The US Treasury's $700 billion Troubled Asset Relief Program (Tarp) is vulnerable to fraud, abuse and profiteering, due to a lack of proper supervision, according to a highly critical report from the programme's inspector-general published today.
The office of the Special Inspector General for Tarp (Sigtarp) reports to the US Congress every three months on the success and oversight of the programme. In its report for the first quarter of 2009, it highlighted several areas in which the Treasury is distributing huge sums without sufficient oversight - or, in some cases, without any oversight at all.
The report summarises the growth of Tarp, from the initial model of using $700 billion in allocated funds to buy up mortgage-linked assets, to the current situation, with 12 intervention programmes, all wholly or partly Tarp-funded, totalling up to $2.98 trillion.
Sigtarp criticised the Treasury for refusing to investigate how banks were using funds they received under Tarp: "Treasury's arguments that such an accounting was impractical, impossible, or a waste of time because of the inherent fungibility of money were unfounded," the report said. The Capital Assistance Program (Cap), which will provide additional capital to banks through share purchases, also needs more oversight: while applicants have to submit a description of how they intend to use the funds, Sigtarp said the Treasury "adamantly continues to refuse to... require Cap recipients (and indeed all Tarp recipients) to report on how they actually used Tarp funds... it is largely meaningless to require an applicant to report on its intended use of funds without setting up a mechanism to monitor its actual use of funds."
The report also highlighted that the Treasury had not selected an asset manager for the assets it buys under the Capital Purchase Program (CPP), which aims to support banks by buying preferred stock and warrants, and has not even developed a method for valuing the assets. With no way of valuation - especially as other bodies have already estimated the Treasury will end up losing between $68 billion and $356 billion through the programme - CPP will lack transparency, Sigtarp warned.
The Treasury will also be lending billions of dollars against collateral consisting of asset-backed and mortgage-backed securities through the Troubled Asset Loan Facility (Talf), but it has failed to put agreements in place to allow it access to the original borrowers or the issuers - leaving it vulnerable to fraud, Sigtarp continued. Oversight has also been starved through the failure to expand the Office of Financial Stability's compliance team, currently "approximately 10 employees", which Sigtarp said was "plainly inadequate".
The latest addition to the suite of financial assistance programmes is the Public-Private Investment Program, which would see private-sector fund managers raising government-guaranteed capital to invest in toxic mortgage-related assets; the programme is open to abuse through collusion and conflicts of interest, as well as possible money laundering activity, and requires tight supervision, Sigtarp said.
Speaking today before the congressional oversight panel set up in October to oversee the assistance plans, Treasury secretary Tim Geithner did not address the Sigtarp criticisms directly, but said that "Treasury is committed to an open and transparent program with appropriate oversight".
See also: Questions raised over US scheme to buy toxic assets
Market frustrated by lack of detail on US toxic-asset purchase plan
Questions remain over $1trn toxic asset purchase plan
"$78 billion Tarp windfall" for banks
$428bn of Tarp funds to be exhausted by end of year
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