The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its second Quarterly Report to Congress today. The report (i) outlines the various programs established by Treasury under the Troubled Asset Relief Program (TARP); (ii) describes what actions, including audits and investigations, SIGTARP has taken since the release of its first report in February; and (iii) provides recommendations for the continuing operation of TARP. The report discusses the expansion of TARP’s “scope, size, and complexity” and describes the “12 separate, but often interrelated, programs involving Government and private funds of up to almost $3 trillion….”

The report describes in detail the oversight activities that SIGTARP has engaged in, including investigations, audits and information collection. “SIGTARP has initiated, to date, almost 20 preliminary and full criminal investigations” into allegations of fraud, including “large corporate and securities fraud matters affecting TARP investments, tax matters, insider trading, public corruption, and mortgage-modification fraud.” It has also proactively formed a taskforce to coordinate law enforcement responses to potential fraud associated with the Term Asset-Backed Securities Loan Facility (TALF).

The report notes six specific audits that SIGTARP is actively conducting:

  • Use of Funds. SIGTARP sent a survey to 364 TARP recipients who had received funding as of January 31, 2009, and is examining the results of the survey to determine how TARP funds are being used by the recipients.
  • Executive Compensation Compliance. This audit is also based on the survey sent to TARP recipients and examines the controls and systems that recipients have put in place to ensure compliance with TARP executive compensation requirements.
  • Bank of America. SIGTARP is examining “the review and approval processes associated with TARP assistance to Bank of America under three different TARP programs and examines Treasury’s decision making related to additional TARP assistance provided in connection with Bank of America’s acquisition of Merrill Lynch.” This audit’s scope has been expanded to include “Treasury’s decision making regarding the first nine institutions to be considered for funding under TARP.”
  • External Influences. SIGTARP is examining whether, or to what extent, external parties are exerting influence over Treasury and bank regulators with respect to their decision making on specific applications for TARP funding. The audit “seeks to determine what procedures are in place to avoid undue outside influence on the process, whether there are any indications of any undue influence, and what actions might be needed to strengthen existing processes to avoid such undue influences in the future.”
  • AIG Bonuses. The fifth audit looks at Federal oversight of executive compensation requirements, particularly with respect to those made to employees of AIG.
  • AIG Counterparty Payments. This examination looks at the basis for counterparty payments made by AIG, including those made to “foreign institutions and other TARP recipients, at 100% face value.”

The report also includes a series of “recommendations to Treasury so that TARP programs can be designed or modified to facilitate effective oversight and transparency and to prevent fraud, waste, and abuse.” Included among these recommendations are:

  • Use of Funds. SIGTARP recommends that Treasury require “TARP recipients to report on their actual use of TARP funds.” The report stresses the importance of this recommendation with respect to the access to the Capital Purchase Program, other lending programs and “transactions in the Public-Private Investment Program (PPIP) and surrenders of collateral in TALF.”
  • Expansion of TALF. The report observes that certain proposals to expand the scope of TALF-eligible collateral pose “significant fraud risks, particularly with respect to legacy residential [mortgage backed securities].” SIGTARP recommends, among other things, that Treasury screen TALF collateral on a security-by-security basis.
  • PPIP Fraud Vulnerabilities. The report was critical of the PPIP with respect to perceived vulnerabilities inherent to the program, including the risk of fraud, waste, and abuse, as well as “conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering.” SIGTARP recommends that Treasury include (i) strict conflict-of-interest rules on fund managers; (ii) rules to enhance transparency with respect to the participation and management funds created under the PPIP; and (iii) investor-screening procedures “at least as rigorous as that of a commercial bank or retail brokerage operation.”
  • Interaction Between PPIP and TALF. SIGTARP recommends that Treasury ensure that private parties have a sufficient stake in the outcome of these programs to lessen “taxpayer exposure to losses.” Treasury’s implementation of the programs should create an incentive for private parties to conduct appropriate due diligence of the collateral and assets being invested in under the programs.
  • Mortgage Modification Program. SIGTARP recommends that Treasury, among other things, require verification of residence and income by a third-party, confirm the identities of parties participating in the modification in “a closing-like procedure” and structure the timing of incentive payments to servicers to prevent fraud during a mortgage modification.