Bailout's hidden costs

SigTARP Neil Barofsky, overseer of the $700 billion TARP program, says the cost to taxpayers will be a lot greater than the government is letting on.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By David Goldman, staff writer

A new report from Special Inspector General Neil Barofsky says the $700 billion bailout will cost more than many think.
Ranking the rescues
The collapse of Lehman led to a deeper recession and a litany of government programs to try to end the pain. We rate just how bold and effective the plans have been so far.
At what level will the Dow Jones industrial average end 2009?
  • Above 11,000
  • Between 10,000 and 11,000
  • At 10,000
  • Below 10,000

NEW YORK ( -- The $700 billion bailout will ultimately cost taxpayers billions of dollars, but the government stands to lose much more than the money it's pouring into companies.

Neil Barofsky, special inspector general for Treasury's financial sector rescue, wrote in a report released Wednesday that the bailout has several hidden costs.

One is the hard cost of borrowing money to fund the rescues of banks and other companies. The others are, according to Barofsky, less tangible but no less important: The danger that comes with rewarding companies that took excessive risk, and the loss of the government's credibility with taxpayers.

"You can't just think of this program in terms of dollars and cents," Barofsky told CNNMoney. "We try to bring attention to these other costs, which have the potential to dwarf the monetary loss in dollars."

To be sure, the monetary loss will likely be substantial: Barofsky cites the Congressional Budget Office estimates that the Troubled Asset Relief Program will ultimately cost taxpayers $159 billion.

But Barofsky focuses his report, a quarterly update to Congress and the public, on what he identifies as the unseen costs and risks of TARP.

Cost of enormous debt

To fund the $467.1 billion that Treasury has spent so far on the bailout, the government has borrowed money by issuing debt in the form of Treasury bonds.

It's unclear exactly how much the government had to borrow to pay for TARP. But according to Barofsky's report, the government paid for 46% of its expenditures in 2009 by issuing new debt, compared with the 10-year average of 9%.

Barofsky said that's okay for now, since the cost of funding through debt is very cheap because of historically low interest rates. But as the government's debt mounts through bailouts and stimulus, rates could go higher and the government's interest payments could get much more expensive.

"Taking on new debt is an action that has implications for the true cost of the U.S. government's financial rescue initiatives," said Barofsky in the report. "This cost may have significant refinancing risk."

Cost of indulging bad behavior

Another hidden cost could come in the form of promoting bad behavior.

After financial institutions threatened the stability of the economy by making irresponsible bets, the government responded by sending them massive infusions of capital. In addition, Treasury gave companies cheap loans to encourage them to buy risky assets like mortgage-backed securities that were a major cause of the credit crisis. The report also notes that "too big to fail" firms only got bigger because of TARP.

All of these issues have set the stage for another large-scale bust unless serious effort is made on reforming regulation of the financial markets, the report said.

"With the potential of moral hazard and 'too big to fail,' the government could be setting itself up for an even more dangerous crisis in the future," Barofsky told CNNMoney. "The ways of addressing these issues are through meaningful regulatory reform."

Barofsky, in the interview, wouldn't comment on which of the administration's regulatory reform plans he favors, but he said action needs to happen soon. In his report, he argued that the recent stock market rally has removed some of the urgency of dealing with the financial system's fundamental problems, but the cost of inaction could be even higher than the current bailout.

Cost of political distrust

Barofsky also said that the government's lack of transparency about the bailout could cost taxpayers in the long run, as a growing distrust of the government could impede its ability to enact important legislation.

"I think we are already seeing the political costs of people losing trust and faith in their government, such as the palpable anger this summer in response to health care," Barofsky told CNNMoney. "It requires a certain amount of good will to support extremely important and expensive programs like bailouts."

Barofsky said Treasury's assurances to the public last year that it would only invest in healthy companies was undermined by the need to give additional, emergency bailouts to Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500). He also argued that Treasury's refusal to require TARP recipients to report on their use of taxpayer funds have both damaged the government's credibility and also the effectiveness of the bailout.

As a result, the report said that anger and cynicism about the bailout could be one of TARP's most "substantial, albeit unnecessary, costs."

"The loss of confidence in the government could be one of the lasting legacies of this program," said Barofsky. "But if Treasury would adopt some pretty basic recommendations, it would at least address some of these suspicions." To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.