The financial rescue fund known as TARP has actually the increased the likelihood of more bank bailouts in the future, Neil Barofsky, the program’s special inspector general, told CNBC Wednesday.
"As long as the market perceives that the government is going to be a backstop...(it will) encourage more and more risk-taking and put us right back where we were in late 2008," said Barofsky.
TARP, which stands for the Troubled Asset Relief Program, is the $700 billion bailout program set up during the 2008 financial crisis to prevent a collapse of the banking system. Most of that money has been paid back by the banks, and the government has even made a profit on much of the aid. But the program has been widely criticized for saving banks that took excessive risks in search of big profits.
Barofsky added that the Dodd-Frank Act isn’t a “magic wand” to solve the problem of large financial institutions that are “too big to fail.” The act, which was passed by Congress in an attempt to rein in rampant speculation in the financial system.
Barofsky cited FDIC chairwoman Sheila Bair's statement that the problem of dealing with large failing financial institutions could be addressed only if regulators have the will and organization to make it happen.
“But,” he added, “there [also] are mechanisms in place—things like living wills—where the banks are required to set forth in advance how they should be dismantled, if they run into trouble.”
Watch the full interview with Neil Barofsky on the Kudlow Report at 7pm, ET.