IG charges Treasury failed to adopt bailout safeguards

The government’s top watchdog over the $700 billion financial rescue package said the Treasury Department has “repeatedly failed” to adopt his recommendations that would make the program more transparent and accountable to taxpayers.

Neil Barofsky, the special inspector general over the Troubled Asset Relief Program (TARP), said that while the program that Congress passed amounts to $700 billion, the total federal government support since 2007 for the economy and the financial sector could reach the far higher figure of $23.7 trillion. The government has committed significantly more money through a variety of other federal agencies and programs.

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Barofsky will tell lawmakers on Tuesday that taxpayers are being left in the dark about what banks are doing with bailout money, don’t know the value of the government’s investments and will not know the full extent of how the money is invested.

While some steps have been taken, the Treasury Department “has repeatedly failed to adopt recommendations that [Barofsky] believes are essential to providing basic transparency,” Barofsky intends to tell lawmakers, according to prepared remarks.

Barofsky is scheduled to testify on Tuesday before the House Committee on Oversight and Government Reform.

“The very credibility of TARP (and thus in large measure its chance of success) depends on whether Treasury will commit, in deed as in word, to operate TARP with the highest degree of transparency possible,” Barofsky says in the prepared remarks. He notes four recommendations from his office that have yet to be adopted, including one requiring banks to detail how they have used capital injections.

Andrew Williams, Treasury Department spokesman, said the $23.7 trillion estimate is “inflated” and that actual outlays are less than $2 trillion so far. Williams said Barofsky’s projection doesn’t account for “fees and other charges that compensate the U.S. taxpayer,”  and “does not provide a useful framework for evaluating the potential exposure.”

The $23.7 trillion figure includes government support potentially reaching $7.2 trillion for Fannie Mae, Freddie Mac and other government housing efforts; $6.8 trillion for the Federal Reserve; and $2.3 for the Federal Deposit Insurance Corporation (FDIC), among other programs, according to a quarterly report issued by Barofsky’s office.

In a separate report issued on Monday, Barofsky’s office noted that banks have used government money for purposes other than increased lending, whether to build up capital cushions, repay debt or help finance acquisitions of other banks. His office is in the process of posting online responses to a survey of 360 banks receiving government aid.

Meanwhile, Barofsky’s office has opened 35 criminal and civil investigations into issues including suspected accounting fraud, securities fraud, insider trading, mortgage servicer misconduct, mortgage fraud, public corruption, false statements and taxes.

“Treasury’s continued unwillingness to provide basic transparency despite the many recommendations of [the special inspector general] and Congress and the repeated demonstration that meaningful data from TARP recipients can be gathered and easily disseminated is unacceptable,” said a memo prepared by Republicans on the Oversight Committee.

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Barofsky’s office also has audits nearly completed on executive compensation restrictions, controls over external influences on the awarding of capital, the selection of the first nine big banks to participate in TARP, the bonuses at AIG and the settling of derivatives with counterparties to AIG. The office is also conducting audits into how the government is valuing warrants that are part of the TARP program; a further assessment of how banks are using the TARP funds; governance issues in companies with large U.S. stakes; the status of taxpayer investments in Citigroup; and the government’s efforts to shore up the housing market.

“This administration promised an ‘unprecedented level’ of accountability and oversight, but as this report reveals, they are falling far short of that promise. In fact, the Treasury Department is actively obstructing transparency,” said Rep. Darrell Issa (R-Calif.), ranking member on the Oversight Committee.

Barofsky said that his office and the Treasury have consulted on the public-private investment program, but that a key recommendation has not been adopted. Barofsky recommended in April that Treasury should require a “wall” between the fund managers in the program and employees of those companies that are managing separate funds not related to the program. Treasury has decided against that, according to the report.-

“Failure to impose a wall,” Barofsky said, will leave the government open to criticism “that Treasury is using TARP to pick winners and losers.”