Is Change Coming to the Big Bailout?

In his confirmation hearing for the post of Treasury Secretary this week, Timothy Geithner spent a lot of time apologizing for his personal income tax peccadilloes. Perhaps he should have also expressed some contrition for his role, as head of the Federal Reserve Bank of New York, in the failure of financial oversight that helped plunge the country into its current economic crisis. Geithner also played a part, albeit one subordinate to former Treasury Secretary Henry Paulson, in the disastrous bailout program that was supposed to clean up the mess created by Wall Street.

In his opening statement to the Senate committee, Geithner declared that the Obama Administration intends to “fundamentally reform” the bailout scheme, still known as the Troubled Assets Relief Program (or TARP) even though the original plan for the federal government to buy up those assets was abandoned in favor of capital infusions. Since it now appears Geithner will be confirmed by the Senate next week, he will have to make good on that commitment to reform. And not a moment too soon. A string of recent revelations shows that the system is more flawed than we realized.

There’s growing evidence that Treasury may not have been as diligent and impartial as it claimed when deciding which banks would get TARP money and which would be denied. Earlier this month, Fortune wrote about the case of OneUnited, a small Boston bank that received $12 million in TARP funds even though its regulator, the Federal Deposit Insurance Corporation, had alleged it was operating without effective underwriting standards and practices. The bank was also making suspicious payments for a beachfront house and a Porsche SUV apparently used by its top executives. This week the Wall Street Journal reports that OneUnited’s TARP infusion came after Rep. Barney Frank (D-Mass.), chair of the House Financial Services Committee, made a plea on behalf of the bank.

While some financial institutions may have used political connections to get on the TARP gravy train, others tried to game the system. For example, Financial Week recently reported that a number of large insurance companies have acquired tiny banks and converted themselves into bank holding companies, potentially making them eligible for big capital infusions from the Treasury Department.

One bright spot is the position being taken by the TARP special inspector general, Neil Barofsky (photo), whose confirmation moved slowly through Congress but who is now cranking up his operation. Barofsky has just indicated that he intends to ask every TARP recipient how the funds are being used.

What a novel idea. After hundreds of billions of taxpayer dollars have been shoveled into the private, someone in the federal government is finally asking what’s being done with the money. It remains to be seen whether Geithner, once in office, makes a clean break with the Paulson debacle and follows Barofsky in demanding real accountability.

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