Watchdog Wonders When Bailout Will Really End

On the same day executives from four of Wall Street's biggest banks testified on Capitol Hill about the financial meltdown, a watchdog group warned that the government's controversial $700 billion bailout program may not end for years.

While the Treasury Department's authority to make new commitments under the Troubled Asset Relief Program expires in October, the bailout will not truly be over at that time, the Congressional Oversight Panel cautioned in a new report.

VIDEO: Financial Crisis Banking Hearing HighlightsPlay

"The end of this authority will not...however, constitute the end of the TARP," the panel said. "Treasury will be authorized to continue making purchases using funds that were committed in advance of the Oct. 3, 2010, deadline. Finally, after Treasury completes all of its TARP purchases, it will hold a massive pool of financial assets likely worth hundreds of billions of dollars, and the process of unwinding some of these holdings may continue for a number of years."

Early last month Treasury Secretary Tim Geithner extended the TARP from its original expiration date of December 2009 until October 2010.

Meg Reilly, a spokeswoman for the Treasury Department, told ABC News late Wednesday that "The Geithner Treasury has demonstrated a cautious, transparent and disciplined approach in winding down the emergency programs, which is already yielding positive returns for taxpayers and the health of the economy."

Reilly pointed out that paybacks from institutions that received TARP money have significantly lowered the cost to taxpayers for the bailout program. "Last February, TARP was estimated to cost more than $500 billion; in August, that estimate fell to $340 billion; and now we are estimating the cost to be around $116 billion and this trend might continue," Reilly said.

In the report, the watchdog also stated that the "moral hazard" created by the government bailout may be a factor in the financial industry for an even longer time period.

"Perhaps most significantly, the TARP has raised the long-term challenge of how best to eliminate implicit guarantees," the report said. "Belief remains widespread in the marketplace that, if the economy once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed too big to fail. This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks – those not too big to fail – do not enjoy."

"These implicit guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens, taxpayers will not allow their failure," the panel continued. "So long as markets continue to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation's economy, even after the last TARP program has been closed and the last TARP dollar has been repaid."

Reilly said Geithner shares the view that the too big to fail yardstick should be retired.

"The administration has been working closely with Congress to enact financial reform that will provide the government with the tools to cope with crises by ensuring the orderly unwinding of failing firms and avoiding the untenable choice between bailouts or damaging collapse."

CEOs Say the 'Too Big to Fail' Mentality Must End

At a hearing earlier Wednesday of the Financial Crisis Inquiry Commission, panel member Keith Hennessey asked Goldman Sachs CEO Lloyd Blankfein if he believed that the government would step in today to bail out a failing firm.

"I think tomorrow, in the context of this environment, at some level, the government would intervene…because of the fragility of the system today," Blankfein replied, adding, "A year from now, maybe not."

Minutes later, Morgan Stanley boss John Mack said, "I think, down the road, that this safety net that many believe, and I believe at least in this particular time frame, is in place, I think that will evaporate and will not be needed."

Blankfein, Mack, and JP Morgan Chase CEO Jamie Dimon all told the panel that the "too big to fail" philosophy must come to an end.

"No institution – including our own – should be too big to fail," said Dimon.

"No firm should be too big to fail," echoed Mack.

"We would like not to have the too-big-to-fail context prevail," said Blankfein.