Watchdog says TARP helps perpetuate "Too big to fail"

WASHINGTON (Reuters) - The watchdog panel for the $700 billion bank bailout faulted the U.S. government for the last time on Wednesday, saying the program helped underpin the perception that federal authorities will always prevent troubled financial firms from failing.

In its final report on the bank bailout, the panel attacked the government for not being transparent enough and not articulating clear goals for its foreclosure prevention program.

It also said federal intervention transformed the notion of 'too big to fail' into a stark reality.

"Very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss," said the report authored by the Congressional Oversight Panel.

Stigmatized for bailing out Wall Street at the expense of ordinary Americans, the Troubled Asset Relief Program, known as TARP, used billions of dollars in taxpayer money to prop up major financial firms, including Citigroup and Bank of America.

Timothy Massad, the Treasury official in charge of the bailout program, said it was "simply wrong" for companies to think that the government would provide assistance to bail them out in the future. The Dodd-Frank financial reform bill "makes it clear that we should not use taxpayer funds for that," Massad told reporters.

In recent months, TARP has enjoyed a renaissance of sorts, with some of its harshest critics admitting that the program helped save the financial system from collapsing.


The watchdog panel concluded taxpayers would not likely recoup all of the $85 billion extended to the auto industry. Most of that went to restructure General Motors Co and Chrysler Group, now run by Italy's Fiat SpA, in bankruptcy.

The group found that government intervention in the automaker bankruptcies "raised questions about the long-term effects" of such action on credit markets, as well as sticky scenarios involving companies considered "too big to fail."

The report found that the Treasury failed to set clear goals, making it difficult to determine whether intervention in GM, Chrysler, suppliers and automaker financing arms was successful. It questioned whether the goal was only to save the auto industry from collapse or to extend rescue financing with the aim of recovering all of it when the industry got back on its feet?

"It is difficult to say whether government intervention was the best option," the report found. Congressional panel Chairman Ted Kaufman told reporters that he thought it was a good thing the government "went forward with funds" for the auto companies.


The panel admitted that TARP helped provide critical support to markets at "a moment of profound uncertainty" by showing that the country would take any action necessary to prevent the collapse of the U.S. financial system.

The TARP's final cost to taxpayers is estimated to be about $25 billion -- an amount far below previous estimates of around $350 billion. Regardless, the panel chided the government for not using the full $50 billion that has been set aside to help keep distressed Americans in their homes.

The Obama administration initially predicted that its Home Affordable Modification Program, or HAMP, would help up to 4 million at-risk homeowners avoid foreclosure by providing permanent loan modifications.

So far, HAMP has provided loan modifications for about 600,000 homeowners, angering House Republicans, who are trying to kill the program. Congressional overseers expect the program to help up to 800,000 homeowners.

The panel said the Treasury Department was not able to determine which TARP programs were succeeding because it never collected relevant data in the first place. "Without adequate data collection, Treasury has flown blind," the report said.

The panel reiterated criticisms that the Treasury has never formally announced a new target. "Absent meaningful goals, the public has no meaningful way to hold Treasury accountable, and Treasury has no clear target to strive toward in its own deliberations," the report said.

(Reporting by Rachelle Younglai and John Crawley; Editing by Dan Grebler)