Will TARP Become America's Economic Armageddon?

Turbo Tax Tim, Clueless In D.C.

The disturbing trend of arrogance, ineptitude, and outright disregard for interests of the American taxpayer continues at The Dept. of the Treasury.

The Special Inspector General for the Troubled Asset Relief Program Act of 2009, “SIGTARP”, submitted his quarterly report to Congress last week, and it is a frightening picture of what could become America’s economic Armageddon.  The report should be read by every American–certainly be every taxpayer.  John Hinderaker at Power Line provides a detailed analysis of what SIGTARP reported.  The refusal of Treasury and Tim Geithner to follow the recommended corrective actions contained in the report are incomprehensible considering  the viability of our nation’s economy may be determined by the success or failure of TARP.  The sticker shock alone should set off alarm bells from coast to coast as TARP has expanded from  the $700 billion originally allocated by Congress to what is now a $3 trillion complex of programs, with the cost of some programs yet to be determined.

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Here are a few excerpts from Hinderaker’s analysis ot the report:

The report is valuable for a number of reasons, not least because it provides the most coherent description I’ve seen of the various programs now underway to bail out–or take over, as the case may be–the country’s financial sector. So far, the report’s most commented-upon feature is its description of the many criminal investigations that are now underway, arising out of TARP:

Both from the Hotline and from other leads, SIGTARP has initiated, to date, almost 20 preliminary and full criminal investigations. Although the details of those investigations generally will not be discussed unless and until public action is taken, the cases vary widely in subject matter and include large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption, and mortgage-modification fraud.

It is safe to assume, however, that the investigations now in progress represent not even the tip of the iceberg. The most troubling feature of the SIG’s report is its documentation of reluctance on the part of Tim Geithner’s Treasury Department to make even modest efforts to protect the interests of the taxpayers. To take just one glaring example, Treasury has refused to require banks to account for what they do with the billions of dollars they receive in TARP money:

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 financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients. Treasury is now conducting regular surveys of the banks’ lending activities; however, with the exception of Citigroup and Bank of America, Treasury has refused to seek further details on TARP recipients’ use of funds.

Not just failed, but “refused.” The report adds:

The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution’s core business and may be little more than a way to gain access to the low-cost capital provided under TARP.

Later, with respect to the Capital Assistance Program specifically, the report says:

Treasury announced that it would require CAP applicants to set forth how they intend to use CAP funding. Notwithstanding this requirement, Treasury adamantly continues to refuse to adopt SIGTARP’s recommendation that it require CAP recipients (and indeed all TARP recipients) to report on how they actually used TARP funds. Putting aside the value of this recommendation in other TARP programs, SIGTARP submits that it is largely meaningless to require an applicant to report on its intended use of funds without setting up a mechanism to monitor its actual use of funds.

I don’t know of any way to explain Treasury’s position other than as a manifestation of the Democratic Party’s instinctive preference for cronyism over accountability.

The Treasury Department is now managing a vast portfolio of "troubled assets" on behalf of the American people. It has not, however, developed any plan for how to dispose of them, or how to manage them in the meantime. This may relate to the Obama administration’s failure to staff the Department…

…

A second risk identified by the Special Inspector General is collusion between participants in the PPIP program–the issue that we highlighted here:

A closely related vulnerability is that PPIF managers might be persuaded, through kickbacks, quid pro quo transactions, or other collusive arrangements, to manage the PPIFs not for the benefit of the PPIF (and taxpayers), but rather for the benefit of themselves and their collusive partners. In both the Legacy Loans Program and the Legacy Securities Program, 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.

This time, consider an example from the Legacy Loans Program. Imagine that a bank owns a pool of mortgage loans that both it and the private equity firm investing in a PPIF values at $600 million. The private equity firm invests $60 million into the PPIF, which is matched by $60 million of TARP funds, and which is leveraged by a loan of $720 million guaranteed by FDIC (the 6-to-1 debt-to-equity ratio). The PPIF private equity firm surreptitiously agrees with the bank to overpay for the pool of loans and causes the PPIF to bid $840 million at auction for that pool. After the auction, the bank secretly pays the PPIF private equity firm a kickback of $120 million, or half the difference between the auction price ($840 million) and the true value ($600 million).

Although the PPIF will eventually perform poorly as a result of the overpayment, the private equity firm’s loss is relatively small. Even if the PPIF was completely wiped out, the most the PPIF private equity firm could lose is $60 million, which would still give it a guaranteed profit of at least $60 million as a result of the kickback, a 100% return. Meanwhile, the bank would have gained an illegal benefit of $120 million, all at the expense of the taxpayer and FDIC. Of course, in practice, the collusive scheme would be far more complex and would likely involve a series of affiliates and offsetting transactions, but the principle would be the same.

The same collusion could occur in the Legacy Securities Program between buyer and seller. Similarly, collusion could occur among other buyers.

The third broad area of risk identified by SIG is money laundering:

Because of the significant leveraging available and the inherent imprimatur of legitimacy associated with PPIP and TALF, these programs present an ideal opportunity to money-laundering organizations. If a criminal organization can successfully invest $10 million of illicit proceeds into a PPIF, not only does the organization enjoy the possibility of profiting through the Government-backed leverage, but any eventual distributions from the PPIF are successfully laundered because they appear to be PPIF investment gains rather than drug, prostitution, or illegal gambling proceeds.

This is a must read at Power Line as is the SIGTARP report.

April 28, 2009  Tags: , , , , , , , , ,   Posted in: Economy, Politics

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