Recommended Reading: “Tarp: The Looming Debacle”

by Marilou Moursund on May 21, 2009

in Credit Crisis,Crossvault Capital,Recommended Reading,TARP

In a blog post entitled TARP: The Looming Debacle, John Hinderaker of PowerLineBlog describes the findings of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) in his quarterly report to Congress released 4/21/09.  The post is lengthy, but the excerpts from the report crystallized some of my misgivings about this huge government program. 

 The initial announcement of the TARP program was welcome given all the market turmoil generated by the failure of Lehman Brothers and the imminent failure of AIG.  However, the program seems to be constantly changing so it’s been difficult to feel confident that the proper checks and balances are in place.  I have been especially concerned about the Public Private Investment Program and its asymmetric risk profile.  It seemed to me that the taxpayer would take all the downside risk while the private investor would get a disproportionate share of any upside from buying the Legacy Assets (the artist formerly known as Troubled Assets).

From John Hinderaker’s post: 

“With respect to specific TARP programs, the report goes into considerable detail about the features of the programs that make them susceptible to fraud and manipulation. Here, the SIG discusses the “Public-Private Investment Program,” one of the most controversial aspects of TARP. PPIP is intended to form public-private “partnerships” to buy distressed assets, mostly mortgage-backed securities. But the vast majority of the risk lies with the taxpayers, while the program is rife with opportunities for connected insiders to make a fortune.”

And from the SIGTARP’s report:

“Many aspects of PPIP could make it inherently vulnerable to fraud, waste, and abuse. First, PPIP deals with assets that have recently been illiquid, making valuation difficult, therefore raising the danger that the Government will overpay for the assets. Second, many of the participants in these markets, such as hedge funds, are substantially unregulated and the internal oversight and compliance capability at those institutions vary widely. Next, the interrelationships between the market participants can be extremely complex and difficult to anticipate: the same entity might buy and sell toxic assets for its own benefit and manage portfolios of toxic assets for others, all while holding or managing equity or debt securities of the banks and other institutions that have large positions in the same toxic assets. Finally, the sheer size of the program — up to a trillion dollars for the PPIFs and up to another trillion dollars for the expansion of TALF — is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives.

After receiving initial briefings from Treasury on PPIP and discussing the issue with law enforcement partners, SIGTARP has identified three of the most significant areas of potential vulnerability to fraud and abuse applicable across the program.”

There is a lot more detail in the post, and while much of the report is disquieting, I actually feel better that someone who really understands the potential for fraud in government programs is on the case.”

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