It’s official. TARP is just theft.

These reports about the TARP must be read to be believed.  Since you are reading this on a screen, I have highlighted in red where you would scrawl WTF! on printed material.  This is best read somewhere you can scream without attracting undue attention.

  1. Thievery Under TARP“, Robert Scheer, The Nation, 22 April 2009
  2. Initial Report to the Congress, SIGTARP, 6 February 2009
  3. Quarterly Report to Congress, SIGTARP, 21 April 2009

Who is SIGTARP? 

The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) was established by the Emergency Economic Stabilization Act of 2008 (“EESA”).

Under EESA, the Special Inspector General has the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program (“TARP”). (source: their website)

Why?

Why has the TARP been structured in such a manner?  Why have all the bank bailout programs been like this?   It is a shortcut to avoid necessary Congression authorization and review.  Patrick Wolff (Managing Director of Clarium Capital Management) explains in his report “The Wonderful World of Oz” (April 2009):

Tim Geithner has structured the PPIP to require as little new money up front as possible. The program supplies market participants with free put options and attractive financing to motivate them to buy impaired assets from troubled banks. Rather than spend money it doesn’t have and is unlikely to get, Treasury is partnering with the FDIC (which receives no Congressional appropriations) to provide free insurance whose claims come due later and whose costs can be obscured from the general public.

Excerpts

(1)  Thievery Under TARP“, Robert Scheer, The Nation, 22 April 2009 — Excerpt

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 twenty 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.

… 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.

… 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.

About the author

Robert Scheer, a contributing editor to The Nation, is editor of Truthdig.com and author of The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America  and Playing President. He is author, with Christopher Scheer and Lakshmi Chaudhry, of The Five Biggest Lies Bush Told Us About Iraq.

(2)  Initial Report to the Congress, SIGTARP, 6 February 2009 — Excerpt

SIGTARP”s Recommendations (p. 8)

{P}articipants should be required to use best efforts to account for the use of TARP funds…

Fraud vulnerabilities in the Term Asset-backed Securities Loan Facility (“TALF”) should be addressed before the program is initiated.

Potential Fraud Vulnerabilities Associated with TALF (p. 99)

First, as discussed more fully in Section 3, TALF is a program in which participants can receive loans upon the posting of certain asset-backed securities (“ABS”) as collateral. Because the loans will be non-recourse, that is, the participant can walk away from the loan by forfeiting the collateral, the risk associated with the ABS (which, in turn, is dependent on the risk of the underlying asset — in this case, certain consumer loans) is critically important to whether the taxpayers’ investment is a sound one.

For this reason, Treasury should consider requiring that some baseline fraud prevention standards be imposed (such as minimum underwriting standards or some other combination of provisions that will minimize the risk of fraud) on the ABS and/or the assets underlying the ABS used as collateral in TALF. SIGTARP was informed in early January by Treasury and the Federal Reserve that the program relies on:

  1. the requirement that the ABS receive a certain minimum rating from credit rating agencies

Transparency (p. 13)

Promoting transparency in the management and operation of TARP is one of SIGTARP’s primary roles. Through EESA, the American taxpayer has been asked to fund — to the tune of hundreds of billions of dollars — an unprecedented effort to stabilize the financial system and promote economic recovery; in this context, the public has a right to know both how the U.S. Department of the Treasury (“Treasury”) decided to invest that money and what was done with it by the recipients. Transparency is a powerful tool to ensure accountability and that all those managing TARP funds will act appropriately, consistent with the law, and in the best interests of the country.

(3)  Quarterly Report to Congress, SIGTARP, 21 April 2009 — Excerpt:

SIGTARP’s Recommendations

SIGTARP continues to recommend that Treasury require all TARP recipients to report on their actual use of TARP funds. (p.6)

… The announced expansion of TALF to permit the posting of MBS as collateral poses significant fraud risks, particularly with respect to legacy residential MBS (“RMBS”). … Aspects of PPIP make it inherently vulnerable to fraud, waste, and abuse, including significant issues relating to conf icts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering. (p. 7)

TARP implementation (p. 14)

The Initial Report contained a series of SIGTARP recommendations with regard to the design of TALF. Since the Initial Report, SIGTARP has remained in regular contact with Treasury and FRBNY with regard to oversight and fraud prevention in TALF and has sought greater transparency, explicit oversight access, and assurances regarding underwriting standards on the loans underlying the securities, among other things. SIGTARP’s past and new recommendations regarding TALF are discussed in greater detail in Section 4 of this report.

Although not all of these recommendations have been adopted, the design of the program, in SIGTARP’s view, has significantly improved from an oversight perspective due to SIGTARP’s suggestions and FRBNY’s willingness to engage on these issues. (p. 14)

SIGTARP’s recommendations to the Treasury

… One of SIGTARP’s responsibilities is to provide recommendations to the Department of Treasury (“Treasury”) so that Troubled Asset Relief Program (“TARP”) programs can be designed or modified to facilitate transparency and effective oversight and prevent fraud, waste, and abuse. SIGTARP’s Initial Report to Congress, dated February 6, 2009 (the “Initial Report”), set forth a series of recommendations, some of which were adopted by Treasury and some of which were not. (p. 137)

Treasury has indicated, however, that it will not adopt SIGTARP’s recommendation that all TARP recipients be required to do the following:

  • account for the use of TARP funds
  • set up internal controls to comply with such accounting
  • report periodically to Treasury on the results, with appropriate sworn certifications

In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the fi nancial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients. (p. 137)

… Lack of Resources within OFS-Compliance –  The Compliance department within OFS has primary responsibility over a vast and complex array of compliance and risk management functions. This responsibility includes ensuring that appropriate internal controls are in place over OFS management of TARP programs, providing primary oversight of vendors that are providing services to OFS, and monitoring TARP recipients’ compliance with their contractual and legal obligations.

More than 500 financial institutions are already participating in various TARP programs; additional announced programs will expand OFS-Compliance’s responsibilities to a mortgage modification program involving millions of mortgages and to public-private partnerships that will involve not only many new participants but also a whole new set of compliance challenges and types of risk.

To carry out all of these responsibilities, now six months into TARP operations, OFS-Compliance currently has a staff of approximately 10 employees. Although SIGTARP has plans for a future audit to assess the integration and effectiveness of OFS’s risk assessment and compliance efforts, SIGTARP makes a preliminary observation that the current resource commitment for this vitally important function appears plainly inadequate.  (p. 144)

Some experts review the Geithner Plan

  1. Despair over financial policy“, Paul Krugman, blog at the NYT, 21 March 2009 — Nobel Laureate economist.
  2. More on the bank plan“, Paul Krugman, blog at the NYT, 21 March 2009
  3. Geithner Plan Will Rob US Taxpayers“, Reuters, 24 March 2009 — Remarks by Joheph Stiglitz, Nobel Laureate economist.
  4. Successful bank rescue still far away“, op-ed by Martin Wolf, Financial Times, 24 March 2009
  5. The Geithner Plan Won’t Work“, James K. Galbraith, posted at The Daily Beast, 24 March 2009
  6. Obama’s bank plan could rob the taxpayer“, Jeffrey Sachs, op-ed in the Finanical Times, 25 March 2009
  7. The Pricing of Investment Grade Credit Risk“, Jubal Coval, Erik Stafford and Jakub Jurek (the first two are Harvard, the last is Princeton), Presented at the USC FBE Finance Seminar, 2 April 2009 — This undercuts the entire basis of the Geithner Plan; the paper appears at the end.
  8. Administration Seeks an Out On Bailout Rules for Firms“, Washington Post, 4 April 2009 — It’s OK to get angry when reading this.
  9. Larry Summers, Tim Geithner and Wall Street’s ownership of government“, Glenn Greenwald, 4 April 2009 — The individuals Obama chose to be his top economic officials embody exactly the corruption he repeatedly vowed to end.
  10. The Geithner-Summers plan is worse than you think“, Laurence J Kotlikoff and Jeffrey Sachs, blog of the Financial Times, 6 April 2009
  11. Apples and Truffles: PPIP is Financially Flawed, Intellectually Dishonest“, The Institutional Risk Analyst, 6 April 2009 — A technical analysis of the plan.
  12. TARP: The Looming Debacle“, John H. Hinderaker, Powerline, 27 April 2009
  13. Green shoots: grounds for cautious pessimism“, William Buiter, blog of the Financial Times, 28 April 2009 — “US regulators and Treasury have put the interests of the unsecured creditors of the banking system ahead of those of current and future tax payers…”

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Posts about the Paulson Plan, now Obama’s Plan:

  1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  2. Another step away from our Constitutional system, with applause, 19 September 2008
  3. America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
  4. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  5. A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
  6. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
  7. A reminder – the TARP program is just theft, 24 November 2008
  8. Stand by for action – more theft of our money being planned in Washington, 4 February 2009
  9. Update: yes, the Paulson Plan was just theft, 14 February 2009
  10. Now is the time for America to get angry, 24 March 2009
  11. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009

Posts about the American spirit:

  1. Americans, now a subservient people (listen to the Founders sigh in disappointment), 20 July 2008
  2. de Tocqueville warns us not to become weak and servile, 21 July 2008
  3. The American spirit speaks: “Baa, Baa, Baa”, 5 August 2008
  4. We’re Americans, hear us yell: “baa, baa, baa”, 6 August 2008
  5. This crisis will prove that Americans are not sheep (unless we are), 8 January 2009
  6. About security theater, a daily demonstration that Americans are sheep, 25 January 2009

17 thoughts on “It’s official. TARP is just theft.

  1. Listened to an interview on NPR this morn with a community banker from W.Va. He was the first to pay back TARP. Saw that Congress was changing the rules and wanted out. Paid a little interest. OK. Then had to deal with the warrant issue. Paid $750, but Treasury rejected and demanded and got $750,000 which works out to 60% interest. Tony Soprano couldn’t do any better than that.
    And TARP was supposed to “help” banks strengthen their balance sheets so they would extend credit. Sure.

  2. Considering the shifting rules for the TARP money, I would say that this is a great opportunity for the banks but they are assuming that Congress won’t mess with them (a relatively safe bet given their collective lobbying power).

    However the penalty for being wrong is REALLY severe. These bankers are putting their lives and livelihoods directly under Congress’ control. Personally, I’d have severe troubles sleeping if I were in that position.

  3. I’m following the Cuomo investigations fairly closely, myself. Ain’t only TARP that’s the theft – more like the latest/most visible in an ongoing, probably 10 year, racketeering scam amongst both financial and governmental entities.

    The solutions we’re being stuck with are consistent with covering up the swindle, although I think the Admin is more scared of the consequences during an economic shakeout than actively participating. At least I hope so.

  4. Use a font color other than red, maybe a brighter red or orange. It’s very hard for me to pick out what’s highlighted.
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    Fabius Maximus replies: Thanks for the tip!

  5. I agree a highlight color other that #800000 would be much better. Red is actually #ff0000.

    “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.”

    Sorry “The Nation” but TARP was written and largely passed by the Democrat controlled congress. Most Republicans in the house voted against it. And about 1/2 in the senate voted against it.
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    Fabius Maximus replies: Your correction is incorrect. The TARP was written by the Bush Administration, not Congress. It was introduced on 24 September and voted on 29 September. The bill was modified by Congress, but the essential structure was unchanged from Paulson’s initial proposal. See Wikipedia for more detail.

  6. My father taught me, if anyone ever comes up to you and says, “Give me a lot of money, and don’t ask what it’s for, it’s an EMERGENCY!” put your hand on your wallet and run, they are trying to rob you.

    Smart man my dad. But what do you do when it’s the government saying it?
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    Fabius Maximus replies: Categorical advice is not always right, with respect to your father. Sometimes it is an emergency. Like now. But we can hold the government to higher standards than displayed in these bank bailouts.

  7. I’m not trying to be overly cynical, but who in their right mind would not believe that *any* huge ’emergency’ program passed by Congress wouldn’t be riddled with fraud and theft? Whether deliberately or accidentally, large, quickly passed programs are always full of potential places for theft to occur. Even the Hurricane Katrina funds had a high rate of ‘misuse’. (I have a friend very high up in the system, and if you ask him about fraud he just shudders and changes the topic.)

    Public money passes through several stages: 1) somebody’s (the taxpayer’s) money; 2) everybody’s (public, so it belongs to us all) money; 3) nobody’s (public — if it belongs to all of us, it belongs to no single person); 4) somebody’s (whoever controls the distribution of public money to specific destinations — see Murtha, John); 5) *MY* (whoever can grab it) money. That movement from stage 3 through stage 5 is rife with potential for theft and corruption.
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    Fabius Maximus replies: The SIGTARP’s reports suggest that the potential for fraud is a feature, not a bug. Hence the Treasury Dept’s refusal to implement key recommendations.

    Nor is this a necessary part of the deal. Harry Hopkins set up the Civil Works Administration with incredible speed. It ran from 8 November 1933 to 31 March 1934. With astonishingly little corruption it “Civil Works Administration hired four million people, and during its five-months of operation, the CWA built and repaired 200 swimming pools, 3,700 playgrounds, 40,000 schools, 250,000 miles (400,000 km) of road, and 12 million feet of sewer pipe.” (from Wikipedia)

  8. Pulitzer prizes galore, and not a journalist with the interest or political objectivity to report them.

  9. This is hilarious. Watching the Democrats squirm as they realize people are watching them ransack the Treasury and annihilate the dollar. News flash, the President is a Democrat. Congress has been controlled by massive majorities of DEMOCRATS for more than two years. Blame the Obama deficit on Bush, all you’re doing is pissing all over your own credibility.
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    Fabius Maximus replies: Since the bailout measures were crafted almost exclusively by Bush’s treasury secretary and Fed Chairman Bernanke, blaming Congress seems unjustified. Esp as only a fraction of the bailout measures were submitted to Congress.

  10. The bank that hold our VISA card called last week to inform us they had TARP funds and offered to set us up with a loan. My husband replied that the TARP were provided by taxes which we paid, we’d just prefer a check, not a loan of our own money. This was met with disbelief from the bank rep. This is the mother of all schemes, take money from taxpayers then loan it to them with interest.

    On the other hand I applaud the bank for pro-actively seeking out customers with good credit to dump the money before congress makes them give it to customers with poor credit histories.

  11. Reminder: interview with the author of “The Best Way to Rob a Bank Is to Own One”

    Excerpt from the transcript of interview with William K. Black on Bill Moyers Journal, 3 April 2009. Black is now a law professor, was He was litigation director for the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and the General Counsel of the Federal Home Loan Bank of San Francisco.

    BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

    WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars’ loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

    BILL MOYERS: You’re describing what Bernie Madoff did to a limited number of people. But you’re saying it’s systemic, a systemic Ponzi scheme.

    WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn’t even get into the front ranks of a Ponzi scheme… verybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, “Triple-A.” … Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic…

    BILL MOYERS: Who did?

    WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

    BILL MOYERS: You talk about the Bush administration. Of course, there’s that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they’re going to slash, cut business loose from regulation, right?

    WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are … the trade representatives. They’re the lobbyists for the bankers. And everybody’s grinning. The government’s working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

    BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

    WILLIAM K. BLACK: There are two reasons. One, they’re much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they’re outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.’ But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

    BILL MOYERS: Who’s covering up?

    WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine. … These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed …

    BILL MOYERS: How is this happening? I mean why is it happening?

    WILLIAM K. BLACK: Until you get the facts, it’s harder to blow all this up. And, of course, the entire strategy is to keep people from getting the fact … about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

    BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you’re seeming disillusioned now.

    WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.

    BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

    WILLIAM K. BLACK: Well, you do a receivership. No one — Ronald Reagan did receiverships. Nobody called it nationalization.

  12. FM says, “But we can hold the government to higher standards”.

    Can we? Exactly how is that possible when “ADD MORE GOVERNMENT WORKERS for regulation and oversight” is the suggested solution to the problem? And we are only talking about our banking problem right now. We also have our car problem and our health care problem and our energy problem and our education problem, to name a few.

    FM talks much about loops. It doesn’t take much stretching for that loop to become a noose.
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    Fabius Maximus replies: Yes, we can. All the strings of power are in our hand. We just lack the will to use them. Apathy and resignation are so much easier. For more on this see the FM reference page America – how can we reform it?.

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