U.S. Bailout Could Prove Less Effective, More Expensive Than Expected

The U.S. government's bailout has largely failed in its goal of helping U.S. homeowners avoid foreclosure and could end up costing more than expected, according to a report released Tuesday by the program's special inspector general's office.

Homeowners have lost 1.7 million homes through foreclosure since January 2009, the 338-page quarterly report notes. The Troubled Asset Relief Program has been responsible for less than half of the 467,000 permanent loan modifications that have occurred since its inception, according to the report, which said the program had fallen "woefully short" in preserving homeownership.

In addition, Treasury estimates earlier this month that TARP's bailout of insurance giant American International Group (AIG) would incur only a $5 billion loss -- instead of the $45 billion the department had estimated six months earlier -- may be overly optimistic, the report suggests. The Treasury changed the way it calculated the loss, according to the special inspector general's office, which criticized the department's lack of transparency.

"While AIG's prospects may have indeed improved during the course of those six months, there is a serious question over how much of this decrease comes from a change in the Treasury's methodology for calculating the loss as opposed to AIG's improved prospects," the report states.

Earlier this month, the Treasury Department also forecast the overall TARP would cost U.S. taxpayers approximately $50 billion, which comes to some 85% less than the $350 billion the Congressional Budget Office initially estimated. The inspector general's report says the financial estimates fail to account for the fact that "the biggest banks are bigger than ever" and that their credit ratings are higher than they should be because those ratings factor in the government's backing.

In addition, belief that TARP is nearing its end is "widespread, but mistaken," Neil Barofsky, the inspector general, wrote in the report. TARP still has $178.4 billion left unspent, as of Oct. 3, including more than $80 billion in funds that have already been committed. While the program isn't authorized to make new commitments, the already-allocated money can still be distributed, making it likely that TARP will end up spending far more after its yearlong extension ended this month than it did during its last year, he wrote.

Enacted during the George W. Bush administration, critics have called TARP an unproductive bailout for fiscally irresponsible financial institutions. In April, Pew Research reported that just 42% of Americans believed TARP helped prevent a more severe financial crisis, while the rest either said it didn't help or didn't know.

"Many Americans continue to view TARP with anger, cynicism and mistrust," according to the inspector general's report.