$23.7 Trillion to Fix Financial System?

Treasury Should Require TARP Recipients to Report on Use of Funds, Says Barofsky

Barofsky notes that there are currently four specific recommendations that the Treasury Department has not adopted. The department, he believes, should require all TARP recipients to report on their use of funds. The department should also report on the values of its TARP portfolio so taxpayers know about the value of their investments; disclose the identity of any TALF borrowers; and disclose tradings, holdings and valuations of assets of the public-private investment funds that will be buying toxic assets from banks.

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This public-private investment program is a key source of concern for the watchdog. In the program, a handful of selected funds will purchase toxic assets -- like mortgage-backed securities -- from banks in an effort to cleanse their balance sheets and help them increase lending.

In his last quarterly report in April, Barofsky cautioned that many aspects of the toxic asset program left it vulnerable to fraud, waste and abuse, such as conflicts of interest for fund managers, collusion with fund managers, money laundering and misuse with the Fed's lending program, known as the TALF.

Since then, Treasury has incorporated many of the watchdog's recommendations, so now "the program has a significantly improved compliance and fraud-prevention regime than that initially proposed," Barofsky says. However, he warns that "there remain some significant areas in which Treasury's plan for PPIP falls short."

One such area is the lack of an informational barrier -- or a wall -- between fund managers making investment decisions on behalf of the program and employees of the fund management company who manage funds that are not part of the program. A fund manager, Barofsky warns, "could generate massive profits in its non-PPIF funds as a result of an unfair advantage."

Treasury has declined to put such a wall in place.

"Failure to impose a wall 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 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," Barofsky says. "The 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."