This could get interesting. The Financial Times tells us that Neil Barofsky, the special investigator general for the TARP, is looking whether banks cooked their books by overvaluing assets to qualify for TARP funding, Remember, bank had to fall into this funny construct of being sick enough to need help, but not so sick as to be terminal.
And since we are widely reading reports of banks carrying lots of mortgage paper at higher than 80 cents on the dollar (we’ve even seen reports of over 90 cents on the dollar being common) it would appear that Barofsky’s suspicions are well founded.
So play this out: we have the public private partnerships designed to hoover up assets at well above market levels. These programs are voluntary, so the banks most decidedly will not sell assets unless they get a price that is above the current carrying value on their books. And recent research suggests that, contrary to the Treasury’s claims otherwise, the current market values are likely to reflect accurately what this dreck is worth. So taxpayers are being asked to overpay substantially for junk in an opaque and unnecessarily costly subsidy (the need to bring in the private asset managers as a fig leaf only adds costs, since they need to somehow see decent odds of a positive return). And doing it this way, by making an indirect subsidy to the banks, excludes the overpayment from what the government calculates as its subsidy to each bank. The more the taxpayers perceive they have given to a Citi or a BofA, the more they are entitled to demand control, or at least more restraints (particularly on risk taking. Why should these banks be gambling with taxpayer funds to enrich shareholders?). So muffing the equation helps the plutocracy.
But now Barofsky is likely to find the banks overvalued their assets to make themselves look less sick. That’s tantamount to saying they defrauded the government, and that the PPIP is overpaying for assets by an even larger margin than previously thought.
Let’s hope he does not get muzzled.
From the Financial Times:
Neil Barofsky, special inspector-general for the troubled asset relief programme, told the Financial Times he was seeking evidence of wrongdoing on the part of banks receiving help from the fund, which was designed to ease credit conditions and support distressed industries…..
Large banks from Citigroup to Goldman Sachs and hundreds of regional banks have taken billions from Tarp to rebuild balance sheets weakened by the financial crisis.
But institutions applying for Tarp money had to show they were fundamentally sound, potentially prompting them to mis-state their assets and liabilities.
Mr Barofsky also said the Treasury’s expanded term asset-backed securities loan facility (Talf) was ripe for fraud.
The former New York prosecutor said the decision to expand the Talf to encourage investors to buy distressed, or “legacy”, assets from banks could put public money behind investments that were backed by fraudulent mortgages.
“One of our strongest recommendations of the last report was do not expand the Talf to buying legacy assets. If its structure is not changed considerably it’s very, very dangerous,” he said.
“We know the triple A rating [ascribed to the securities by credit rating agencies] was a sham. We could be buying securities that are backed with assets that we know were likely riddled with fraud.”
Mr Barofsky revealed at a Congressional hearing earlier this month that he was involved with “probably more than a dozen” investigations into possible wrongdoing and fraud. He told the FT that potential fraudsters would pay attention when his team began seeking indictments. “Indictments can serve as great deterrents,” he said….
With scant reporting requirements when the bail-outs began at the end of last year, banks had a fairly free rein on what to do with Tarp money. Concerned about a lack of transparency, Mr Barofsky has written to all of them to ask how the funds were spent.
“We haven’t served a single subpoena,” he says. The preliminary audit will be published in the next few weeks, after analysis of the “pretty detailed descriptions with what banks say they’ve done with the money”.
That fulfils part of his office’s transparency remit and is not necessarily a trawl for fraud. But big banks are potential targets…
“One of our main areas of focus [on executive compensation] is to see if there was a significant communications breakdown as to how that policy decision was made,” says Mr Barofsky.