U.S. bank bailout encourages risky behavior: watchdog

Rueters ^ | 1/31/10 | staff

[Nachum]

WASHINGTON (Reuters) - The U.S. taxpayer-funded rescue program set up to save banks from collapse during the financial crisis makes future reckless behavior more likely, the government's bailout watchdog said in a quarterly report.

A quarterly report to Congress on the $700 billion Troubled Asset Relief Program, or TARP, made available in draft form late on Saturday, said financial firms seen as too big to fail before 2008 have only grown larger as they feasted on subsidies from the bailout program.

"To the extent that institutions were previously incentivized to take reckless risks through a 'heads I win, tails the government will bail me out' mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions," the report from the Office of the Special Inspector General for the Troubled Asset Relief Program, said.

The office, headed by Neil Barofsky, acts as a watchdog for taxpayers over how TARP money the Treasury Department administers is use

[Nachum]

The list, ping

[Need4Truth]

Gee, I wonder why this report was released in the middle of the night on a weekend.

[Cheap_Hessian]

That goes without saying... This war on risk is foolish. The FDIC, “too big to fail”, and other safe guards all contribute to excessive risk taking. Look at Barney Frank’s solution to the problem, we need “global sovereignty” to manage these larger risks.

We need bigger bailouts to cover bigger risks which encourages even bigger risks that requires even bigger bailouts. It creates a feedback loop that won’t stop until we create a problem so big nothing can bail it out. To improve decision making and risk management, we need to decentralize risk, stop insuring failure, increase competition, and reintroduce market based interest rates.