US rescue averted meltdown, but problems remain: report

WASHINGTON (AFP) – The US government's 700-billion-dollar financial rescue helped bring the system back from a near-meltdown, but the overall outcome of the program is unclear, a report to Congress said Wednesday.

The report also said it is unlikely taxpayers will get all their money back from the massive investments to stabilize the financial system and economy through the so-called Troubled Asset Relief Program (TARP).

File photo shows a US twenty dollar bill matched up with the north side of the White House in Washington, DC. (AFP photo)

The quarterly report from the special inspector general ordered by Congress said that since the measure was passed in October 2008, "there are significant signs of improvement in the stability of the financial system."

"Although the causes for such improvement are many and complex, it appears that the dramatic steps taken by the US Department of the Treasury and other agencies through TARP and related programs played a significant role in bringing the system back from the brink of collapse," the report said.

"On the other hand, the risk of foreclosure continues to affect too many Americans, unemployment continues its rise, and the stresses on the commercial real estate market threaten to increase the pressure on banks and small businesses alike yet again."

The measure was approved rapidly in Congress after the collapse of Wall Street giant Lehman Brothers caused a freezup in the global financial system and a massive flight from risk that sent the economy deep into recession.

The report by inspector general Neil Barofsky said assessing the costs is complex because there are not only direct financial costs, but also the so-called "moral hazard" costs of bailouts and the cost to US government credibility.

"The past year has demonstrated that TARP's costs, in each category, could prove to be substantial," the report said.

"Although several TARP recipients have repaid funds for what has widely been reported as a 17 percent profit, it is extremely unlikely that the taxpayers will see a full return on their TARP investments."

The report said some 50 billion dollars used to help avoid foreclosures "will yield no direct return." As for the investments in insurance giant AIG and auto giants General Motors and Chrysler, "full recovery is far from certain."

On moral hazard costs, the report said that some of the funds may be bailing out "the very institutions that caused the crisis" and "homeowners who may have borrowed irresponsibly."

The government is also offering "cheap, non-recourse loans to incentivize the purchase of the same volatile and over-valued asset-backed securities that were a major cause of the current crisis."

"The firms that were 'too big to fail' last October are in many cases bigger still," it added.

Without tougher regulatory reform, "TARP runs the risk of merely re-animating markets that had collapsed under the weight of reckless behavior," the report said.

The report indicated that many Americans view the TARP "with anger, cynicism, and distrust" and that this threatens to undermine the credibility of the program.

"The government's capacity to address financial crises depends in no small measure on its credibility, both with market participants whose confidence is essential to stabilize the financial system and with the American public whose confidence is essential to underpin the political support required to take the difficult (and often expensive) steps that are needed," the report said.

"Unfortunately, several decisions... including Treasury's refusal to require TARP recipients to report on their use of TARP funds, its less-than-accurate statements concerning TARP's first investments in nine large financial institutions, and its initial defense of those inaccurate statements -- have served only to damage the government's credibility and thus the long-term effectiveness of TARP."

Source: AFP

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