Hundreds of small banks can't afford to repay federal bailout loans, a top watchdog will warn Wednesday in a report that challenges the government's upbeat assessment of its financial-system rescue. 
 
 Christy Romero, special inspector general for the Troubled Asset Relief Program, said 351 small banks with some $15 billion in outstanding TARP loans face a "significant challenge" in raising new funds to repay the government. 
 
 Ms. Romero made the comments in her quarterly report to Congress, the first since the Senate approved her appointment in March as special inspector general for the program. She urged the government and regulators to ... 

 Contrary to the Obama administration's claims, the bailouts of the financial and auto industries have not turned a profit for the U.S. government and may never turn a profit, according to a grim new assessment by the bailout's watchdog. 
 
 Even by non-financial standards the bailout has been less than a roaring success and may be helping to lay the groundwork for future financial disasters and bailouts, writes Christy Romero, the Special Inspector General for the Troubled Asset Relief Program, in her latest quarterly report to Congress, released Wednesday morning. 
 
 "It is a widely held misconception that TARP will make a profit," she writes right at the top of her 327-page report. "The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost)." 
 
 That directly contradicts the Treasury Department's repeated claims that the government will eventually at least break even on the bailout. So far, the government has gotten back about $300 billion of the $414 billion it has paid out to banks, but some banks paying back TARP have simply used other government money to do so, as The Huffington Post and the Wall Street Journal have reported. 
 
 Update: In an email to The Huffington Post, Treasury spokesman Matthew Anderson said the department stands by its projections, pointing readers to charts 10, 11 and 12 of a recent presentation about the government's response to the crisis and writing: 
 
 On TARP, most of the remaining projected cost ($46 billion) is related to foreclosure prevention aid, which was not intended to be recovered. TARP's investment programs, together with Treasury's full stake in AIG, are currently expected to realize a positive return. Additionally, when you look at the government's overall financial crisis response -- which includes not only TARP, but other actions by Treasury, the Federal Reserve, and the FDIC -- we're currently expected to at least break even and may realize a positive return. 
 
 Anderson also pointed out that TARP, which was launched during the Bush administration, included bailouts of more than just the banking sector and claimed that bank-specific programs have already turned a profit. 
 
 But there are still banks with TARP money and having a hard time getting rid of it. In her report, Romero says that smaller community banks are struggling to get out of TARP because they don't have easy access to other forms of capital. One problem is that dividend payments to the U.S. government under TARP are set to jump from 5 percent to 9 percent in late 2013, which will make repayment more difficult for small banks, and Treasury has no plan to get them out, according to Romero. 
 
 "The report is the latest sign of a yearslong squeeze on smaller banks, those with less than $1 billion in assets," the Journal wrote today in a story about community banks still carrying a TARP load. "Their numbers and profitability have been declining due in part to regulatory and technological changes that made bigger institutions more profitable." 
 
 Romero suggests that TARP has mainly helped the too-big-to-fail banks, which she notes are bigger than ever, but have been slow to lend TARP money to help the economy. 
 
 But this isn't all about cost, Romero reminds us. On the plus side, TARP gave the banks desperately needed cash to keep the financial system from being sucked into the core of the earth forever. On the downside, though, Romero points out that the costs of TARP are also intangible: 
 
 "While TARP and other government responses to the financial crisis may have prevented the immediate collapse of our financial and auto-manufacturing industries and improved stability since 2008, the tradeoff is not without profound long-term consequences." 
 
 These legacies of TARP include "increased moral hazard," bloated financial giants and episodes of white-collar crime, which Romero says her office "is uncovering and stopping." 
 
 Most critically, she warns that the bailout may have helped lull financial regulators, banks and the American public into a false sense of security that another crisis can be averted. The public's obsession with whether TARP is going to turn a profit for the U.S. government, fed by the Obama administration, is misleading -- and missing the point entirely: 
 
 Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals and whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry in the form of TARP 2.0. 
 
 Unlike most regulators, who already seem to be forgetting the lessons of the financial crisis that made TARP (arguably) necessary in the first place, Romero is keenly aware of the risks. 
 
 "As a nation, we cannot become complacent and allow improved financial stability to lead us to relax our guard or forget about the urgent need to implement reform," she writes. 
 
 Romero writes that the TARP watchdog office has made nearly 100 recommendations to the Treasury Department for helping prevent waste and abuse under the program, but Treasury has fully adopted only about a third of them, notes the Project On Government Oversight. 
 

– The Treasury Department tends to give glowing reviews to the TARP bailout, but the program's inspector general has a distinctly different view. "It is a widely held misconception that TARP will make a profit," writes Christy Romero in a new report to Congress, according to the Huffington Post. She notes in particular that 351 smaller banks that got loans are struggling to repay them, reports the Wall Street Journal. "The status of those banks is one of the major issues facing TARP nearly four years after the financial crisis," says her report. What's more, Romero warns that the question of whether TARP even makes a profit is narrow-minded. TARP may indeed "have prevented the immediate collapse of our financial and auto-manufacturing industries," but "the trade-off is not without profound long-term consequences. A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed 'too big to fail.'" Reform is still needed, and the nation can't let its guard down because of its improved financial picture, warns Romero.