Bair Says Using TARP for Bank Capital Helped Fuel Public Outcry

Nov. 14 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said using the Troubled Asset Relief Program to pump capital into banks was “not a good idea” and helped erode confidence in the regulatory system.

“I just see all the problems it’s created now, the horrible public outcry,” Bair said on PBS’s “The NewsHour with Jim Lehrer” yesterday. “It’s had a terrible, terrible impact on public attitudes toward the financial systems, toward the regulatory community.”

The U.S. created TARP last year to remove souring assets such as subprime mortgages weighing down balance sheets and leading banks to stop lending, among steps Bair said were needed to contain the crisis. Former Treasury Secretary Henry Paulson was forced to drop the strategy and use the $700 billion fund to inject capital into banks when the plan prompted lenders to hoard cash and failed to halt a slide in the stock market.

“We would have tried to dissuade Treasury from making these capital investments,” Bair said. “In retrospect, that was probably not a good thing. At the time it sounded like the right thing to do.”

TARP capital gave the U.S. stakes in the institutions, raising questions about additional steps if the firms needed further help, and put the government in the role of containing compensation at the firms getting taxpayer aid, Bair said.

Given the urgency at the time, no one should be held accountable “for not thinking all this through,” Bair said. “I think it was not a good idea.”

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