Trouble Under the TARP? A Review of Oversight Efforts As Program Concludes
November 2010
IN THIS ISSUE
— A Tale of Carrots With Few Sticks: An Appraisal of TARP
— No Strings Attached, But Look Out For That Subpoena
GREETINGS!
Welcome to the November 2010 edition of our newsletter! In this issue, we’ll examine the oversight efforts regarding the Troubled Asset Relief Program (TARP) as it formally concludes, and look at areas where monitoring could have been improved.
A TALE OF CARROTS WITH FEW STICKS: AN APPRAISAL OF TARP
When TARP was enacted in late 2008, it was seen as a response to a crisis of extreme proportions — and was then extended as the crisis failed to subside to the degree lawmakers preferred. While the program provided financial lifelines to banks and other industry sectors that were suffering profound losses, the U.S. Treasury Department has been faulted for failing to police the funds properly — and even failing to explain where they went, and why. This led to public skepticism about “bailouts” in general and TARP in particular, the Congressional Oversight Panel charged with reviewing the program said in a report as TARP neared its expiration date of October 3, 2010. “Some of this stigma has arisen due to valid concerns with Treasury’s implementation of TARP programs and with its transparency and communications,” the authors wrote. “For example, Treasury initially insisted that only healthy banks would be eligible for capital infusions under the Capital Purchase Program (CPP). When it became clear that some of these banks were in fact on the brink of failure, all participating banks – even those in comparatively strong condition – became tainted in the public eye. Stigma may also have arisen due to deep public frustration that, whatever the TARP’s successes, it has not rescued many Americans from suffering enormous economic pain.”
While TARP expired to mixed public feelings and criticism from academic experts who called its foreclosure prevention efforts “half-hearted” and questioned the program’s efforts to actually buy “toxic” assets, one government official will be shining a light on TARP for years after its expiration: TARP Special Inspector General Neil Barofsky, who reportedly began hiring another 20 staffers — an increase of 14 percent — in the weeks leading up to the program’s expiration. “Most of the ramp-up in our numbers, the expansion in our hiring, is due to our criminal investigations,” Barofsky said.
NO STRINGS ATTACHED, BUT LOOK OUT FOR THAT SUBPOENA
Although TARP can make no new investments after its expiration, the question remains: did officials do their due diligence when allocating taxpayer dollars, or did they dole out cash first and reserve the right to investigate later? A partial answer comes from Barofsky, who said in the same article that the same institutions whose lies helped create the financial crisis often lied again when seeking government aid. “Under the bailout law passed in October 2008, TARP funds could go only to banks and other financial companies deemed by their regulators and the Treasury as healthy and viable institutions,” the article said. “Barofsky said more evidence is now surfacing that some of these institutions may have made false statements in their earnings statements, in their TARP applications, and in communications supporting their funding requests. ‘Predominantly where our resources are most deployed are where the intended victim or actual victim is the United States government,’ Barofsky said. ‘These are attempts to steal money from the taxpayer through fraudulent representation in their TARP applications.'”
The first conviction on TARP-related fraud charges came about two weeks after the program expired, when Charles J. Antonucci, former CEO of Park Avenue Bank, was convicted of fraudulently obtaining more than $11million in aid under the program, pleading guilty to that charge and other counts, including bribery. Antonucci reportedly misled regulators by “misrepresenting the source of millions of dollars of money that he claimed to have invested in the Bank out of his own pocket to recapitalize the Bank. He then attempted to use that sham recapitalization to fraudulently obtain over $11 million in TARP funds by convincing the Bank’s regulators that Antonucci had recapitalized the Bank when, in fact, he had not.”
Unfortunately, due diligence processes undertaken before the funds were distributed did not catch such schemes, leaving a costly and protracted legal and investigative effort – also on the taxpayer dollar — where a more focused prevention and detection effort likely would have been more effective. As Barofsky himself warned, apparently to no avail: “Inadequate oversight and insufficient information about what companies are doing with the money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering.” Responsible financial institutions should bolster their use of internal and external fraud detection consultants, particularly when considering any future federal emergency assistance, to make certain to avoid embarrassing and costly scandals that only serve to increase public outrage.