Government Watchdog Says Treasury and Fed Misled the Public on Bailout

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Rarely does the U.S. government crack down on itself for misleading the public, but in a refreshing turn of events -- that is just what happened this week in Washington, D.C.

Neil Barofsky, the independent inspector general for the TARP bailout program, issued a report highly critical of the Treasury Department, the Federal Reserve and other federal agencies for comments made to the public last fall. Last October, the federal government was deeply enmeshed in the attempt to stem the worst financial crisis in decades. On October 14, 2008, the Fed and Treasury announced capital injections worth $125 billion for nine of the largest financial institutions: Bank of America, Citigroup, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, State Street and the Bank of New York Mellon.

In announcing this initial bailout, former Treasury Secretary Hank Paulson said, "These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses." The Treasury Department, the Federal Reserve and the FDIC also released a joint statement reiterating that: "these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the US economy."

In truth the SIGTARP reports: "Contemporaneous reports and officials' statements to SIGTARP during this audit indicate that there were concerns about the health of several of the nine institutions at that time and, as detailed in this report, that their overall selection was far more a result of the officials' belief in their importance to a system that was viewed as being vulnerable to collapse than concerns about their individual health and viability."

This may seem like old news given that subsequent events proved that many of these institutions were better described as "in their last throes." But the decision to hold government officials to account for peddling propaganda is a healthy antidote to the usual Washington indifference.