Inspector General: US misled about health of banks

WASHINGTON -- The credibility of the government's $700 billion financial rescue program was damaged by claims a year ago that all of the initial banks receiving support were healthy, a new report contends.

Special Inspector General Neil Barofsky generally found that the government had acted properly in October 2008 as it scrambled to implement the Troubled Asset Relief Program to avert the collapse of the U.S. financial system.

But the report said that then-Treasury Secretary Henry Paulson and other officials were wrong to contend at an Oct. 14 press conference that all nine institutions receiving the first round of support - $125 billion - were sound.

"These are healthy institutions, and they have taken this step for the good of the economy," Paulson had declared at the time.

Barofsky said that the fact that Citigroup Inc. and Bank of America Corp. soon required billions in additional assistance highlighted the inaccuracy of that claim and raised questions about the whole effort. In addition, Merrill Lynch, which was also in the original nine, was in the process of being acquired by Bank of America because of its weakening financial position.

"Statements that are less than careful or forthright - like those made in this case - may ultimately undermine the public's understanding and support," the report said. "This loss of public support could damage the government's credibility and have long-term unintended consequences that actually hamper the government's ability to respond to crises."