U.S. lost credibility on initial TARP aid, audit says

The Treasury Department “lost credibility” when it said its first capital injections from the $700-billion financial rescue were for healthy banks, the inspector general for the Troubled Asset Relief Program said.

In a report issued Monday, Neil Barofsky said then-Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke had concerns about the finances of several of the nine banks in which the government invested $125 billion last October. Two of those lenders, Bank of America Corp. and Citigroup Inc., were later given more aid.

Barofsky separately said his review didn’t find any evidence that officials pressured Bank of America to complete its acquisition of Merrill Lynch & Co. BofA considered ending the deal in December, but Paulson and Bernanke advocated its completion and arranged $20 billion more in assistance.

“Federal officials acted based on their concerns for the financial markets as a whole,” Barofsky wrote in his report. Paulson and Bernanke “believed that the already fragile financial system could further destabilize if the acquisition of Merrill Lynch failed.”

Barofsky said the Treasury should have been more open about potential financial problems with the biggest banks when it began the TARP a year ago. “Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending,” he wrote.

The Treasury “lost credibility when lending at those institutions did not in fact increase and when subsequent events . . . demonstrated that at least some of those institutions were not in fact healthy,” he said.