The watchdog overseeing America’s $700 billion bailout fund undermined US Government claims that taxpayers would benefit from bailing out troubled banks, with a damning quarterly report to Congress.

The Office of the Special Inspector General to the Troubled Asset Relief Program (Sigtarp) also repeated criticisms of the Treasury’s handling of the bailout fund.

The Sigtarp’s report for the three months to September 30 said that the Treasury had announced plans to spend almost $637 billion of the $700 billion that Congress had allocated to Tarp at the height of last year’s financial crisis.

This is equivalent to spending $5,000 on behalf of every US taxpayer, according to the Sigtarp's report said.

By the end of September, 47 Tarp recipients had paid back $72.9 billion, including some of the biggest banks, which returned their whole taxpayer loans.

The Government received $9.5 billion in interest, dividends and other income and $2.9 billion from the sale from warrants and preference shares.

But the Sigtarp report said that the17 per cent return reportedly made by taxpayers on repaid funds so far was unlikely to be replicated on all Tarp investments.

“Certain Tarp programs … will yield no direct return,” the report said. “For others, including the extraordinary assistance to American international Group and the auto companies, full recovery is far from certain.”

The Inspector General’s office repeated its criticism that former Treasury Secretary Hank Paulson and his department undermined the Government’s credibility by failing to force Tarp recipients to account for their use of their bailouts and for making misleading statements as to how it would use the Tarp money.

Neil Barofsky, the Special Inspector General, has been a fierce critic of the Government’s attempts to deal with the credit crunch.

In a report released last week into the circumstances surrounding the controversial payment of $165 million in retention bonuses paid to employees of AIG’s financial products division earlier this year, Mr Barofsky said that the Treasury did not make a great enough effort to understand the scope and scale of the insurer’s compensation plan.

The bonus payments infuriated lawmakers and taxpayers when news of the windfalls emerged.

Mr Barofsky said: “Treasury's failure to discover the scope and scale of AIG's executive compensation obligations, in particular at AIG Financial Products, potentially resulted in a missed opportunity to avoid the explosively controversial events”.

The Treasury said in response that it was working to address the Sigtarp’s criticisms and would implement its recommendations on sharing information with other regulators.

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