Inspector General's Report Criticizes TARP Management

A report sharply critical of the Treasury Department's management of the government's Troubled Asset Relief Program (TARP) was released today by the program's legal overseer.

The 250-page report, issued by TARP Special Inspector General Neil Barofksy, says that lax oversight of the program and a failure to accurately value assets creates a risk of fraud, waste and abuse. He calls for the Treasury Department to institute strict new rules to get a clearer picture of where program funds are going and to accurately assess the value of assets the government obtains under the program.

In addition, Barofsky announced that his office has initiated nearly 20 criminal investigations into possible fraud involving TARP funds, including corporate and securities fraud, tax matters, insider trading, public corruption and mortgage modification fraud.

Investment strategy lacking

The report took Treasury to task for failing to develop a comprehensive strategy for managing the billions of assets the government is investing in through TARP, and for failing to hire an asset manager to manage the portfolio or develop an investment strategy for the assets. Both were recommendations of the Barofsky's initial report in January. It also criticized Treasury for failing to develop an accurate valuation of TARP assets, although Treasury has reported that it is putting such a process in place.

One of the report's sharpest criticisms is that the Treasury Department has not required TARP fund recipients to fully account for their use of the funds, relying instead on periodic surveys of bank lending activity. According to the report, the Treasury Department contended that more detailed accounting was impractical, due to the inherent fungibility of money; however, Barofsky's office reported that its own survey of over 300 banks were able to obtain a reasonable level of detail regarding how they used TARP funds.

"In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients," the report read.

Great transparency urged

The report also called for greater transparency and conflict-of-interest protections in the establishment of public-private investment funds under TARP to guard against the potential for collusion among participants and money laundering. It also urged the adoption of greater safeguards in mortgage modifications conducting with TARP funding, including third-party verification of residence and income, and verification of the assets represented in mortgage-backed securities acquired under TARP.

The TARP has expanded dramatically since it was introduced in October 2008. The program was originally intended to provide up to $700 billion for the purchase, management and eventual sale of so-called "toxic assets," primarily troubled mortgages and mortgage-backed securities. The program has since then expanded to include 12 separate programs that could involve a total of nearly $3 trillion in funds from various sources, including the original $700 billion from TARP, plus Federal Reserve loans, FDIC guarantees and private money.