Neil Barofsky’s latest report on the TARP-funded bailout of banks last October contains the explosive allegation that the Bush administration lied about the health of the banks that received massive cash infusions.  Nine banks got billions of dollars from the TARP funds, ostensibly to help shore up confidence in the American financial sector, while Henry Paulson declared them “healthy.”  Instead, Barofsky now says at least some of those nine institutions were in serious trouble when they got the cash infusions:

On Oct. 13, after Congress had passed the $700 billion financial bailout program earlier that month, Treasury provided capital injections for nine institutions that together held over $11 trillion in assets: Bank of America, Citigroup, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, State Street and the Bank of New York Mellon. As of June 2008, these nine banks accounted for around 75 percent of all assets held by U.S. banks.

In announcing the initial $125 billion provided to these banks, former Treasury Secretary Hank Paulson on Oct. 14 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.”

That same day, 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.”

Barofsky finds, however, senior officials at the Treasury and the Fed had serious concerns about the health of some of these banks. Fed chief Ben Bernanke, for one, told the watchdog that the central bank believed each of the nine institutions faced certain risks given the economic environment.

This explains why these “healthy” institutions did not transform those infusions into easy credit.  Both the Bush and Obama administrations have taken heat from Capitol Hill and the media for not pressuring the TARP recipients into expanding their lending after getting hefty chunks of taxpayer money.  Barofsky merely confirms what most of us suspected from the beginning, which is that the government wouldn’t have bothered to bail them out if they didn’t need the money.

Barofsky notes that this will damage the credibility of the American government on financial matters in the future.  That’s true, but the damage done by Congress and succeeding administrations goes far beyond lying about the health of these nine institutions.  The financial crisis got triggered by heavy-handed intervention in lending markets, and has been exacerbated by massive spending on so-called stimulus programs that have not stemmed unemployment or resulted in a recognizable recovery.  This administration has already had to admit a $2.2 trillion error in its calculations on long-term deficits, which hardly lends to its credibility, either.

In the long run, few people will regard the Paulson cheerleading as one of the more egregious bungles by the federal government connected to this collapse.