parties, reinforcing that not only would the government bail out the largest institutions, but would do so in a manner that would do little harm to the responsible stakeholders,” Barofsky said.

In a New York Times op-ed article published today, Barofsky criticized the Treasury for providing money to banks “with no effective policy or effort to compel the extension of credit.”

Photographer: Andrew Harrer/Bloomberg

Timothy "Tim" Massad, acting assistant secretary at the U.S. Treasury Department's Office of Financial Stability. Close

Timothy "Tim" Massad, acting assistant secretary at the U.S. Treasury Department's... Read More

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Photographer: Andrew Harrer/Bloomberg

Timothy "Tim" Massad, acting assistant secretary at the U.S. Treasury Department's Office of Financial Stability.

Bush Appointee

Barofsky, appointed by President George W. Bush in 2008, steps down today and will join New York University’s law school as an adjunct professor.

Massad said taxpayers have recovered $6 billion more than the $245 billion of TARP investments in U.S. banks. The Treasury estimates that the bank bailouts eventually will “provide a lifetime positive return of nearly $20 billion.”

Massad also praised the restructuring of American International Group Inc. (AIG) and said the Treasury has made “enormous progress in recovering our investment” in the New York-based insurer.

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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