By MICHAEL SMALLBERG
The Treasury Department has failed to fully implement two thirds of the recommendations made by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) during the course of the Wall Street bailout, according to a new SIGTARP report released this morning.
When Congress approved the bailout in 2008, it also created the SIGTARP to protect against the abuse of taxpayer funds. Since then, the SIGTARP has issued nearly 100 recommendations aimed at preventing waste, fraud, and abuse across a wide range of bailout programs. But like all IGs, the SIGTARP cannot compel an agency to take action based on its findings.
Treasury has put many of the SIGTARP’s recommendations in place, which “resulted in important protections for taxpayers” according to the SIGTARP’s report. But in other cases, for reasons that are not always clear, Treasury has decided not to adopt the recommendations, raising concerns about the ongoing potential for abuse.
For instance, the SIGTARP made several recommendations concerning a bailout program in which the government partnered with private firms to invest in the troubled assets that remained on the balance sheets of many banks, preventing them from raising capital and increasing lending. (POGO and others had raised concerns about potential conflicts of interest arising from the private interests of the fund managers selected by the government.)
But when the SIGTARP recommended that Treasury require fund managers to establish internal firewalls to address potential conflicts of interest, Treasury simply refused to take action. The SIGTARP notes that Treasury’s refusal “represents a material deficiency in the program.” In addition, the SIGTARP had recommended that Treasury come up with a system to evaluate the effectiveness of the fund managers. But Treasury still has not established a benchmark, “[e]ven though there has been two and a half years of trading by the [public-private investment funds].” The SIGTARP had also recommended that Treasury establish standards for removing fund managers who violated compliance or ethical rules, but Treasury again refused to adopt the recommendation, “potentially [putting] significant Government funds at risk.”
With respect to the Home Affordable Modification Program (HAMP), the SIGTARP had recommended that Treasury “rectify the confusion that its own statements have caused for HAMP by prominently disclosing its goals and estimates (updated over time, as necessary) of how many homeowners the program will help through permanent modifications and report monthly on its progress toward meeting that goal.” The SIGTARP reports that, despite its “repeated highlighting of this essential transparency and effectiveness measure, Treasury has refused to disclose clear and relevant goals and estimates for the program.”
In some cases, it appears even the SIGTARP is in the dark about why Treasury decided not to adopt a recommendation. For instance, in response to a recommendation that Treasury consider renegotiating the terms of certain bailout contracts in order to preserve the value of taxpayers’ investments, the SIGTARP reports that “Treasury rejected this recommendation without ever addressing why.”
While agencies sometimes have legitimate reasons not to implement an IG’s recommendation, Treasury and other agencies should provide more explanation when they decide not to do so, especially when it comes to programs such as TARP that create significant risks for taxpayer losses.
Speaking of which, today’s SIGTARP report also includes an interesting discussion about the profits and losses associated with Treasury’s bailout programs. A few weeks ago, Treasury released a series of flashy charts illustrating the government’s response to the financial crisis. One chart indicates that there has been an 83 percent decrease in projected TARP costs since August 2009, despite earlier predictions about potentially devastating taxpayer losses:
However, today’s SIGTARP report proposes a broader framework for analyzing the total costs and benefits related to the bailout:
While TARP and other Government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing industries, and improved stability since 2008, the tradeoff is not without profound long-term consequences. A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.” TARP’s legacy also includes the impact on consumers and homeowners from the large banks’ failure to lend TARP funds. TARP continues to be subject to criticism that TARP helped large banks but not homeowners. In addition, after 3½ years, community banks have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds. Finally, TARP’s legacy includes white-collar crime that SIGTARP is uncovering and stopping.
Moving forward, we urge Treasury to expand its discussion of TARP to address these long-term tradeoffs, and to continue working with SIGTARP to ensure that taxpayers are protected from further losses.
Michael Smallberg is a POGO investigator.
Image via Great Beyond.