The US Treasury has failed to provide oversight of vital parts of its $700 billion Troubled Assets Relief Program (Tarp), according to a report issued today by the US Government Accountability Office (GAO).“The Treasury has yet to address a number of critical issues, including determining how it will ensure that the Capital Purchase Program (CPP) is achieving its intended goals and monitoring compliance with limitations on executive compensation and dividend payments,” the GAO noted.
Additionally, the office said further efforts were required to establish internal controls for monitoring how Tarp funds are used and to establish an effective management structure.
Revision of executive remuneration and bonuses within financial firms, which have come under increasing scrutiny in the current economic climate, was an essential component of the CPP. In the initial plans, the Treasury stipulated compensation based on materially inaccurate earnings had to be refunded, while golden parachute payments were to be scrapped.
However, the GAO noted the Treasury has yet to determine how it will monitor firms’ compliance with its compensation rules. “Without a consistent process for monitoring participating institutions, the Treasury’s ability to identify and address any potential problems in these institutions’ compliance with programme requirements will be limited," the GAO warned.
In addition, the GAO said, the Treasury “has not yet set up policies and procedures to help ensure the CPP funds are being used as intended”. The GAO noted the Treasury’s ability to ensure accountability and transparency will be hindered without this oversight.
The report notes that, while institutions participating in the CPP are subject to restrictions on dividend payments and repurchasing of shares, “the Treasury has no policies and procedures in place for ensuring the institutions are complying with these requirements or that they are using the capital investments in a manner that helps meet the purposes of the Act”.
Furthermore, the GAO believes the Treasury’s ability to oversee the implementation of Tarp has been affected by the change in the direction of the programme. Initially, Tarp’s primary focus was expected to be the purchase of illiquid mortgage-backed securities and wholesale loans. However, on November 25 the focus of the programme switched to providing financial institutions additional capital through purchases of senior preferred stock. A total of $250 billion of the $700 billion Tarp funds was allotted to the CPP, while the Treasury also purchased $115 billion in senior preferred shares of eight national financial institutions.
The GAO recommends the Treasury works with bank regulators to establish a system for reporting whether the activities of financial institutions are “generally consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency”. Additionally, the GAO said, the Treasury must ensure institutions participating in CPP comply with key programme requirements, including those covering executive compensation, dividend payments and the repurchase of stock.
See also: Contenders queue up for Tarp funds
Paulson: buying MBSs no longer Tarp priority
US Treasury considering allowing insurers, auto-makers to access Tarp
Treasury to take $125bn equity in nine US banks, says Paulson
More on Regulation
“You cannot have 80% of the market being just HFT,” says Ranjan
Dealers: we're 'sitting ducks' in Treasury market overrun by HFTs
Regulator will impose Basel III add-on if risks are not captured by LCR
G30 warns many banks are still lagging behind
Sign up for Risk.net email alerts
Sanjay Sharma talks about risk transparency and how his book helps achieve it.
A five-minute formula from Alexander Denev that takes you through a simple probabilistic graphical model and explains how and why these are used. Find out more about the ground-breaking book, Probabilistic...
Industry leader Vincent Kaminski discusses the challenges faced by energy markets and his new book, Managing Energy Price Risk, 4th Edition.
Momtchil Pojarliev talks about his book, The Role of Currency in Institutional Portolios, currency investing and the potential role of currencies in institutional portfolios.
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.