Watchdog: Bailout Has Helped Wall St., But Infuriated Main St.

More than a year after its implementation, the $700 billion bailout program has proven to be a mixed bag of successes and failures, helping Wall Street but infuriating Main Street, a government watchdog says in a new report.

In his new quarterly report to Congress released today, watchdog Neil Barofsky says the controversial bailout has helped lead to "significant signs of improvement in the stability of the financial system," but it has not yet stopped rising unemployment and home foreclosures.

"The dramatic steps taken by Treasury and other agencies through TARP and related programs played a significant role in bringing the system back from the brink of collapse," says Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

"On the other hand, the risk of foreclosure continues to affect too many Americans, unemployment continues its rise, and the stresses on the commercial real estate market threaten to increase the pressure on banks and small businesses alike yet again," he says.

Moreover, Barofsky adds, the bailout has also put hundreds of billions of taxpayer dollars at risk, created serious moral hazards, and fueled public anger about the government's lack of transparency.

Barofsky, as he has in the past, reiterates that although the government has raked in a 17 percent profit on repaid TARP funds up to this point, "it is extremely unlikely that the taxpayers will see a full return on their TARP investments," since the recovery of funds given to AIG, General Motors, Chrysler, and the housing help program is "far from certain."

TARP Bailout Has Not Stopped Rising Unemployment and Home Foreclosures

On moral hazard, Barofsky observes, "Market behavior is bound to be impacted by the massive infusions of government capital into the very institutions that caused the crisis."

"The firms that were 'too big to fail' last October are in many cases bigger still, many as a result of government-supported and sponsored mergers and acquisitions," he warns.

"The conflicted rating agencies that failed to warn of the risks leading up to the financial crisis are still just as conflicted; and the recent rebound in big bank stock prices risks removing the urgency of dealing with the system's fundamental problems," he says.

"Absent meaningful regulatory reform, TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior," he says.

The watchdog also continues his quest to increase the transparency of the government program, noting that Treasury's inaccurate statements last fall about the health of the first nine bailed-out firms and the Department's refusal to require firms to report on their use of TARP funds have hurt the government's credibility.

Public distrust of the government bailout, Barofsky says, is "fueled by the lack of transparency in the program."

"Despite the aspects of TARP that could reasonably be viewed as a substantial success, 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," he says.

At this point, TARP consists of 12 announced programs, of which 10 have been implemented.

As of Sept. 30, Treasury had announced commitments to spend $637 billion of the $700 billion total. Forty-seven TARP recipients had paid back all or part of their principal or repurchased shares for an aggregate total of almost $73 billion in repayments, leaving $317 billion -- or 45 percent of the $700 billion -- still left for distribution.