WASHINGTON, April 21 The U.S. Treasury's plan
to purge toxic assets from banks' balance sheets is vulnerable
to fraud and abuse and needs tough rules against conflict of
interest, the government's bailout watchdog said on Tuesday.
Neil Barofsky, the special inspector general for the $700
billion Troubled Asset Relief Program (TARP), said in a report
that subsidies for public-private investment partnerships
(PPIP) to buy assets could expose taxpayers to higher losses
without corresponding increases in the potential for profit.
"Aspects of PPIP make it inherently vulnerable to fraud,
waste and abuse, including significant issues relating to
conflicts of interest facing fund managers, collusion between
participants and vulnerabilities to money laundering," said
Barofky's second quarterly report since he took office in
He called on the Treasury to impose strict rules to screen
investors in such funds and for the disclosure of ownership
stakes and all transactions in them. Managers running them
should comply with "know your customer" requirements for banks
and brokers under anti-money-laundering laws.
The Treasury is accepting, through Friday, asset managers'applications to run public-private investment funds to buy
illiquid securities backed by troubled mortgages that are owned
by banks. This is part of its plan to sell off up to $1
trillion in toxic assets that are constraining bank lending.
The Treasury is expected to name initial fund managers on
May 15, with asset purchases to commence sometime in the
ensuing weeks and months.
Barofsky's report called the plan, and a corresponding
expansion of a Federal Reserve securities loan program to up to
$1 trillion, a "tremendous expansion in the scope, scale and
complexity of the TARP."
It warned of higher risks associated with investing in
toxic securities, and said taxpayers could suffer bigger losses
if public-private investment funds were allowed to finance
securities purchases by borrowing from the Fed's Term
Asset-Backed Securities Loan Facility.
The taxpayers' subsidies could dilute private investors'
financial commitments, or "'skin in the game' and therefore
reduce their incentive to conduct appropriate due diligence,"
the report said.
In a response to a draft of the report, the Treasury's
administrator for TARP, Neel Kashkari, said the Treasury will
consider the suggestions.
"As you recommendations make clear, there are risks
associated with investing in or lending against legacy assets,
which is in part why markets for them are currently frozen,"
Kashkari said in an April 14 letter attached to the report.
Barofsky's report confirmed that his office has opened
nearly 20 preliminary and full criminal investigations
associated with the $700 billion bailout program. These range
from large corporate and securities fraud matters affecting
TARP investments to insider trading, public corruption and
mortgage modification fraud. It did not disclose any specific
The inspector general's office is now conducting six
audits, including one on whether recent bonus payments to
American International Group (AIG.N) employees complied with
government aid conditions and whether Treasury was aware of the
full range of compensation plans at the company.
The report said Treasury had committed $590.4 billion of
the $700 billion through March 31, but when additional Fed
financing commitments and asset guarantees are added in,
taxpayers could be responsible for up to $2.977 trillion in
total TARP costs.
(Reporting by David Lawder, Editing by Chizu Nomiyama)