Friday, May 8, 2009

Tribune of the People

Hey, hey. So a couple of weeks ago I told you about all the depressing articles I've been reading (or half reading) about how our technocrat friends in the Treasury are botching the bailout and how basically everyone in Washington is in the tank for the banks because bankers have deep pockets and give generously to election campaigns and "what's good for Wall Street is good for America" (also, the business of America is... finance?). This article gives a really great, concise explanation of the crisis...

What was I saying? Oh right; so there's a wide choice of villains to point to in connection with the financial meltdown, but there's one character in this story who in my opinion seems to stand out as a hero.



Allow me to introduce you to Neil Barofsky who is the Special Inspector General that oversees the Troubled Assets Relief Plan or, as he likes to style himself, the "TARP cop." He was appointed to his post by President Bush last November (and I like him?! I know; the world's gone mad). Barofsky's job is basically to keep tabs on all the bailout money the Treasury is shelling out under the program: reporting his findings to Congress, making recommendations to Treasury Secretary Geithner, and investigating possible cases of fraud or corruption.

Investigations

As Barofsky explains it, whenever the government launches a big program like this where it starts writing out checks (and the scale of TARP is basically unprecedented) there will always be opportunities for fraud. Shoot, at the end of 2007, the government estimated that around $500 million in fraud had been committed in connection with Hurricane Katrina relief.

Criminal activites and misdeeds that might crop up in relation to TARP could run the gambit from cases of misrepresentations/fraud in the accounting of companies who've come looking for a handout, to instances of insider trading by executives with foreknowledge about companies that will receive TARP funds, to failure to adhere to the caps on executive pay specified by Congress in the enacting legislation. As of two weeks ago, when he presented his report to Congress, Barofsky said that he had 20 investigations and 6 audits underway. These are said to include verifications into the propriety of the bonuses paid out to Merrill Lynch executives on the eve of the brokerage firm's sale to Bank of America as well as those infamous AIG bonuses.

Recommendations

One of the big recommendations Barofksy made in his report is that the Treasury should put in place a better system for determining the value of the shares and other securites it is receiving from companies in exchange for TARP money. This will become even more important if and when the Treasury starts trading in its preferred shares for common shares in order to magically give companies more equity capital without having to ask Congress for more money.

The inspector general is also concerned that the planned mortgage rescue effort be safeguarded against potential real estate scammers and that TARPs public-private investment program be adequately protected against conflicts of interest.

But probably the biggest point of contention between Barofsky and Geithner is that Barofsky wants to require TARP recipients to submit documentation specifically accounting for how all the funds they receive are used. Geithner argues that this is impractical/silly given that money is fungible (i.e. a company has $10 million in cash to begin with and it receives $10 million from TARP, if it allocated $5 mill to a specific program who's to say whether that came out of the TARP money or the previously existing liquidity?) and that the Treasury can adequately see what the companies are doing by consulting their financial statements. But Barofsky says that he recently sent out letters requesting some such specific information from recipient companies and he received a 100% response, thus proving that gathering this information was neither impossible nor impractical. When it was suggested in his interview with NPR that these disclosure requirements might discourage some banks from participating in TARP, Barofsky answered "Good. If they're afraid to tell the American people how they're using the money we don't want them."

I'm curious to see what else Barofsky will do, what will come out of these investigations, and how Congress and the Treasury will respond to his recommendations. But, in the meantime, knowing this guy is watching out for our collective interest makes me feel slightly better about things.

Photo of Neil Barofsky by Susan Walsh found on NPR website.

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