TARP Watchdog Warns Congress About Conflicts of Interest

Fresh off his first announcement of criminal charges filed in connection with bailout fraud, Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Neil Barofsky appeared before the Joint Economic Committee this morning to testify on the findings of his latest audit report.

Naturally, we were glad to see the Committee turn its attention to several issues that are near and dear to us.

Committee Chair Carolyn Maloney (D-NY) and other members asked Barofsky about his finding that the Public Private Investment Program (PPIP) is "inherently vulnerable to fraud, waste, and abuse." Barofsky reiterated that he is "extremely concerned" about the potential for conflicts of interest in the program, and warned of "catastrophic taxpayer losses" if measures are not put in place to identify and mitigate these conflicts.

He specifically mentioned the Legacy Securities Program, in which every dollar raised by private investors will be matched by one dollar in equity from Treasury and up to two dollars in non-recourse loans--in other words, up to 75 percent of the financing will come from taxpayers. As he pointed out, the potential for a conflict arises if "the fund manager has on its books, or is managing for other clients from which it derives fees, the exact same mortgage-backed security that it's going to go out and buy at a higher price." The fund manager could then overbid for these securities, unload its own holdings at the inflated price, and leave taxpayers to foot the bill if the price drops back down to its market level. Barofsky called for increased transparency so that Treasury can examine the books of these fund managers and identify any such conflicts.

POGO has raised similar concerns about the private fund managers hired to advise the Federal Reserve on its mortgage-backed securities purchase program. We've also been banging the drum about the potential for significant taxpayer losses in the Legacy Loans Program, and we hope that future hearings will take up the question about whether the FDIC has the statutory authority to guarantee up to $1 trillion in financing for the program.

Later in the hearing, Barofsky proudly reported that he got a 100 percent response rate from the 364 banks he surveyed about their use of TARP funds, including detailed information about the banks' lending activities. He said he hoped this would discredit the argument that it would be almost impossible to track what banks actually do with their bailout money. If Treasury continues to delay in requesting this information, we urge Congress to step in and demand that they obtain it, as has been proposed in pending legislation.

The Committee also learned that Barofsky is carrying out his crucial work with only 37 staffers working under him. He'll have a much easier time reaching his goal of 150 staffers once President Obama gets around to signing the recently passed SIGTARP Act of 2009, which will give Barofsky the authority to quickly hire new employees and retired government auditors.

Finally, we're glad Barofsky told the Committee that one-third of his investigations originated from whistleblower tips. This further underscores why it's so important for IGs to improve how they handle whistleblower cases, as we argued in our recent report on IG accountability.

-- Michael Smallberg

UPDATE: The SIGTARP bill was just signed into law.

Comments

[Scott]

You noted:
>Barofsky proudly reported that he got a 100 percent response rate from the 364 banks he surveyed about their use of TARP funds, including detailed information about the banks' lending activities.

>He said he hoped this would discredit the argument that it would be almost impossible to track what banks actually do with their bailout money.

Response:
The FDIC better keep track they spent four years and millions of taxpayer dollars on creating a new FDIC-banking control system which should have completed in 2007. Hold Deloitte Consulting responsible if they are not able to keep track.

[Ken Huffman]

The SIGTARP's first criminal case appears to piggyback a multi agency investigation of a PONZI scheme in which the word "TARP" was misrepresented as a lure to private investors. Hard to see from the press release what this has to do with the SIGTARP's mandate to uncover misuse of actual TARP funds.