According to a new report released Monday by Special Inspector General for the Troubled Asset Relief Program (TARP) Neil Barofsky, the Treasury Department "lost credibility" after it said last year that banks were healthy.
Barofsky specifically pointed to a statement from then-Treasury Secretary Henry Paulson on October 14, 2008, when he said that the big banks were "healthy" and only accepted the bailout money "for the good of the U.S. economy."
In reality, Barofsky said in his report, Paulson and Federal Reserve Chairman Ben Bernanke "believed that the already fragile financial system could further destabilize if the acquisition of Merrill Lynch (by Bank of America) failed."
"Treasury may have created unrealistic expectations about the institutions' condition and their ability to increase lending," Barofsky wrote.
He said, "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."
Barofsky added that Treasury's claims that the banks were healthy were "less than careful or forthright" and "may ultimately undermine the public's understanding and support."
"This loss of public support could damage the government's credibility and have long-term unintended consequences that actually hamper the government's ability to respond to crises," he said.
He made sure to note, however, that the intention of his report was not "to suggest that government officials should make public their concerns over the financial health of individual institutions, but rather that government officials should be particularly careful, even in a time of crisis, of describing their actions (and the rationales for such actions) in an accurate manner."
"Ultimately, the lesson is straightforward," Barofsky said, "Accuracy and transparency will enhance the credibility of Government programs like TARP and restore taxpayer confidence in the policy makers who manage them."
"Inaccurate statements, on the other hand, could have unintended long-term consequences that could damage the trust that the American people have in their government," he added.
Passed in October 2008, TARP was intended to purchase assets and equity from struggling financial institutions in an attempt to prevent them from collapsing. The fear was that had these banks failed, the entire financial system might have failed with them.
Some of the largest banks included in the TARP program were Bank of America and Citigroup, both of which were later given additional aid.
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