Neil M. Barofsky, the special inspector general appointed by President Bush in November to oversee the government’s Troubled Asset Relief Program, issued a scathing 250-page report today that ripped the Treasury Department’s plans to bail out the nation’s banks.
Barofsky told Congress that what began as a $700-billion bailout last fall has evolved into a $3-trillion bonanza that is being administered with little oversight and almost no information about what the banks are doing with the taxpayer funds they are receiving.
Barofsky also warned that Treasury Secretary Tim Geithner’s plan to have the government fund $1-trillion in ”partnerships” with private investors to take a mountain of toxic assets off the books of major banks is ”inherently vulnerable to fraud and should not be started without stronger safeguards.”
According to a report in today’s New York Times, Barofsky was particularly critical of the Treasury Department’s refusal to demand detailed information from banks and other financial institutions about what they are doing with the money they receive from the government.
”The American people have a right to know how their tax dollars are being used,” the federal watchdog stated in his report, the second he has issued since his appointment to the post.
Barofsky added that Treasury officials are ”jeopardizing the credibility of their efforts” by not requiring more transparency from the banking industry regarding its use of government bailout bucks.
The inspector general raised several red flags concerning Geithner’s scheme—known as TALF (Term Asset-Backed Securities Loan Facility)—to jump-start an auction of toxic mortgage-backed securities with a $100-billion down-payment from Treasury, to be followed with up to $1-trillion in low-interest ”loans” to private investors from the Federal Reserve. The Fed recently increased the money supply by $1 trillion to prepare for this program.
Barofsky said Geithner’s plan poses ”significant fraud risks” because rather than buy up the toxic assets directly, the government intends to loan money to investors without examining the poorly documented mortgage-backed securities, relying instead on the evaluation of the major credit rating agencies who not only failed to warn against the dangers of sub-prime mortgages, but actually awarded toxic assets their prized triple-A ratings.
”Credit ratings, cited as one of the primary credit protections in TALF as currently configured, have been proven to be of questionable value,” Barofsky’s report stated. ”The wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the credit crisis.”
Barofsky noted that, under Geithner’s plan, private investors will be able to acquire ”nonrecourse” loans from the government which will permit them to walk away from the loans if the investments fail to generate profits, sticking taxpayers with the bill.
Barofsky, a 38-year-old former federal prosecutor from New York who specialized in tracking down white-collar criminals, also disclosed that he has opened 20 criminal investigations and six audits into whether tax dollars are being stolen or wasted in the big bank bailout program.
Mr. Geithner had no initial comment on Barofsky’s report, but he undoubtedly will be questioned about it when he appears this afternoon before a Congressional panel that oversees the financial bailout program.