Watchdog: Bernanke, Paulson Misled Public on Bailouts

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Posted: Oct 05, 2009 10:50 AM
A watchdog groups assigned to oversee the bank bailout is now reporting that Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson "misled the public about the financial weakness of Bank of America and other early recipients of the government's $700 billion Wall Street bailout, creating 'unrealistic expectations' about the companies and damaging the program's credibility."

As we all know, the federal government loaned struggling banks a total of $125 billion--an initial payout from the Troubled Asset Relief Program (TARP) to avoid major bank failures.  The goal, according to the Washington Times, was to give money to stable banks (not failing ones) so they would be able to lend money and reignite the economy:

But an audit released Monday by TARP Special Inspector General Neil Barofsky says senior government officials and Wall Street regulators, including Mr. Bernanke and Mr. Paulson, had "affirmative concerns" that several of the nine institutions were financially shaky.

In other words, many banks were deemed "stable" and received federal funding, even thought they were quite unstable.  

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"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 audit says.

"Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events - the further assistance needed by Citigroup and Bank of America being the most significant examples - demonstrated that at least some of those institutions were not in fact healthy."

The report makes no recommendations but argues that Treasury, the Federal Reserve and other federal agencies "should take more care in publicly characterizing the nature and objectives of their initiatives."

Full story here.