TARP watchdog fears bailouts have ingrained ‘too big to fail’ mantra

The watchdog for the Troubled Asset Relief Program (TARP) issued its final verdict on the bailouts Wednesday in a mixed report that credited the program with stabilizing the economy but warned that a “too big to fail” mentality might persist. 

In its final report, the bailout watchdog credited TARP for its “critical support” to markets and Treasury for bringing the program in well below the originally estimated cost.

But the group noted that the extraordinary intervention might have ingrained a “too big to fail” mentality in the financial markets, and perhaps in corporate America.

“By protecting very large banks from insolvency and collapse, the TARP also created moral hazard: Very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss,” the report stated, adding that government efforts to save domestic auto manufacturers might have spread that hazard to non-financial institutions as well.

“The implication being that any company in America can receive a government backstop, so long as its collapse would cost enough jobs or deal enough economic damage,” the report stated.

Treasury officials pushed back against that assertion, arguing that the government did what it could at the time, and now has the tools to prevent such bailouts in the future.

Timothy Massad, Treasury’s acting assistant secretary for financial stability, said the nation’s regulatory system “wasn’t adequate” to deal with the 2008 financial crisis, but thanks to the Dodd-Frank financial reform law, the federal government now has the tools to prevent such broad intervention in the future.

“Dodd-Frank now gives us the tools to liquidate any financial firm … that poses a risk to the health of the system, and it gives us other tools to mitigate the causes that led to this crisis,” Massad told reporters. “If any company thinks now that we are going to provide assistance to bail them out in the future even though they engage in risky behavior, they’re simply wrong.

“The fact is, where we are today shows that the program, by any reasonable objective measure, was a success.”

Once thought to be a boondoggle costing taxpayers hundreds of billions of dollars, the Congressional Budget Office (CBO) now estimates TARP may cost as little as $25 billion.

The oversight panel said that reduced estimate is “encouraging, [but] it does not necessarily validate Treasury’s administration of the TARP.”

Through careful restructuring and diligent oversight, the Treasury did work to lower costs, but the panel also noted that the lower bill is also due in part to the failure of the administration’s housing relief programs to meet expectations.

{mosads}”Viewed from this perspective, the TARP will cost less than expected in part because it will accomplish far less than envisioned for American homeowners,” the report stated.

House Republicans have recently set their sights on some of those underachieving programs, such as the Home Affordable Modification Program (HAMP), pushing bills that would shutter four administration efforts to deal with rampant foreclosures.

The White House has threatened to veto all of those bills.