$23.7 Trillion to Fix Financial System?

TARP watchdog says it's possible government could spend $23.7 trillion.

July 20, 2009, 12:19 PM

July 20, 2009— -- Sitting down?

"The total potential federal government support could reach up to $23.7 trillion," says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government's efforts to fix the financial system.

Yes, $23.7 trillion.

"The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn't even imaginable," said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. "If you spent a million dollars a day going back to the birth of Christ, that wouldn't even come close to just $1 trillion -- $23.7 trillion is a staggering figure."

Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.

At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.

Barofsky's estimate means that if each federal agency spends the maximum potential amount involved in these 50 different initiatives -- if the Federal Reserve ends up spending $6.8 trillion on its programs. If the Treasury Department spends $4.4 trillion, if the Federal Deposit Insurance Corporation spends $2.3 trillion, and so on -- then the numbers add up to a total of $23.7 trillion.

That figure, Barofsky notes, is designed to "suggest the scale and scope of these efforts and not to provide a firm financial statement." It is not a figure that has been evaluated to give an estimate of likely net costs to the American taxpayer. "The actual potential for losses," he says, "is likely to be lower."

But in his new quarterly report to Congress that will be released Tuesday, the watchdog warns that hundreds of billions of taxpayer dollars could be lost if the government does not make certain changes to these programs. The Treasury Department, he cautions, needs to increase the transparency of the $700 billion TARP program, which he says has grown to an unprecedented scope and scale.

"Although Treasury has taken some steps toward 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," Barofsky says in the report.

Barofsky said his office currently has 35 ongoing civil or criminal investigations.

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.

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."

Barofsky to Testify Tuesday on Report's Findings

Barofsky also wants the department to increase the disclosure of trading activities and holdings of the program's investment funds."

"Such transparency not only dissuades misconduct and promotes sound management but also promotes a better understanding of PPIP and thus enhances the credibility of PPIP and TARP more broadly," he says. "Even more importantly, the most significant investors in each PPIF, the American taxpayers, have a right to know the status of their investments. The lack of transparency as to what use TARP funds were put by recipients in other TARP programs, in SIGTARP's view, has damaged the credibility of TARP and therefore may have threatened its viability. Treasury should not repeat that apparent error with PPIP."

However, the department, Barofsky says, plans to disclose "no more than the bare minimum required by statute."

With nearly $24 trillion potentially flying out of federal coffers, the watchdog wants the government to do a lot more than just "the bare minimum."

When Barofsky testifies before the House Oversight and Government Reform Committee on Tuesday, Congress is expected to sound off on the watchdog's findings.

In a separate report released Monday, Barofsky said he obtained responses from banks on what they did with TARP funds, something that the Treasury Department has refused to do. Many of the banks, he said, used some funds to make investments, buy other banks and pay off debts.

"This administration promised an 'unprecedented level' of accountability and oversight, but as this report reveals, they are falling far short of that promise," Issa said. "In fact, the Treasury Department is actively obstructing transparency. The American people deserve to know how their tax dollars are being spent -- especially considering they are the ones who are footing the bill."

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