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How Did Bank Bailout Money Wind up Overseas?

Government Watchdog Critical of U.S. Policy


How Did Bank Bailout Money Wind up Overseas?

Protesters demonstrate against the bank bailout.

Mario Tama/Getty Images
Updated August 13, 2010

The Troubled Assets Relief Program was a $700 billion attempt by the federal government to prevent a meltdown of some of the largest financial institutions in the United States in 2008.

The TARP program, signed into law by President George W. Bush in October of that year, pumped money into banks, guaranteed billions of dollars in debt and troubled assets, and even purchased some of those troubled assets.

But the Congressional Oversight Panel, a government watchdog, discovered that the massive bailout actually had a far greater positive impact on foreign countries than their rescue plans had on the United States.

The panel, in a critical report issued in August of 2010, revealed that billions of U.S. taxpayer dollars actually ended up in big banks in France, Germany and other nations.

"It appears likely that America's financial rescue had a much greater impact internationally than other nations' programs had on the United States," the report concluded.

How the Money Wound Up Overseas

The U.S. Treasury and Federal Reserve allowed banks to borrow cheaply from the government and guaranteed selected pools of assets.

Other countries did the same thing for their financial institutions, but with one rather significant difference.

While the United States flooded money into as many banks as possible - including those that had significant overseas operations - most other nations targeted their efforts more narrowly, toward institutions that in many cases had no major U.S. operations, the report found.

"This outcome was likely inevitable given the structure of the TARP, but if the U.S. government had gathered more information about which countries' institutions would most benefit from some of its actions, it might have been able to ask those countries to share the pain of rescue," the Congressional Oversight Panel reported.

Examples of U.S. Bailout Money Going to Foreign Banks

In the largest government rescue, the Federal Reserve bore the entire $70 billion risk of pumping capital into the failing insurance giant AIG in September of 2008. And yet banks in France and Germany were among the greatest beneficiaries of AIG's rescue, the government watchdog found.

"The U.S. share of this single rescue exceeded the size of France's entire $35 billion capital injection program and was nearly half the size of Germany's $133 billion program," the Congressional Oversight Panel reported.

Of the 87 banks and financial institutions that benefited indirectly from government assistance provided to AIG, 43 were foreign, according to the report.

"Even though the TARP legislation required Treasury to coordinate its programs with similar efforts by foreign governments, the global response to the financial crisis unfolded on an ad hoc, informal, country-by-country basis," the report found.

"Each individual government made its own decisions based on its evaluation of what was best for its own banking sector and for its own domestic economy," it found.

Fixing the Problem

The Congressional Oversight Panel said the crisis "revealed the need for an international plan to handle the collapse of major, globally significant financial institutions."

Specifically, the watchdog panel called for a "cross-border resolution regime" that would oversee large international financial institutions, while also encouraging contingency planning and the development of resolution and recovery plans.

The panel also recommended that U.S. regulators encourage regular crisis planning and "war gaming" for the international financial system. The panel has repeatedly called for the treasury to do so.

"Financial crises have occurred many times in the past and will undoubtedly occur again in the future," the Government Oversight Penal concluded.

"Failure to plan ahead will only undermine efforts to safeguard the financial system. Careful policymakers would put plans in place before the next crisis, rather than responding on an ad hoc basis at the peak of the storm."

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