IG harshly criticizes Treasury's handling of $700B bailout program

Steps taken by the Treasury Department to implement the $700 billion financial bailout program have undermined the credibility of the U.S. government, a top government watchdog said in a report released on Wednesday.

Neil Barofsky, the special inspector general over the Troubled Asset Relief Program (TARP), as the financial bailout is known officially, criticized the Treasury Department for failing to require banks to detail exactly how they are using the money. Barofsky also criticized the Treasury Department for not being more forthright about how and why it selected the first nine recipients of TARP money.

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“Treasury’s actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism, and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP,” Barofsky said in the report.

The TARP program remains one of the most controversial government programs in decades, though Barofsky said it has played, “a significant role in bringing the system back from the brink of collapse.”

Still, Barofsky said there has been “scant attention” paid to the impact TARP has had on the government's overall credibility. He mentioned specifically the confidence in the government from participants in financial markets and from the American public at large.

Barofsky also homed in one one area of TARP, just getting underway, that raises serious concerns.

Barofsky said the Treasury Department decided to deny his office access to the “books and records” that affiliates of fund managers keep under the public-private investment partnership program. The program is meant to facilitate the purchase of troubled and toxic assets weighing down bank balance sheets.

“This decision is particularly surprising given that Treasury itself has the contractual right to these same books and records,” Barofsky wrote, adding that his office would consider issuing a subpoeana for the records if they are not provided.

The Treasury Department, in response to the report, said that it is committed to transparency.

“We agree that an important lesson of these earlier events is that transparency and effective communication are important to restoring and maintaining public confidence, especially during a financial crisis,” wrote Herbert Allison, assistant Treasury secretary.

Barofsky also warned lawmakers not to stall new regulations over the financial system. The House Financial Services Committee is marking up several bills that form a series of major new regulations over the financial system. The Senate will likely take longer to mark up legislation, which may not head to the president's desk before 2010.

“Absent meaningful regulatory reform, TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior,” Barofsky said.

Barofsky's office has 54 ongoing civil and criminal investigations into potential fraud, insider trading, public corruption, false statements, obstruction of justice, money laundering and other issues.

Barofsky also took aim at the credit rating industry for its role in the crisis. The industry issued top ratings to financial products that later turned out to be far riskier than believed. Many of those securities were central to the crisis in the housing market. Barofsky criticized proposed changes to the ratings industry as half-measures.

“The U.S. Government, however, while proposing some increased regulation of rating agencies, has not called for the type of significant overhaul of rating agencies that others have called for as part of its broad regulatory reform proposals,” Barofsky wrote.