Report: Unwinding bailout program will be tricky (1:53 p.m. 1/14/10)

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By Marcy Gordon
AP Business Writer

Washington — The government will face a complex and delicate task when it moves to unwind the federal financial bailout that officially ends in October, and the rescue will leave a deep impact the economy long afterward, according to a report from a government monitoring panel.

The $700 billion taxpayer bailout will leave a legacy in financial markets, which may now be convinced the government will rescue financial institutions considered too big to fail, according to a new report by the Congressional Oversight Panel.

That expectation gives big banks and other institutions an advantage in raising capital that smaller ones don’t enjoy and encourages a “moral hazard” for the big banks to take risks again, according to the report, which was released Thursday.

According to the report, as a result of the so-called Troubled Asset Relief Program, or TARP, the Treasury Department now holds hundreds of billions of dollars of assets — about $258 billion as of Dec. 31 — that it must eventually sell. That will require a delicate balance between maximizing the return to taxpayers and maintaining financial stability.

“There are … unavoidable political considerations that will affect these decisions, and that political context in the current environment can shift quickly and unpredictably,” according to the report.

There is also the question of how the banks, other financial firms and automakers that received bailout aid intend to make the taxpayers whole, according to the panel.

“In fact, TARP will live on for years,” panel chairwoman Elizabeth Warren said in a call with reporters Wednesday, noting that Treasury will still have authority to dispense some money and will be managing the hundreds of billions in assets. “Treasury must learn from the mistakes it made over the past year,” she said.

In response to the report, Treasury spokeswoman Meg Reilly said the department “has demonstrated a cautious, transparent and disciplined approach in winding down the emergency programs, which is already yielding positive returns for taxpayers and the health of the economy.”

Treasury estimates that TARP programs aimed at stabilizing the banking system will earn a profit thanks to dividends, interest, early repayments and the sale of the government’s stakes in the institutions receiving aid, according to a statement attributed to Reilly.

The panel, one of three oversight mechanisms Congress mandated for the bailout that it enacted at the height of the financial crisis in October 2008, makes periodic assessments of how the government is managing the rescue program.