Thievery Under the TARP

We are being robbed big-time, but you
can't say we haven't been warned. Not after the release Tuesday of a
scathing report by the Treasury Department's special inspector general,
who charged that the aptly named Troubled Asset Relief Fund bailout
program is rife with mismanagement and potential for fraud. The IG's
office already has opened 20 criminal fraud investigations into the
$700 billion program, which is now well on its way to a $3 trillion
obligation, and the IG predicts many more are coming.

Special Inspector General Neil M. Barofsky
charged that the TARP program from its inception was designed to trust
the Wall Street recipients of the bailout funds to act responsibly on
their own, without accountability to the government that gave them the
money.

He pointed to the example of AIG, which
has acted as a conduit of funds to the banks it had insured without
being required to tell the government what it is doing: "Failure to
impose this requirement with respect to the injection of yet another
$30 billion into AIG would not only be a failure of oversight, but
could call into question the credibility of the government's efforts."

AIG is just one example in a bailout that
has left the financial conglomerates unsupervised as they spend
taxpayer money in what the report termed a government program of
"unprecedented scope, scale and complexity," putting the public and the
Treasury Department in the dark as to how the money is being used by
the very tycoons who got us into this mess. "The American people have a
right to know how their tax dollars are being used," Barofsky wrote in
the report, which sharply criticized the government for failing to hold
financial institutions accountable.

For all of its criticism of the original
program, designed by the Bush administration, the report was equally
severe in denouncing the Obama administration's plan to partner with
hedge funds and other private capital groups to buy up the "toxic"
holdings of the banks. Charging that the plan carries "significant
fraud risks," the inspector general's report pointed out that almost
all of the risk in this new trillion-dollar plan is being borne by the
taxpayers. The so-called private investors would be able to put up
money they borrowed from the Fed through "nonrecourse" loans, meaning
if the toxic assets purchased prove too toxic and the scheme failed,
the private investors could just walk away without repaying the Fed for
those loans.

The reason those loans may prove even more
toxic than expected and the price paid by this government-underwritten
partnership far too high is that the government is purchasing the most
suspect of the banks' mortgage packages. In addition, the plan is to
accept at face value the evaluation of those packages by the very same
credit-rating firms whose absurdly wrong estimates of the dollar worth
of these securities helped create the problem that now haunts the
world's economy. "Arguably, 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 current
credit crisis," the report found.

As with the entire banking bailout, the
new plan of Obama's treasury secretary, Timothy Geithner, is likely to
enrich the very folks who impoverished the rest of us, as the report
notes: "The significant government-financed leverage presents a great
incentive for collusion between the buyer and seller of the asset, or
the buyer and other buyers, whereby, once again, the taxpayer takes a
significant loss while others profit."

At the heart of this potentially massive
fraud was the original decision of Henry Paulson, President Bush's
treasury secretary and a former Goldman Sachs chairman, to not require
the recipients of the bailout, such as his old firm, to account for how
the money was spent. Unfortunately, President Obama's administration
continued that practice.

The only difference is that the amount of
public money being put at risk is now far greater, and the hedge funds,
which are totally unregulated, have been brought in as the central
players. One of the largest of those hedge funds, D.E. Shaw, carried
Obama's top economic adviser, Lawrence Summers, on its payroll to the
tune of $5.2 million last year. He may have reason to trust these
secretive enterprises that operate beyond the law, but the public does
not.