Gov’t audit: Treasury bailed out 66 weaker banks; better oversight needed for new $30B program

Watchdog: Treasury bailed out 66 weaker banks

WASHINGTON — Treasury Department officials sent bailout money to dozens of banks with known financial problems, and a growing number of bailed-out banks are struggling to stay afloat, a new government audit says.

Banks seeking money from the $700 billion financial bailout faced different standards depending on which agency regulated them, according to a report Monday from the Government Accountability Office. Some questionable banks got bailouts by persuading Treasury officials to overlook their problems. Others were blocked by regulators from making a case to Treasury.

Officials approved bailouts for 66 banks with known problems, the GAO found. Those banks have fared worse than the others in the program. They were twice as likely to miss dividend payments they owed to Treasury, the report says.

The report blasts Treasury for failing to track decisions by regulators about which banks could apply for money and which are strong enough to repay. It says the same problems could plague a new program that will send $30 billion to small banks. The new program aims to boost lending by offering banks government money at very low rates.

The report comes a day after the expiration of Treasury’s powers under the 2008 bailout law. The GAO’s findings highlight a key political challenge for the Obama administration. Officials must convince skeptical voters that the unpopular program was a success, and that it’s over. Yet billions are still held by banks, an auto maker and an insurance company that can’t afford to repay. Many banks need the money to survive.

One indication is the dividend payments that banks owe to Treasury. A growing number of banks can’t afford them. Regulators say paying would leave the banks dangerously short of cash. One hundred and forty-four banks have missed at least one payment, according to the report, which analyzed the Capital Purchase Program, Treasury’s main bank rescue.

Another worrying sign: The number of bailed-out banks on the government’s confidential “problem list” is rising. As of June 30, 78 bailed-out banks had problems severe enough to threaten their survival, the GAO said.

Treasury spokesman Mark Paustenbach said that the bailout applications were approved by bank regulators. He pointed out that three-fourths of the bank bailout money has been repaid, and said the bank bailouts have yielded $16 billion in extra revenue.

“The initiative worked in stabilizing the financial system, and generated a profit for taxpayers,” Paustenbach said.

Overall, taxpayers will lose about $66 billion on programs funded by the bailout law, according to the latest estimate from the Congressional Budget Office. Most of the losses are from the rescues of auto makers and the insurance conglomerate American International Group Inc.

Banks seeking bailout money applied first to their regulator — a different agency for each type of bank. Some banks were recommended for quick approval. Some were told to withdraw their applications, sparing them public criticism. Those in the middle were forwarded to Treasury.

Regulators had different standards for which applications should be withdrawn, the report says. It says Treasury didn’t track those decisions. Treasury also didn’t monitor the regulators’ varying tests for banks seeking to repay the government, the GAO said.