TARP Inspector General warns of bank bailout plan shortcomings

During the past few weeks, HughS and I have written a number of pieces discussing the weaknesses and dangers inherent in the Treasury’s massive TARP/TALF/PPIP bank bailout and toxic asset relief programs.

But what do we know? We’re just a couple of amateurs.

Fortunately, lots more knowledgeable folks (to whom we have repeatedly linked in our posts) have had many of the same reservations about the bank bailouts. The latest to question the feasibility and safety of these programs is Neil Barofksy, the Inspector General of the TARP Program:

Using blunt language, Inspector General Neil Barofksy offers a series of recommendations to protect the public and takes the Treasury to task for not implementing previous advice. The report also commends Treasury and the Federal Reserve for creating some safeguards.

The report’s warnings about the public-private plan’s potential for losses echoes alarms raised by some lawmakers and economists, but Barofksy has significant credibility in Congress and his views are likely to carry ample weight.

Overall, the report says the public-private partnership — using Treasury, Federal Reserve and private investor money — could total $2 trillion. The financial markets responded positively to the program when the Obama administration announced it last month, but the administration is still putting final touches on its implementation.

“The sheer size of the program … is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives,” the report states.

In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky says would dilute the incentive for private fund managers to exercise due diligence.

Barofsky recommends that Treasury not allow the use of Fed loans “unless significant mitigating measures are included to address these dangers.”


Among Barofsky’s recommendations:

–Treasury should set tough conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at taxpayer expense.

–Treasury should disclose the owners of all private equity stakes in a public-private fund.

–Fund mangers should have “investor-screening” procedures to prevent asset purchase transactions from being used for money laundering.

If you haven’t been following the story, not only has the Federal Reserve refused to provide the names of all recipients and dollar amounts involved in the first TARP bailout, but recent analysis indicates that among the largest banks known to have received TARP funds, lending activity has actually decreased.

Call me an out-of-touch, angry, racist “Teabagger” for saying it, but we simply cannot allow the Treasury Department and the Federal Reserve to peddle $2 trillion in taxpayer dollars to banks without demanding full disclosure of what the banks are doing with the money. Hopefully the Inspector General’s report will be a wake-up call for Congress, and motivate them to question the Treasury Department and the Federal Reserve more thoroughly.

ADDED: Here’s a different spin on Barofsky’s report from The Los Angeles Times:

In the first major disclosure of corruption in the $750-billion financial bailout program, federal investigators said Monday they have opened 20 criminal probes into possible securities fraud, tax violations, insider trading and other crimes.

The cases represent only the first wave of investigations, and the total fraud could ultimately reach into the tens of billions of dollars, according to Neil Barofsky, the special inspector general overseeing the bailout program.

The disclosures reinforce fears that the hastily designed and rapidly changing bailout program run by the Treasury Department and Federal Reserve is going to carry a heavy price of fraud against taxpayers — even as questions grow about its ability to stabilize the nation’s financial system.

Barofsky said the complex nature of the bailout program makes it “inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering.”

So far, none of the senior executives and officers from the major banks and other financial institutions that received TARP bailout funds have been formally charged with fraud, even though evidence of fraud involving securities, mortgages, and accounting practices at those same institutions during the last three years is abundant (think Countrywide and WaMu). I noted this fact in a previous post.

Not all management-level bank employees were crooks, and we need to make sure that the “pitchfork mobs” organized by ACORN and other Democratic party operatives do not destroy the careers of talented and honest individuals who could put our banking system back together. On the other hand, it would be a serious miscarriage of justice if we failed to prosecute those who engineered and promoted fraudulent financial transactions simply because they were “the best and brightest” in the banking industry.

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