Watchdog slams US government for mismanaging financial rescue

Oct 21, 2009, 18:24 GMT

Washington - The US government may have halted a collapse of its financial sector by plugging billions of dollars into banks, but its management of the programme leaves much to be desired, according to a scathing report by a watchdog agency Wednesday.

Special Inspector General Neil Barofsky, charged with overseeing the Treasury Department's 700-billion-dollar financial rescue effort, said a lack of transparency had 'undermined' the government's credibility in dealing with the financial crisis.

The bail-outs also encourage banks to assume they will get the same treatment when the next financial crisis hits, Barofsky said. Banks will have an incentive to grow 'too big to fail' unless Congress adopts far-reaching regulatory reforms in the coming year, he said.

In a quarterly report, Barofsky slammed the government for not requiring banks to inform the public about how they were using the government funds, which have been handed out over the past year under what is known as the Troubled Asset Relief Programme (TARP).

'Treasury's actions in this regard contributed to damage the credibility of the programme and of the government itself,' Barofsky wrote. 'The anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP.'

Barofsky did say there were 'significant signs' that the programme had brought stability to the US financial sector, which stood on the brink of failure after Lehman Brothers declared bankruptcy in September 2008.

TARP was launched under former president George W Bush and approved by Congress in November 2008. US President Barack Obama supported the effort and continued to use the funds after taking office in January.