Inspector General: Treasury Misled Public About Bank Health

Neil M. Barofsky, who heads up oversight of the bailout program, said Bush administration officials claimed that the banks were "healthy" when in fact there was significant understanding within the administration that some of them were in serious trouble.

"Contemporaneous reports and official's statements to SIGTARP during this audit indicate that there were concerns about the health of several of the nine institutions at that time and, as detailed in this report, that their overall selection was far more a result of the officials' belief in their importance to a system that was viewed as being vulnerable to collapse that concerns about their individual health and viability," Barofsky wrote.

The nine banks in question received $125 billion in taxpayer capital days after the bailout program was formally announced. They included Bank of America Inc., Citigroup Inc., Wells Fargo & Co., J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, State Street Corp., and Bank of New York Mellon.

The banks issued preferred stock and warrants to the Treasury in exchange for the aid.

The same day the investments were announced, Treasury officials repeatedly referred to strength of the recipient banks, repeatedly emphasizing the word "healthy" and casting the decision to take the money as almost a sacrifice on behalf of the country, according to Barofsky.

"These are healthy institutions, and they have taken this step for the good of the U.S. economy," said former Treasury Secretary Hank Paulsen.

"These healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy," said the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. in a joint statement.