Others have already commented on it, but we think it's worth taking another look at an important hearing that took place on Tuesday with three of the inspectors general (IGs) tasked with bailout oversight.
At the hearing, entitled "The Role of Inspectors General: Minimizing and Mitigating Waste, Fraud and Abuse," the House Financial Services Subcommittee on Oversight and Investigations heard from Treasury IG Eric Thorson, Federal Reserve IG Elizabeth Coleman, and FDIC IG Jon Rymer. All three IGs remarked that they are devoting considerable time and resources to conducting material loss reviews (MLRs) of failed banks whenever their collapse costs the Deposit Insurance Fund at least $25 million, as is required by the Federal Deposit Insurance Act.
To be sure, the MLRs are an important mechanism for detecting fraud in the event of a bank failure. But in recent months, they've come at a steep price. Coleman told the Subcommittee that 75 percent of the Fed IG's audit resources are focused on "mandatory work required by statute." And Thorson remarked that he has "shut down or indefinitely deferred nearly all critical audits in other Treasury high-risk programs" in order to meet the MLR requirements.
Rep. Alan Grayson (D-FL) drove this point home when he pressed Coleman to explain what the Fed IG is doing to monitor the tremendous increase in Fed lending in response to the financial crisis. The answer, it turns out, is not much. Although Coleman insisted that her office is conducting a "high-level review of the various lending facilities collectively," she struggled to answer some fairly basic questions about the Fed's balance sheet, which, as Grayson pointed out, has expanded by over $1 trillion since last September:
As we wrote in our recent report on IG accountability, many IG offices struggle to figure out how to "wash the big windows and ignore the little ones"--one IG whom we interviewed revealed that he actually orders his staff to read the daily newspaper. When it comes to the MLRs, however, Congress could also play a role in helping these IGs prioritize their audits and investigations. We've heard, for instance, that Rep. Steve Driehaus (D-OH) is working with Subcommittee Chairman Dennis Moore (D-KS) on legislation to increase the threshold for initiating an MLR.
In the meantime, we'll continue to keep a close watch on what the IGs (including, of course, the Special IG for the Troubled Asset Relief Program) are doing to oversee the $12.8 trillion that has been spent, lent, or committed by the Fed, Treasury, and FDIC to stabilize the financial system.
-- Michael Smallberg