Treasury Must Boost TARP Transparency, Safeguards

Americans are increasingly exposed to losses, and the government is more vulnerable to fraud, under initiatives that have created a federal bank bailout program of "unprecedented scope," a government report finds.

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The program in question is the Troubled Asset Relief Program, or TARP. The report, which examines the six-month old, $700 billion program, was released Tuesday.

In a 250-page quarterly report to Congress, TARP's special inspector general concludes that a private-public partnership designed to rid financial institutions of their "toxic assets" is tilted in favor of private investors and creates "potential unfairness to the taxpayer."

Using blunt language, Inspector General Neil Barofksy offers a series of recommendations to protect the public and takes the Treasury to task for not implementing previous advice. The report also commends the U.S. Treasury and the Federal Reserve, the nation's central bank, for creating some safeguards.

Treasury officials maintain that the public-private program is the best response to the troubled loans and securities clogging the system. They say that if government did nothing, the financial crisis could linger for years, and that if government intervened alone by closing troubled banks and taking over their bad assets, taxpayers would be at greater risk.

They argue that private investors and taxpayers would share profits equally, and investors would be the first to lose should the asset purchase end up losing money.

"Over the last two months, we've significantly increased the amount of transparency into the programs, including actively measuring lending and requiring banks under the new capital program to report on how every dollar of government resources goes toward increasing lending to consumers and businesses," Treasury spokesman Andrew Williams said.

The report's warnings about the public-private plan's potential for losses echoes alarms raised by some lawmakers and economists, but Barofksy has significant credibility in Congress and his views are likely to carry ample weight.

Overall, the report says the public-private partnership that includes TARP and other initiatives -- using Treasury, Federal Reserve and private investor money -- could total $2 trillion. The financial markets responded positively to the program when the Obama administration announced it last month, but the administration still is putting final touches on its implementation.

"The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report states.

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In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans announced by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, which Barofsky says would dilute the incentive for private fund managers to exercise due diligence.

Barofsky recommends that Treasury not allow the use of Fed loans "unless significant mitigating measures are included to address these dangers."

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