More than four years after the worst economic crisis since the Great Depression, the nation's financial institutions remain dangerously interconnected, according to a report issued Wednesday by the independent watchdog that is overseeing the Troubled Asset Relief Program.

Banks and other companies deemed too big to fail in 2008 continue to form the foundation of the U.S. economy and have become even larger, the special inspector general for Tarp said in a 374-page report to Congress.

Support from the government, including a belief the government will protect creditors if necessary, has lowered the cost of raising funds and enabled the biggest banks to grow significantly despite evidence that excessive risk-taking continues, the report said.

It also urges regulators to step up their supervision of risk management at all banks, to set strong capital requirements and liquidity cushions that can enable banks to withstand shocks, to tighten rules that govern leverage, to curb products or lines of business that can mask risky behavior, and "to send clear signals to the financial industry about levels of complexity and interconnectedness that will not be accepted."

Financial institutions also must revamp their governing practices and understand fully their exposure to risk, which they cannot manage solely by placing bets that offset one another, the report finds.

"While there has been significant reform to our financial system, more change is needed to address the root causes of the financial crisis and the resulting bailout," Christy Romero, special inspector general for Tarp, said in a statement. "Treasury and regulators must have courage and steely resolve to enact change as they are up against Wall Street executives who simply wish to return to business as usual, with no public memory of the bailout or the lasting impact on the American taxpayer."

The report cites data from the Federal Reserve that shows the five biggest U.S. banks held $8.7 trillion in assets, or roughly 55% of gross domestic product, as of Sept. 30, up from $6.1 trillion or 43% of GDP before the financial crisis.

It follows a separate report Monday by Romero that blasted the Treasury Department for failing to rein in outsize executive pay at some of the biggest bailed-out companies.

According to the inspector general, a $6 billion trading loss in May by JPMorgan Chase (JPM) and alleged manipulation by some of the world's biggest banks of a benchmark that is used to set the rate at which banks loan to one another shows that risk-taking continues unchecked by executives and directors.

"As history has a way of repeating itself, we must take those lessons learned and put into place changes that will bring a safer tomorrow, a future in which the flaws and excesses of corporate America do not create an undertow for families and businesses," Romero added.

Though the Dodd-Frank Act gives regulators authority to supervise banks' liquidation in the event of a crisis that regulators lacked in 2008, Romero says it remain too soon to tell whether the law, once implemented, will lessen the need for taxpayers to bail out financial firms.

The report, which the law that established the Tarp obligates the inspector general to prepare quarterly, notes that 338 institutions, including Ally Financial, American International Group and General Motors, remained in Tarp as of Dec. 31, although AIG repaid its bailout and left the program at the end of the year.

GM still owes taxpayers $21.6 billion for their investment, while Ally, GM's former lending arm, owes $14.6 billion. Romero charges that Treasury, which in March 2011 postponed a public offering of its shares in Ally, lacks a plan to dispose of its investment while preserving the company's financial stability.

For its part, Treasury notes that Ally has proceeded with a bankruptcy filing in May of its Residential Capital subprime lending unit and a sale of Ally's international operations that will enable the government to part with its stake. "As these two key initiatives are completed, Treasury will be able to monetize its remaining investment through a sale of its stock (either through a public or private sale) or through further sales of assets," Timothy Massad, an assistant secretary for financial stability, wrote to Romero on Jan. 15.

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