Bailout 'makes reckless lending more likely'
- Source: Global Times
- [00:03 February 01 2010]
- Comments
The US taxpayer-funded bailout program, used to save banks from collapse during the financial crisis, makes future reckless behavior more likely, the government's bailout watchdog said in a report.
A quarterly report to Congress on the $700 billion Troubled Asset Relief Program, or TARP, made available yesterday, 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 incentivized 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,'' said the report from the Office of the Special Inspector General for the TARP.
The office, headed by Neil Barofsky, acts as a watchdog for taxpayers over how TARP money that 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, (with) 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.
With some banks already repaying TARP capital, it appears that taxpayers' ultimate costs may be less than initially feared but many of the program'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 on a month-by-month basis.
While preserving homeownership and promoting jobs were ''explicit purposes'' of an act that enabled TARP, the unemployment rate remains at 10 percent and only a small fraction of troubled mortgages have been permanently modified to lower borrowers' payments.
The report said that by coming to the aid of the troubled housing market, the US government effectively ''has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.''
Despite clear signs that aspects of the financial system are far more stable than they were at the height of the crisis in the fall of 2008, ''whether these goals can effectively be met through existing TARP programs is very much an open question at this time,'' the report noted.
Agencies
