Geithner Defends TARP as Banks Lend Less
Geithner Faces Questions about Bailout Amid Warnings of Fraud
By MATTHEW JAFFE and CHARLIE HERMAN
April 21, 2009—
Testifying before Congress today, Treasury Secretary Timothy Geithner defended President Obama's bank bailout, parrying questions about the Troubled Assets Relief Program's transparency and the administration's plan to encourage private investors to help financial institutions get rid of their troubled assets.
"I believe in the importance of transparency, accountability, oversight. I think it is critical to our credibility to respect what you're doing in this context," Geithner told the Congressional Oversight Panel, an independent agency assigned to oversee how bailout funds are spent.
"I will commit to make sure that we have as effective a working relationship as possible, so you have the information you need and an intensity of interaction with us to help you do your jobs," he said.
His testimony came after another government watchdog's report that warned that Obama administration initiatives could increasingly expose taxpayers to losses and make the government more vulnerable to fraud.
Neill Barofsky, a special inspector general assigned to the Treasury's $700 billion bailout program, found in his quarterly report to Congress that the private-public partnership tilts in favor of private investors and creates "potential unfairness to the taxpayer."
American taxpayers have trillions of dollars at stake as part of the administration's programs to end the financial crisis, but this money is vulnerable to fraud, waste, and abuse, ranging from collusion to money laundering, according to the report.
"I think there we've identified some potentially very, very dangerous and significant fraud risks regarding price fixing and those types of frauds," Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), told ABC News.
In a quarterly report to Congress released Tuesday, Barofsky highlights a wide variety of problems with the government's financial rescue programs. The nearly 250-page report documents how the initial $700 billion TARP has grown to become "a program of unprecedented scope, scale and complexity" of 12 separate but interrelated plans involving taxpayer dollars and private funds totaling almost $3 trillion.
And Barofsky, citing that most government programs lose approximately 10 percent to fraud, noted that such a loss in this case would equal $300 billion.
"If there are no protections put in and the concerns that we raise are not paid attention to, I think the numbers could be staggering," he said.
He cautioned, however, that this is not a traditional government program and that his office has been working with the Treasury Department to put into place anti-fraud provisions that will minimize losses.
One area of particular concern is one of the more prominent government programs: its $1 trillion plan to get bad assets off of banks' balance sheets. The Public-Private Investment Partnership (PPIP) seeks to entice private investors to partner with the government to purchase toxic assets from banks thanks to attractive government financing.
The report, however, says the plan is rife with risks.
"Aspects of PPIP make it inherently vulnerable to fraud, waste, and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering."
The Treasury Department responded to Barofsky's report Tuesday morning in a written statement.
"We believe that the input and recommendations from all of the TARP oversight bodies are critical to Treasury's efforts to implement the programs critical to stabilizing the financial system and increasing the flow of credit to support economic recovery," said Treasury spokesman Andrew Williams. "Over the last two months, we've significantly increased the amount of transparency into the programs, including actively measuring lending and requiring banks under the new capital program to report on how every dollar of government resources goes toward increasing lending to consumers and businesses."
Toxic Asset Plan's Toxic Problems?
The report details exactly how the government's plan could lead to taxpayer losses.
A fundamental problem with the toxic assets is determining how much they are actually worth, there is a danger that "the government will overpay for the assets." In addition, many of the private investors the government hopes will participate in the program, such as hedge funds, are largely unregulated. That in turn could challenge the oversight of the program since the relationships between all the participants can be quite complex and firms could end up buying, selling and managing the troubled assets for others while holding or managing similar assets for other institutions.
Most important, with possibly $2 trillion available, the report says "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."
Barofsky told ABC News that Treasury needs to address these risks.
"The idea of price collusion and conflicts of interest and the private fund managers engaging in practices to drive up prices for these assets for their own benefit at the taxpayers' expense are very, very real concerns," he said. "It's a great inherent danger in these programs that needs to be addressed."
The special inspector general even requests that Treasury not allow one aspect of the recently announced program. In his report, he argues it could result in private investors investing less while putting taxpayer dollars at greater risk, unless mitigating measures are put in place.
Chrysler Financial Asks for More Money, No Strings
Barofsky's report also reveals that the administration rejected a request for additional funding from Chrysler Financial because company executives refused to accept compensation restrictions.
"As Treasury reported to us, Chrysler Financial sought additional funding," Barofsky told ABC News Monday. "They had basically used up the $1.5 billion that was lent to them ... and came back and asked for more money."
"Treasury asked as a condition that the top 25 executives sign waivers reflecting the new executive compensation restrictions that were in the stimulus package. And Chrysler Financial executives refused to sign the waivers. So, Treasury, in response, declined their request for additional funding."
The auto financing company received $1.5 billion of TARP funds last January to finance consumer auto loans and dealer loans.
Chrysler Financial said that its executives were never presented with any new compensation demands.
"Chrysler Financial has determined that it has adequate private capital funding to cover the short-term needs of our dealers and customers and as such, no additional TARP funding is necessary at this time," a Chrysler Financial official said in a statement. "As such, executives have not been presented with any new demands with regard to executive compensation. As a TARP recipient, the company remains in full compliance with current executive compensation requirements."
The Treasury Department responded with a statement Monday evening.
"Unlocking credit and helping consumers get access to affordable auto loans is an important component of our efforts to stabilize the financial system," according to the statement. "As part of that effort, the Auto Task Force continues to monitor closely the financing situations for both GM and Chrysler. This is an issue that Chrysler and its stakeholders will need to address as part of this process and any potential deal."
Banks: What Are They Doing With Taxpayer Dollars?
Of the original $700 billion for TARP, Treasury has announced how it will spend $590 billion according to the Inspector General. As of the end of March, $328 billion had been allocated and Barofsky reiterated his call for Treasury to require TARP recipients to report on their use of funds.
"With the exception of Citigroup and Bank of America, Treasury has refused to seek further details on TARP recipients' use of funds," the report states. "Simply put, the American people have a right to know how their tax dollars are being used."
Since Treasury has not heeded his recommendation, Barofsky and his office conducted its own survey of 364 TARP recipients and plans to issue a report in the coming weeks.
So far, according to the report, "Respondents provided diverse answers on how TARP funds have been used." Common responses include using the money to strengthen banks cash base, increase credit lines, make new loans, even retire existing debt.
Total lending activity, however, has not increased in recent months. From January to February, 12 of the top 21 TARP recipients reported a drop in lending, according to Treasury data.
Barofsky says what matters is that lending has not decreased as much as it would have without the $700 billion bailout.
"A lot of banks have indicated that because they received the TARP funds, they were able to maintain or not reduce lending as much as they would have otherwise," he told ABC News. "And that really goes to the fundamental question of what is the goal of the program. If the goal of the program was to increase lending, well obviously lending has not increased. Recently though some of the public statements of Treasury ... indicated that the extent of the goal is to stem the decline of lending, so it's not as great as it would be otherwise. I think our survey results show that that's probably what happened: there would be less lending right now if not for the TARP."
Since last week, numerous TARP recipients, such as Citigroup, JPMorgan Chase, and Goldman Sachs, have released better-than-expected earnings reports for the first three months of this year. The numbers have not escaped Barofsky's eye and now he has vowed to take a close look at the banks' applications to receive government funds.
"If you look behind a lot of reporting on a lot of these earnings announcements, there are some pretty complicated accounting issues that are underlying," he said. "I'm not suggesting that there's fraud, but ultimately we'll see. We're going to take a look at the financial institutions that applied for TARP funds and if we see that they lied in their applications, that's obviously something that we're going to investigate thoroughly."
Treasury insists that it has put in place an extensive set of requirements that address both fraud and credit loss prevention. Treasury believes these measures are consistent with achieving the purpose of encouraging lending to consumers and small businesses.
Big Money, Little Staff
One recurring concern for Barofsky's office has been under-staffing. At present, the special inspector general only has 35 people monitoring almost $3 trillion in government programs. The office intends to ratchet up staffing to 150 employees in the future.
But Treasury has similar staffing shortages.
The Office of Financial Stability's compliance department, which has "primary responsibility over a vast and complex array of compliance and risk management functions," has about 10 employees on staff, according to the report. Treasury acknowledged to Barofsky's office its under-staffing and is working to fill five positions immediately that deal mainly with executive compensation.
Barofsky also faults Treasury for not yet hiring an asset manager to oversee and manage the enormous asset portfolio it now owns on behalf of the American taxpayer.
"The failure to have an asset manager, an investment plan, or an accurate valuation of the securities and warrants it holds will soon be a significant deficiency in the program if not promptly addressed," the report stated.
The Congressional Oversight Panel has estimated that Treasury overpaid by $68 billion in its acquisition of assets, but as of March 31, no such valuation by Treasury had occurred, per the report. The Congressional Budget Office, meanwhile, has estimated taxpayer loss in TARP could ultimately rise as high as $356 billion.
Barofsky's office now has at least six ongoing audits. Those include how financial institutions are using TARP funds, how executive compensation rules are being implemented and how Bank of America received additional assistance. The special inspector general is also reviewing the bonuses paid to a controversial division of insurance giant AIG as well as how it paid counterparties in the complex insurance it provided for mortgages sold as investments.