Senior Democrats call on Treasury to be more open

WASHINGTON -- Two senior congressional Democrats pointedly called on the Obama administration Tuesday to make the $700 billion financial bailout program more visible and accountable to taxpayers, with one complaining that the Treasury Department's approach to the fund is, "Don't ask, don't tell."

Rep. Edolphus Towns of New York, chairman of the House Oversight and Government Reform Committee, and Sen. Max Baucus of Montana, who heads the Senate Finance Committee, insisted that Treasury Secretary Timothy Geithner adopt recommendations from a government watchdog that the department has resisted.

"There is no evidence the Treasury has made any attempt to determine whether (financial rescue) funding has resulted in increased lending and whether that has had any effect on reducing unemployment," Towns said.

The criticism came as the oversight committee heard testimony from special inspector general Neil Barofsky, who oversees the massive Troubled Asset Relief Program. Barofsky on Tuesday delivered a quarterly report to Congress sharply critical of Treasury's reluctance to better track how federal bailout money is being spent.

"The Special IG's recommendations on transparency are critical to the success of the program, and I will be pressing the secretary of Treasury to adopt these standards," Baucus said.

"The taxpayers now have a $700 billion spending program that's being run under the philosophy of 'don't ask, don't tell,'" Towns added.

In his report, Barofsky said the Treasury has accepted some of his recommendations for greater accountability, but that the department has not taken steps to require all TARP recipients to report on their actual use of funds. He said the Treasury should also report the values of its investments in banks and other financial institutions, disclose the identity of borrowers under a nonrecourse loan program and disclose trading activity under a public-private investment fund.

Barofsky also pointed out that in response to a survey by his office, banks were able to provide information on how they used TARP money even though the Treasury has declined to seek similar information.

"The evidence is as we suspected," Barofsky said. "Contrary to [the] Treasury's suggestions, banks can and should be required to report on how they're using funds."

Barofsky also cited accountability weaknesses in a new public private investment fund initiated by the Treasury that is designed to purchase mortgage-backed assets that have clogged bank balance sheets. The federal share of the program is $30 billion. Under the program, the Treasury selected nine financial firms as partners in the securities purchase plan.

He said the Treasury has declined to adopt a recommendation that would require the nine firms to create an internal wall between the officials managing the government partnership and those handling the rest of the firm's work. The firewall would prevent a firm from generating profits in its other business as a result of knowledge gained from its purchase of toxic assets with the government.

Summing up the effectiveness of the $700 billion TARP, Barofsky said:

"If the goal was to remove $700 billion of toxic assets off the books of financial institutions, that clearly has not happened. If the goal was to increase lending, I think that, too, unfortunately has not happened. If the goal was to avoid a complete systemic collapse of the financial industry, that may very well have happened."

Barofsky noted that several aspects of the TARP probably will not result in a return to the federal government and said he doubted that any profits made in other TARP transactions would result in a full recovery of the $700 billion.

"The idea of getting dollar for dollar return would be extremely unlikely," he said.

Barofsky defended his conclusion that the government's total potential exposure to assist the financial sector could total $23.7 trillion — about $10 trillion more than the size of the entire U.S. economy.

Barofsky acknowledged that actual government spending on the financial sector peaked at $4.7 trillion and now stands closer to $3 trillion.

"The important caveat is we don't have $23.7 trillion outstanding right now," he said.

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

Barofsky included in his total about 50 programs created since 2007 to assist the financial sector. The programs include those run by the Federal Reserve, the Treasury and the Federal Deposit Insurance.

The estimate, however, does not account for the fees and other costs that some of these programs charge and for the collateral that many of the programs require that participants provide.

For instance, Barofsky assigned $6.8 trillion in potential exposure to the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae, Freddie Mac and the 12 federal home loan banks. However, losses of that magnitude would require every homeowner with a Fannie or Freddie guaranteed mortgage to default and the value of the homes drop to zero.