Tuesday, October 6, 2009

Report on Bailouts Says Treasury Misled Public

Report on Bailouts Says Treasury Misled Public

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The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.

The report also provides new insight into the way the Treasury allocated billions of dollars to nine of Wall Street’s largest players. The report says that Bank of America appeared to qualify for more aid earlier, under the government plan. That assertion adds another element of intrigue to continuing investigations of the bank’s merger with Merrill Lynch and the role that regulators played in the deal, even as Merrill’s condition deteriorated.

The bailout formula called for banks to get an amount equal to as much as 3 percent of their risk-weighted assets, with aid capped at $25 billion for each institution, according to the report. By size, Citigroup, JPMorgan Chase and Bank of America could have qualified for more, and the first two received $25 billion.

But Bank of America was given only $15 billion in October, since Merrill Lynch was earmarked for $10 billion. The two companies agreed to a merger, though their deal had not yet been approved by regulators or shareholders.

Bank of America ultimately received Merrill’s $10 billion in January — as well as $20 billion in additional bailout funds — but if the bank had not been involved in the Merrill deal, it would probably have received $25 billion at the outset, as did Citigroup and JPMorgan.

Another company in the process of a merger was not treated the same. Wells Fargo was acquiring Wachovia, and it received both companies’ money at the start, according to the inspector general.

Mr. Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses.

In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general writes.

The inspector general said government officials need to be more careful when describing their actions and rationale. In a letter included with the report, the Federal Reserve concurred with Mr. Barofsky’s concern about the statements made last year, but the Treasury Department said that any review of announcements last year “must be considered in light of the unprecedented circumstances in which they were made.”

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