Treasury called to account for Tarp

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.

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