naked capitalism

You have to love it. If the allegations prove true, it provides further evidence that the banksters cannot contain themselves. Here they get their bacon saved by the TARP (which was way too cheaply priced relative to the risk involved) and a host of hidden subsidies and supports. Yet the employees cannot stand to let an opportunity for personal enrichment go to waste, legal or not.

The Financial Times appears to have broken the story that the Office of the Special Inspector General is investigating reports of insider trading in connection with the TARP. And what makes this probe potentially serious (aside from the brazenness of it) is that the suspects include executives as well as foot soldiers:

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.

“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”

Yves here. With the notable exception of the network surrounding , Raj Rajaratnam, nearly all insider trading scandals have involved junior employees as the ones leaking confidential information, usually on corporate mergers. While most M&A deals involve lots of junior level support, knowledge of pending TARP financings at a particular firm would presumably be limited to comparatively few people, and then largely the very top officers.

SIGTARP is also looking into possible gaming of the Public Private Investment Partnerships, a potential pitfall that had worried many commentators. Note he indicates here the trades he is questioning may have been permissible, reflecting weak controls and program design:

Mr Barofsky….said there remained substantial problems with the structure of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.

He said there should be walls between fund managers taking part in PPIP, which co-invests government funds with those of the private sector, and managers at the same firm buying and selling similar securities.

An example of suspicious activity at an unnamed firm showed a manager selling a security from a non-PPIP fund and then buying it back at a slightly higher price with a taxpayer-supported PPIP fund minutes later.

“The rules are insufficient,” said Mr Barofsky. He said even if the behaviour, which Sig-Tarp is investigating, was found to be within the rules “it still creates this credibility issue, this reputational damage, this appearance of fund managers gaming the system”.

The Treasury said it had identified the suspicious behaviour and brought it to the attention of Sig-Tarp, showing that the system was transparent.

Yves here. Ahem, “bringing it to the attention” of SIGTARP falls well short of a remedy. And as we discussed at length, the PPIP made no sense unless it acquired securities at above current market prices (the whole point was to avoid having banks mark soured positions down to current market levels; had they been willing to do that, there would be no impediment to selling them). It will be interesting to see whether SIGTARP examines the contradictory claims made for the PPIP (that it was a good deal for the banks and taxpayers) and exposes what the structure was designed to hide, namely, the amount of the subsidies.