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FOR OFFICIAL USE ONLY UNTIL RELEASED BY THE
HOUSE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM STATEMENT OF NEIL BAROFSKY SPECIAL INSPECTOR GENERAL TROUBLED ASSET RELIEF PROGRAM BEFORE THE HOUSE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM July 21, 2009 Link SIGTARP Barofsky's statement Chairman Towns, Ranking Member Issa and Members of the Committee, I am honored to appear before you today to deliver to this Committee my quarterly report to Congress. In the nine months since the Emergency Economic Stabilization Act of 2008 ("EESA") authorized creation of the Troubled Asset Relief Program ("TARP"), the U.S. Department of the Treasury ("Treasury") has created 12 separate programs involving Government and private funds of up to almost $3 trillion. From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase "toxic" assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity. Moreover, TARP does not function in a vacuum but is rather part of the broader Government efforts to stabilize the financial system, an effort that includes dozens of inter-related programs operated by multiple Federal agencies. Thus, before the American people and their representatives in Congress can meaningfully evaluate the effectiveness of TARP, not only must the TARP programs themselves be understood, but also TARP’s scope and scale must be placed into proper context with the other Government programs designed to support the financial system. TARP IN FOCUS, AND IN CONTEXT TARP, as originally envisioned in the fall of 2008, would have involved the purchase, management, and sale of up to $700 billion of "toxic" assets, primarily troubled mortgages and mortgage-backed securities ("MBS"). That framework was soon shelved, however, and TARP funds are being used, or have been announced to be used, in connection with 12 separate programs that, as set forth in Table 1 below, involve a total (including TARP funds, loans and guarantees from other agencies, and private money) that could reach nearly $3 trillion. Through June 30, 2009, Treasury has announced the parameters of how $643.1 billion of the $700 billion would be spent through the 12 programs. Of the $643.1 billion that Treasury has committed, $441 billion has actually been spent. As massive and as important as TARP is on its own, it is just one part of a much broader Federal Government effort to stabilize and support the financial system. Since the onset of the financial crisis in 2007, the Federal Government, through many agencies, has implemented dozens of programs that are broadly designed to support the economy and financial system. The total potential Federal Government support could reach up to $23.7 trillion. Any assessment of the effectiveness or the cost of TARP should be made in the context of these broader efforts.
OVERSIGHT ACTIVITIES OF SIGTARP Since its April Quarterly Report, SIGTARP has been actively engaged in fulfilling its vital investigative and audit functions as well as in building its staff and organization. SIGTARP’s Investigations Division has developed rapidly and is quickly becoming a sophisticated white-collar investigative agency. Through June 30, 2009, SIGTARP has 35 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected accounting fraud, securities fraud, insider trading, mortgage servicer misconduct, mortgage fraud, public corruption, false statements, and tax investigations. Two of SIGTARP’s investigations have recently become public: More than 50% of SIGTARP’s ongoing investigations were developed in whole or in part through tips or leads provided on SIGTARP’s Hotline (877-SIG-2009 or accessible at www.SIGTARP.gov). Over the past quarter, the SIGTARP Hotline received and analyzed more than 3,200 tips, running the gamut from expressions of concern over the economy to serious allegations of fraud. SIGTARP remains committed to being proactive in dealing with potential fraud in TARP. For example, the previously announced TALF Task Force, which was organized by SIGTARP to get out in front of any efforts to profit criminally from the Term Asset-Backed Securities Loan Facility ("TALF"), has been expanded to cover the Public-Private Investment Program ("PPIP"). In addition to SIGTARP, the TALF-PPIP Task Force consists of the Inspector General of the Board of Governors of the Federal Reserve System, the Federal Bureau of Investigation, Treasury’s Financial Crimes Enforcement Network, U.S. Immigration and Customs Enforcement, the Internal Revenue Service Criminal Investigation Division, the Securities and Exchange Commission, and the U.S. Postal Inspection Service. On the audit side, SIGTARP is in the process of completing its first round of audits. SIGTARP issued yesterday its first formal audit report concerning how recipients of Capital Purchase Program ("CPP") funds reported their use of such funds. In February 2009, SIGTARP sent survey letters to more than 360 financial and other institutions that had completed TARP funding agreements through January 2009. Although most banks reported they did not segregate or track TARP fund usage on a dollar-for-dollar basis, most banks were able to provide insights into their actual or planned future use of TARP funds. For some respondents the infusion of TARP funds helped [1] to avoid a "managed" reduction of their activities; others reported that [2] their lending activities would have come to a standstill without TARP funds; and others explained that they [3] used TARP funds to acquire other institutions, invest in securities, pay off debts, or that they retained the funds to serve as a cushion against future losses. Many survey responses also highlighted the importance of the TARP funds to the bank’s capital base, and by extension, the impact of the funds on lending. In light of the audit findings, SIGTARP renews its recommendation that the Secretary of the Treasury require all TARP recipients to submit periodic reports to Treasury on their use of TARP funds. [The clear implication is that this isn't being done now by Treasury.] SIGTARP also has audits nearing completion examining the following issues: executive compensation restriction compliance, controls over external influences on the CPP [Capital Purchase Program] application process, selection of the first nine participants for funds under CPP (with a particular emphasis on Bank of America), AIG bonuses, and AIG counterparty payments. In addition, SIGTARP is undertaking a series of new audits, as follows: SIGTARP’S RECOMMENDATIONS ON THE OPERATION OF TARP One of SIGTARP’s oversight responsibilities is to provide recommendations to Treasury so that TARP programs can be designed or modified to facilitate effective oversight and transparency and to prevent fraud, waste, and abuse. SIGTARP details ongoing recommendations concerning PPIP, TALF, and tracking use of funds and provides an update on the implementation of recommendations made in previous reports. Two categories of recommendations are worth highlighting in particular: Transparency in TARP Programs Although Treasury has taken some steps towards improving transparency in TARP programs, it has repeatedly failed to adopt recommendations that SIGTARP believes are essential to providing basic transparency and fulfill Treasury’s stated commitment to implement TARP "with the highest degree of accountability and transparency possible" [Why isn't Treasury on board here. "the highest degree of accountability" is axiomatic for managing any financial program. That's basic and not in place.] With one new recommendation made in this report, there are at least four such unadopted recommendations: Although SIGTARP understands Treasury’s need to balance the public’s transparency interests, on one hand, with the interests of the participants and the desire to have wide participation in the programs, on the other, Treasury’s default position should always be to require more disclosure rather than less and to provide the investors in TARP -- [the American taxpayers] -- as much information about what is being done with their money as possible. Unfortunately, in rejecting SIGTARP’s basic transparency recommendations, TARP has become a program in which taxpayers (i) are not being told what most of the TARP recipients are doing with their money, (ii) have still not been told how much their substantial investments are worth, and (iii) will not be told the full details of how their money is being invested. In SIGTARP’s view, the very credibility of TARP (and thus in large measure its chance of success) depends on whether Treasury will commit, indeed as in word, to operate TARP with the highest degree of transparency possible. [The SIG for TARP is saying that we're operating blind, we the people, when it comes to reporting from TARP. This should have been major news. It is certainly more important than a bunch of crazy claims about "death panels" and the status of President Obama's birth certificate, both of which are absurd claims. But it isn't, according to the media's record of coverage.] Imposition of Information Barriers, or "Walls," in PPIP In the April Quarterly Report, SIGTARP noted that conflicts of interest and collusion vulnerabilities were inherent in the design of PPIP stemming from the fact that the PPIF managers will have significant power to set prices in a largely illiquid market. These vulnerabilities could result in PPIF managers having an incentive to overpay significantly for assets or otherwise using the valuable, proprietary PPIF trading information to benefit not the PPIF, but rather the manager’s non-PPIF business interests. As a result, SIGTARP made a series of recommendations in the April Quarterly Report, including that Treasury should impose strict conflicts of interest rules. Since the April Quarterly Report, Treasury has worked with SIGTARP to address the vulnerabilities in PPIP, and SIGTARP made a series of specific recommendations, suggestions, and comments concerning the design of the program. Treasury adopted many of SIGTARP’s suggestions and has developed numerous provisions that make PPIP far better from a compliance and anti-fraud standpoint than when the program was initially announced. However, Treasury has declined to adopt one of SIGTARP’s most fundamental recommendations — that Treasury should require imposition of an informational barrier or "wall" between the PPIF fund managers making investment decisions on behalf of the PPIF and those employees of the fund management company who manage non-PPIF funds. Treasury has decided not to impose such a wall in this instance, despite the fact that such walls have been imposed upon asset managers in similar contexts in other Government bailout-related programs, including by Treasury itself in other TARP-related activities, and despite the fact that three of the nine PPIF managers already must abide by similar walls in their work for those other programs. [What's the hold up by Treasury on this. As explained, it's essential.] If nothing else, the reputational risk that Treasury and the program could face if a PPIF manager should generate massive profits in its non-PPIF funds as a result of an unfair advantage, even if that advantage is not strictly against the rules, justifies the imposition of a wall. Failure to impose a wall, on the other hand, will leave Treasury vulnerable to an accusation that has already been leveled against it — that Treasury is using TARP to pick winners and losers and that, by granting certain firms the PPIF manager status, it is benefiting a chosen few at the expense of the dozens of firms that were rejected, of the market as a whole, and of the American taxpayer. This reputational risk is not one that can be readily measured in dollars and cents, but is rather a risk that could put in jeopardy the fragile trust the American people have in TARP and, by extension, their Government. [The "good faith" of the Treasury Department has value but that value is compromised by in action on Treasury even in the face of clear, sensible advise like this. Why the delay? Why the resistance on the part of Treasury?] In addition to these recommendations, SIGTARP also makes additional recommendations, concerning other aspects of PPIP and concerning the use of ratings agencies in TALF. Chairman Towns, Ranking Member Issa and Members of the Committee, I want to thank you again for this opportunity to appear before you, and I would be pleased to respond to any questions that you may have. SIGTARP Hotline If you are aware of fraud, waste, abuse, mismanagement or misrepresentations affiliated with the Troubled Asset Relief Program, please contact the SIGTARP Hotline. By Mail: Hotline: Office of the Special Inspector General For The Troubled Asset Relief Program 1801 L Street, NW, Suite 600 Washington, D.C. 20220 Press Inquiries Please contact our Press Office if you have any inquires: Kris Belisle, Director of Communications Kris.Belisle@do.treas.gov 202-927-8940 Legislative AffairsPlease contact our Legislative Affairs Office for Hill inquires: Lori Hayman, Director of Legislative Affairs Lori.Hayman@do.treas.gov 202-927-8941 Obtaining Copies of Testimony and Reports To obtain copies of testimony and reports please log on to our website at http://www.sigtarp.gov
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