Sticker Shock: $23.7 Trillion Bailout?

July 21, 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 report released today 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."

To be sure, we aren't there yet.

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. So far they've cost taxpayers around $4 trillion.

But Barofsky says if each federal agency spent the maximum potential amount involved in these initiatives, taxpayers could be on the hook for trillions more.

The staggering $23.7 trillion estimate elicited concern from members of Congress and a sharp rebuke from the Treasury Department after the report was leaked late Monday.

Treasury spokesman Andrew Williams called the estimate "inflated," saying it "does not provide a useful framework for evaluating the potential cost of these programs."

He said utilization of the department's financial rescue programs has begun to decline, and some banks have already repaid $70 billion in TARP funds.

Other financial experts also questioned the significance of Barofsky's potential TARP price tag.

"I'm not sure how you could come up with a number like [$23.7 trillion] without lots of assumptions involved," said Kevin Petrasic, a private financial services lawyer with broad government experience.

"Throwing out a number you can't provide a tremendous amount of insight about: what's in that? You just get a headline. Why do we even need to know that this number, in a worst case scenario, is the number? What is gained from that?"

In his appearance before the House Oversight and Government Reform Committee today, Barofsky insisted his report provides a valuable accounting of taxpayer dollars.

"We take offense to [Treasury's] comments," he said. "These numbers are from the government."

He said the $23.7 trillion figure in his quarterly report was derived from publicly available data on allocations to the government's various bailout programs.

"We've explained the number does include some programs that have terminated… and it isn't that the taxpayer is on the hook for $23.7 trillion – we don't say it, we don't suggest it," Barofsky said. "The actual potential for losses," he says, "is likely to be lower."

Barofsky: Treasury Should Require Banks to Report on Use of TARP Funds

The watchdog also warned today that hundreds of billions of taxpayer dollars could be lost if the government does not increase the transparency of the TARP program, which he says has grown to an unprecedented scope and scale.

"TARP has become a program in which taxpayers are not being told what most of the TARP recipients are doing with their money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested," Barofsky says in the report.

"Does Treasury ask what TARP recipients do with the money?" Committee Chairman Edolphus Towns, D-N.Y., asked the special inspector general.

"No," replied Barofsky. "They say that information is not meaningful or reliable… But if it's meaningless, why do they do it in respect to Citigroup, Bank of America and AIG?"

Requiring TARP recipients to report on how government funds are used is among the recommendations urged by Barofsky. He also wants the department to 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.

"[Convicted financier Bernard] Madoff said 'Trust us. We have high returns,'" said Ranking Member Rep. Darrell Issa. "Treasury is now saying the same thing."

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."

'Unprecedented Level' of Transparency?

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."

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 a statement. "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."

The committee plans to invite Treasury Secretary Timothy Geithner to testify and explain why several SIGTARP recommendations have not been enacted. Chairman Edolphus Towns also says he may subpoena information about Treasury's TARP portfolio which has not been made public.