Duh: AP Reports that "Bank Bailout May Hurt Taxpayers, Be Open to Fraud" w/Obama Plan

Discussion in 'Economics' started by ByLoSellHi, Apr 21, 2009.

  1. Really? You don't say.



    Bank Bailout May Hurt Taxpayers, Be Open to Fraud

    Published: April 21, 2009

    Filed at 12:04 a.m. ET

    Taxpayers are increasingly exposed to losses and the government is more vulnerable to fraud under Obama administration initiatives that have created a federal bank bailout program of ''unprecedented scope,'' a government report finds.

    In a 250-page quarterly report to Congress, the rescue program's special inspector general concludes that a private-public partnership designed to rid financial institutions of their ''toxic assets'' is tilted in favor of private investors and creates ''potential unfairness to the taxpayer.''

    The report, which examines the six-month old, $700 billion Troubled Asset Relief Program, is scheduled for release Tuesday.

    Using blunt language, Inspector General Neil Barofksy offers a series of recommendations to protect the public and takes the Treasury to task for not implementing previous advice. The report also commends Treasury and the Federal Reserve Bank for creating some safeguards.

    The report's warnings about the public-private plan's potential for losses echoes alarms raised by some lawmakers and economists, but Barofksy has significant credibility in Congress and his views are likely to carry ample weight.

    Overall, the report says the public-private partnership -- using Treasury, Federal Reserve Bank and private investor money -- could total $2 trillion. The financial markets responded positively to the program when the Obama administration announced it last month, but the administration is still putting final touches on its implementation.

    ''The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives,'' the report states.

    In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky says would dilute the incentive for private fund managers to exercise due diligence.

    Barofsky recommends that Treasury not allow the use of Fed loans ''unless significant mitigating measures are included to address these dangers.''

    Other recommendations:

    --Treasury should set tough conflict of interest rules on public-private fund mangers to prevent investment decisions that benefit them at taxpayer expense.

    --Treasury should disclose the owners of all private equity stakes in a public-private fund.

    --Fund mangers should have ''investor-screening'' procedures to prevent asset purchase transactions from being used for money laundering.

    The report lands as the bailout plan comes under new leadership at Treasury. Last week, the White House announced it had nominated Herbert Allison, the president and CEO of mortgage behemoth Fannie Mae, to replace Neel Kashkari, an assistant Treasury secretary and a holdover from the Bush administration.

    In a response to Barofsky's report dated last week, Kashkari acknowledged that ''there are risks associated with investing in or lending against legacy assets, which is in part why markets for them are currently frozen.'' Kashkari said Treasury was considering Barofsky's recommendations.

    The report also comes as lawmakers demand evidence that the government's role is unclogging credit and banks are being held accountable. Despite the infusion of government money, bank lending has declined and some banks have began to bristle at the oversight and the restrictions attached to acceptance of federal assistance.

    With a sharp rebuke, Barofsky's report notes that the Treasury Department has refused to adopt the inspector general's recommendation that all recipients of TARP money account for the use of their government money.

    ''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,'' the report states.

    The report pointed out that the inspector general has conduced its own survey of 364 TARP recipients seeking information and has received a 100 percent response.

    Barofsky's report said his office is still evaluating the responses but that in general, some banks reported new lending as a result of the money, some said new loans had slowed as a result of the economy, while others said the money helped them maintain lending levels.

    ''Treasury's arguments that such an accounting was impractical, impossible, or a waste of time because of the inherent fungibility of money were unfounded,'' the report states.