It’s official. TARP is just theft.

These reports about the TARP must be read to be believed.  Since you are reading this on a screen, I have highlighted in red where you would scrawl WTF! on printed material.  This is best read somewhere you can scream without attracting undue attention.

  1. Thievery Under TARP“, Robert Scheer, The Nation, 22 April 2009
  2. Initial Report to the Congress, SIGTARP, 6 February 2009
  3. Quarterly Report to Congress, SIGTARP, 21 April 2009

Who is SIGTARP?

The Office of the Special Inspector General for the Troubled Asset Relief Program (”SIGTARP”) was established by the Emergency Economic Stabilization Act of 2008 (”EESA”).

Under EESA, the Special Inspector General has the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program (”TARP”). (source: their website)

Why?

Why has the TARP been structured in such a manner?  Why have all the bank bailout programs been like this?   It is a shortcut to avoid necessary Congression authorization and review.  Patrick Wolff (Managing Director of Clarium Capital Management) explains in his report “The Wonderful World of Oz” (April 2009):

Tim Geithner has structured the PPIP to require as little new money up front as possible. The program supplies market participants with free put options and attractive financing to motivate them to buy impaired assets from troubled banks. Rather than spend money it doesn’t have and is unlikely to get, Treasury is partnering with the FDIC (which receives no Congressional appropriations) to provide free insurance whose claims come due later and whose costs can be obscured from the general public.

Excerpts

(1)  Thievery Under TARP“, Robert Scheer, The Nation, 22 April 2009 — Excerpt

We are being robbed big-time, but you can’t say we haven’t been warned. Not after the release Tuesday of a scathing report by the Treasury Department’s special inspector general, who charged that the aptly named Troubled Asset Relief Fund bailout program is rife with mismanagement and potential for fraud. The IG’s office already has opened twenty criminal fraud investigations into the $700 billion program, which is now well on its way to a $3 trillion obligation, and the IG predicts many more are coming.

Special Inspector General Neil M. Barofsky charged that the TARP program from its inception was designed to trust the Wall Street recipients of the bailout funds to act responsibly on their own, without accountability to the government that gave them the money.

… For all of its criticism of the original program, designed by the Bush administration, the report was equally severe in denouncing the Obama administration’s plan to partner with hedge funds and other private capital groups to buy up the “toxic” holdings of the banks.

… As with the entire banking bailout, the new plan of Obama’s treasury secretary, Timothy Geithner, is likely to enrich the very folks who impoverished the rest of us, as the report notes: “The significant government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit.”

At the heart of this potentially massive fraud was the original decision of Henry Paulson, President Bush’s treasury secretary and a former Goldman Sachs chairman, to not require the recipients of the bailout, such as his old firm, to account for how the money was spent.

Unfortunately, President Obama’s administration continued that practice.

The only difference is that the amount of public money being put at risk is now far greater, and the hedge funds, which are totally unregulated, have been brought in as the central players. One of the largest of those hedge funds, D.E. Shaw, carried Obama’s top economic adviser, Lawrence Summers, on its payroll to the tune of $5.2 million last year. He may have reason to trust these secretive enterprises that operate beyond the law, but the public does not.

About the author

Robert Scheer, a contributing editor to The Nation, is editor of Truthdig.com and author of The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America  and Playing President. He is author, with Christopher Scheer and Lakshmi Chaudhry, of The Five Biggest Lies Bush Told Us About Iraq.

(2)  Initial Report to the Congress, SIGTARP, 6 February 2009 — Excerpt

SIGTARP’’s Recommendations (p. 8)

{P}articipants should be required to use best efforts to account for the use of TARP funds…

Fraud vulnerabilities in the Term Asset-backed Securities Loan Facility (“TALF”) should be addressed before the program is initiated.

Potential Fraud Vulnerabilities Associated with TALF (p. 99)

First, as discussed more fully in Section 3, TALF is a program in which participants can receive loans upon the posting of certain asset-backed securities (“ABS”) as collateral. Because the loans will be non-recourse, that is, the participant can walk away from the loan by forfeiting the collateral, the risk associated with the ABS (which, in turn, is dependent on the risk of the underlying asset — in this case, certain consumer loans) is critically important to whether the taxpayers’ investment is a sound one.

For this reason, Treasury should consider requiring that some baseline fraud prevention standards be imposed (such as minimum underwriting standards or some other combination of provisions that will minimize the risk of fraud) on the ABS and/or the assets underlying the ABS used as collateral in TALF. SIGTARP was informed in early January by Treasury and the Federal Reserve that the program relies on:

  1. the requirement that the ABS receive a certain minimum rating from credit rating agencies …

Transparency (p. 13)

Promoting transparency in the management and operation of TARP is one of SIGTARP’s primary roles. Through EESA, the American taxpayer has been asked to fund — to the tune of hundreds of billions of dollars — an unprecedented effort to stabilize the financial system and promote economic recovery; in this context, the public has a right to know both how the U.S. Department of the Treasury (“Treasury”) decided to invest that money and what was done with it by the recipients. Transparency is a powerful tool to ensure accountability and that all those managing TARP funds will act appropriately, consistent with the law, and in the best interests of the country.

(3)  Quarterly Report to Congress, SIGTARP, 21 April 2009 — Excerpt:

SIGTARP’s Recommendations

SIGTARP continues to recommend that Treasury require all TARP recipients to report on their actual use of TARP funds. (p.6)

… The announced expansion of TALF to permit the posting of MBS as collateral poses significant fraud risks, particularly with respect to legacy residential MBS (“RMBS”). … Aspects of PPIP make it inherently vulnerable to fraud, waste, and abuse, including significant issues relating to conf icts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering. (p. 7)

TARP implementation (p. 14)

The Initial Report contained a series of SIGTARP recommendations with regard to the design of TALF. Since the Initial Report, SIGTARP has remained in regular contact with Treasury and FRBNY with regard to oversight and fraud prevention in TALF and has sought greater transparency, explicit oversight access, and assurances regarding underwriting standards on the loans underlying the securities, among other things. SIGTARP’s past and new recommendations regarding TALF are discussed in greater detail in Section 4 of this report.

… Although not all of these recommendations have been adopted, the design of the program, in SIGTARP’s view, has significantly improved from an oversight perspective due to SIGTARP’s suggestions and FRBNY’s willingness to engage on these issues. (p. 14)

SIGTARP’s recommendations to the Treasury

… One of SIGTARP’s responsibilities is to provide recommendations to the Department of Treasury (“Treasury”) so that Troubled Asset Relief Program (“TARP”) programs can be designed or modified to facilitate transparency and effective oversight and prevent fraud, waste, and abuse. SIGTARP’s Initial Report to Congress, dated February 6, 2009 (the “Initial Report”), set forth a series of recommendations, some of which were adopted by Treasury and some of which were not. (p. 137)

… Treasury has indicated, however, that it will not adopt SIGTARP’s recommendation that all TARP recipients be required to do the following:

  • account for the use of TARP funds
  • set up internal controls to comply with such accounting
  • report periodically to Treasury on the results, with appropriate sworn certifications

In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the fi nancial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients. (p. 137)

… Lack of Resources within OFS-Compliance –  The Compliance department within OFS has primary responsibility over a vast and complex array of compliance and risk management functions. This responsibility includes ensuring that appropriate internal controls are in place over OFS management of TARP programs, providing primary oversight of vendors that are providing services to OFS, and monitoring TARP recipients’ compliance with their contractual and legal obligations.

More than 500 financial institutions are already participating in various TARP programs; additional announced programs will expand OFS-Compliance’s responsibilities to a mortgage modification program involving millions of mortgages and to public-private partnerships that will involve not only many new participants but also a whole new set of compliance challenges and types of risk.

To carry out all of these responsibilities, now six months into TARP operations, OFS-Compliance currently has a staff of approximately 10 employees. Although SIGTARP has plans for a future audit to assess the integration and effectiveness of OFS’s risk assessment and compliance efforts, SIGTARP makes a preliminary observation that the current resource commitment for this vitally important function appears plainly inadequate.  (p. 144)


Originally published at Fabius Maximus and reproduced here with the author’s permission.