TARP watchdog Neil Barofksy appeared on CNBC today to discuss the 250-page report card on the bailout the SIGTARP office (that’s Special Inspector General of the Toxic Assets Relief Program, but you knew that) submitted today to Congress. The tenor of his appearance was a great deal milder than that of his report. Asked if he worried that his prosecutorial zeal would dissuade financial institutions from participating in federal programs to restore the system to health, he emphasized that those who “play by the rules” had nothing to worry about. “Those institutions — those banks, those creditors, those those hedge funds — that are seeking to steal from the system, to game this program — I hope we do scare them off,” he told the program Squawk Box.
The scary thing, of course, is that from the sound of his report there still aren’t many rules governing the bailout — and in part as a result, it’s in danger of destroying the government’s credibility. Video and excerpts after the jump.
His office has already initiated 20 separate criminal probes.
The report disclosed no details, but it made clear the vulnerabilities to fraud were in no way limited to any single realm of the TARP: crimes thus far detected include “large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption and mortgage modification fraud.”
Treasury seems to have set gratuitously low expectations for disclosure from TARP recipient banks.
In his office’s February report Barofsky noted that “TARP agreements” — except in those of Bank of America and Citigroup — “generally do not require recipients to report or track internally the use of TARP funds.” So Barofsky sent the 364 TARP-receiving banks a letter asking about just that, and 364 responded.
Although the results of the survey still need to be analyzed, one thing is clear: Treasury’s arguments that such an accounting was impractical, impossible, or a wast of time because of the inherent fungibility of money were unfounded.
And those banks have made clear to Barofksy that Treasury has been less than clear it expects them to go comply with the executive compensation laws Congress passed last fall.
Treasury should address the confusion and uncertainty on executive compensation by immediately issuing the required regulations.
The TALF, or Troubled Assets Lending Facility, demands even less than the TARP.Treasury, the report says, failed to secure itself even enough oversight authority over the program to learn the identity of borrowers in the program that defaulted and surrendered their assets as collateral to the government.
In other words, under its current agreement, Treasury does not have access to the identity, or any oversight authority over, the borrowers from whom, in effect, it will be buying surrendered ABS.
Geithner’s recently announced Public Private Investment Partnership, under which private investors can qualify for massive non-recourse government loans to invest in toxic and illiquid securities to get the markets back in functioning order may be “inherently vulnerable to fraud, waste and abuse.”
Basic conflict-of-interest problems in the deal practically beg investors to overvalue the assets for profit in a scheme that also invites corruption, collusion and money laundering, the report says.
The comprehensively botched handling of the AIG bailout — with the bonus controversy and the AIG Financial Products counterparty payouts comprising two of the six special audits Barofksy’s office is conducting of the TARP — could get even worse, and it’s destroying its credibility.
In light of the controversy surrounding AIG’s use of government assistance, both through the paying of bonuses and in its dealings with counterparties, failure to impose this requirement with respect to the injection of yet another $30 billion would not only be a failure of oversight, but could call into further question the credibility of the Government’s efforts with respect to the assistance provided to AIG.
As a result of the bailout, Treasury is managing a massive portfolio of bank shares, warrants and other assets with no coherent strategy for maximizing its return.In February Barofsky concluded that Treasury “needs, in the near term, to begin developing a more complete strategy on what to do with the substantial portfolio it now manages on behalf of the American people.”
As of the drafting of this report, however, no asset manager had been hired to managing the existing asset portfolio, and no investment strategy has been developed.
