The Inspector General appointed to keep watch over the taxpayer money being used to bail out the nation's banking system is sounding the alarm. In a 250-page report to Congress, Inspector General Neil Barofsky says the Obama Administration has created a massive bailout program that puts taxpayers at risk.
The Troubled Asset Relief Program, or TARP, was created last October when Congress appropriated $700 billion for the purchase of real estate-backed securities that had lost most of their value. Since financial institutions owned these securities as assets, the entire credit system was in danger of collapse.
However, the U.S. Treasury Department has not used the $700 billion to buy these assets, mainly because there was still no way to place a value on them. The TARP program wanted to purchase them at a steep discount but the banks refused to sell them. So instead, the government purchased stock in troubled banks to infuse them with capital.
But the problem of what to do with the "toxic" assets remains. A "private-public" partnership, unveiled by the Obama Administration last month, will now purchase the assets, as a means to get rid of the problem. It is this private-public partnership that gives Barofsky, a former U.S. attorney for the Southern District of New York and chief of the Mortgage Fraud Group, the most concern.
Under the plan, the Treasury Department, the Federal Reserve and private investors will put up money perhaps as much as $2 trillion - to buy the securities, at terms highly favorable to the private investors. Too favorable, according to the Inspector General.
"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 warns.
In particular, Barofsky is concerned about possible conflict of interest by the managers of the public-private funds. Investment decisions, he says, should benefit taxpayers, not just investors who, after all, are making their profits using mostly taxpayers' money.
The report also calls for disclosure of ownership of all private equity stakes in the fund and the screening of all investors to prevent the funds' use as a vehicle for money laundering.
Congress, along with much of the public, appears to be growing weary of all the bailouts. Despite all the infusions of taxpayer cash into the banking system, lending has not increased.
Even some banks appears tired of the bailouts, with JPMorgan Chase and Goldman Saks saying they want to repay the money the government gave them and end government oversight.
Barofsky's report notes that taxpayers still don't know how banks have used TARP funds they've received, because the Treasury Department has declined to make them account for it.
"In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system," the report says, "it is not unreasonable that the public be told how those funds have been used by TARP recipients."
