The Joint Economic Committee (JEC) held a hearing last week on the recommendations Neil Barofsky, Special Inspector General of the Troubled Asset Relief Program (SIGTARP), laid out in it the second quarterly report to Congress. In her opening statement, Representative Carolyn Maloney, Chair of the JEC, noted that it was regrettable that “some of the key recommendations in [the] report reiterate critical recommendations in the first report – recommendations that would promote transparency and accountability and reduce the potential for fraud and misappropriation, but which Treasury has yet to adopt.” She also noted that SIGTARP demonstrated that information can be gathered from TARP recipients on the use of TARP funds, an action that Treasury has yet to require for most recipients. Mr. Barofsky’s written statement echoed the executive summary provided in the report. He reinforced that the report was intended to (i) explain the programs established under TARP and Treasury’s use of the programs; (ii) describe the audits and investigations commenced by SIGTARP since the release of its first report; and (iii) make a series of recommendations regarding TARP programs going forward.
A post-hearing memo of the hearing was also provided. During questioning Mr. Barofsky provided additional details surrounding SIGTARP’s criticism of the Public-Private Investment Partnership (PPIP). He noted that the private fund managers involved in the pricing of assets purchased by the PPIP will have a great deal of discretion and economic power, which gives rise to the potential for conflicts of interest. He asked rhetorically: “what if that fund manager has on its books or is managing for other clients from which it derives fees the exact same mortgage backed security that it’s going to go out and buy at a higher price?” To combat this potential for artificial pricing, he advised JEC that “tougher conflict of interest rules be implemented” and that, at a minimum, “private entities be required to set up rigid internal walls that make collusion, price-fixing and conflicts-of-interest impossible.”
In his discussion on the expansion of the Term Asset-Backed Securities Loan Facility (TALF), Mr. Barofsky stressed the need for Treasury and TALF officials to look “beyond the credit ratings in evaluating the true worth of these assets” and recommended against including “liar loans” – which the JEC’s post-hearing summary characterized as “legacy mortgages and securities with inadequate underwriting standards – in TALF. Mr. Barofsky stated that SIGTARP is currently pursuing 21 criminal investigations and recently announced the first criminal charges related to TARP. Mr. Barofsky stated that “fully one third of the criminal investigations currently underway were initiated as a result of hotline tips.”