It took a full month for many in Congress and the American public to realize that billions in bailout funds were not going to be used the way they thought.
Instead of purchasing failed mortgage assets, the Treasury Department used the taxpayer money to buy preferred shares of stock in select banks. It was not only weak banks in need of assistance, but also banks supposedly deemed to be "strong" by federal regulators; the idea apparently to help shore up the economy by ensuring strong banks take over weaker ones (although nobody from the Treasury Department has responded to our repeated requests for information).
Sources tell CBS News the bank strategy was not discussed in advance with important members of Congress who were "sold" on the bailout. Sources also say the strategy was not mentioned to top members who spoke directly with Treasury Secretary Paulson. But in the first weeks of the bailout, select banks become in-the-know quickly. Several of them have said it was "federal regulators" who approached them and urged them to apply for bailout money ... even before the public or Congress were aware this would be its use.
The banks themselves, which are not required under the bailout law or by Treasury to disclose the information, aren't saying much about how they got clued in so early on the strategy that was a surprise to so many others. But another indicator that giving the money to banks, some of them using it to buy other banks, was no sudden accident. It's significant to note that concurrent with the bailout, Secretary Paulson quietly made a change in archaic tax law. It was a change that stands to benefit some bailout banks that buy others.
Rep. Charles Schumer has said he thinks that investing the taxpayer bailout money in banks instead of failed mortgage assets is a good idea. But other members of Congress have blasted the Treasury Department for a "bait and switch."
While the strategy may be debatable, the perceived secrecy about what some now see as Treasury's true intent has become an issue. And in the end, if the idea was for strong banks to buy weak banks, and if only strong banks are supposed to be getting bailout funds (as Treasury's bailout leader Neel Kashkari told Congress), then why are some of the bailout banks being bought rather than doing the buying? CBS News has now learned that these issues are being probed by the Congressional Oversight Panel (COP) charged with getting answers on the bailout. So far, the head of the COP panel says the Treasury Department has been non-responsive on key questions – even though the COP was designated by Congress to do oversight.
I'll have more of this story on tonight's CBS Evening News. And we'll continue Following the Money – because it's your tax dollars at stake – on this issue.