Leading U.S. bank regulator Sheila Bair said on Friday that the government's capital injections into the largest banks was probably not a good thing.

Bair, the chairman of the Federal Deposit Insurance Corp, said the billions of dollars of capital infusions last year had a terrible impact on public perception of the financial industry and government regulators.

I think at the time it sounded like the right thing to do and, again, it was part of an international effort, but I just see all the problems it's created, Bair said during an interview with PBS NewsHour. I think we would have tried to dissuade Treasury from making these capital investments.

During the height of the financial crisis that had virtually frozen credit markets, the Treasury Department in October 2008 injected $125 billion into the nine largest U.S. banks.

The capital investments were part of the $700 billion Troubled Asset Relief Program, which was originally pitched to Congress as a way to absorb banks' toxic assets but was switched to become largely a capital infusion plan to shore up banks' balance sheets and encourage them to lend.

Public outcry followed the investments, which largely came to be referenced as government bailouts. Lawmakers raced to attach more conditions, such as restrictions on compensation, to the capital injections.

It's had a terrible, terrible impact on public attitudes toward the financial system, toward the regulatory community, Bair said. It's created all sorts of issues about government ownership of these institutions, what happens if they get in trouble again.

Soon after populist anger erupted over the capital injections, banks strove to give back the funds. So far, Treasury has allowed a handful of the largest banks to return the government investments, but other firms such as Bank of America and Citigroup retain large government ownership stakes.

Bair has on occasion locked horns with other regulators and administration officials over the right method to stabilize the financial system.

She has advocated a more restrained approach, and is now pushing Congress to crack down on the notion that some firms are too big to fail.

Bair said during the interview that no one should be held accountable for the government's decision to inject capital into the largest banks, but noted that complications are still lingering.

She said the government, as partial owners of some banks, are put in the difficult position of determining how to manage compensation and executive changes at these firms.

I think in retrospect that was probably not a good thing, Bair said.

(Reporting by Karey Wutkowski, editing by Leslie Gevirtz and Matthew Lewis)

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