TARP Purchases Increasing as Oversight Languishes

As Treasury Secretary Henry Paulson continues to purchase hundreds of billions of dollars in bank equities under the Troubled Asset Relief Program (TARP), oversight of the program remains meager. TARP, as created through the Emergency Economic Stabilization Act (EESA), gives Paulson wide latitude in selecting firms and individuals to implement the program and equally wide latitude in disbursing the $700 billion in authorized funds. However, with $290 billion already committed, two of three oversight institutions created by EESA have yet to be implemented, signaling that oversight and transparency in TARP are second-tier objectives for Congress and the Treasury Department. Since backing away from the program's original purpose to purchase toxic mortgage-related assets from banks, Paulson has initiated the Capital Purchase Program (CPP). CPP will inject $250 billion into the banking system through direct purchases of bank equity. An additional $40 billion of TARP money has been promised to insurance giant AIG. The combination of CPP and the AIG package have committed the Treasury to $290 billion in expenditures, but Treasury's website indicates that only $149 billion has been spent on transactions involving 29 banks.

Outside watchdog groups have had to step in to provide information about the TARP program because the Treasury Department has done such a poor job in its obligation to release information on how the bailout money is being spent. According to the investigative news source ProPublica, Treasury has approved billions of dollars more in bank stock purchases. Tracking news media reports of which firms have been approved for participation in CPP, ProPublica indicates that over $175 billion has been promised to over 60 banks. The discrepancies in Treasury's and ProPublica's figures are based on the statute that mandates Treasury report TARP asset transactions. The Treasury Department is required to publish online details on transactions completed, whereas ProPublica notes approvals of bank stock purchases. While the difference in the two reporting methods is real and significant, both sets indicate that the federal government has spent well over $100 billion, yet contrary to TARP authorizing legislation, scant oversight has been conducted.

EESA contains a set of provisions that create several oversight bodies and mechanisms. The first of these is the creation of the Financial Stability Oversight Board (FSOB). The FSOB is composed of the Federal Reserve Chairman, the Treasury Secretary, the Department of Housing and Urban Development Secretary, the Director of the Federal Housing Finance Agency, and the Chairman of the Securities and Exchange Commission. Within days of TARP being signed into law, the FSOB held its first meeting. Since then, it has met two other times to discuss the operations of the program. While the expeditious formation of the FSOB is to be lauded, the second executive branch oversight institution has yet to be implemented: a Special Inspector General for TARP (SIGTARP).

SIGTARP would provide an independent assessment of the execution of TARP and, like other IGs, have the ability to seek evidence and issue subpoenas — the tools necessary to expose any improprieties in the program. As EESA indicates, the president must nominate, and the Senate must confirm, the SIGTARP. And although EESA was signed into law on Oct. 3, President Bush waited over a month to announce his nominee — Neil Barofsky, an assistant U.S. attorney in the Southern District of New York — for this post on Nov. 14. The Senate Finance Committee held a hearing on Nov. 17 to begin the confirmation process, but after $155 billion in bank stock purchases and millions of dollars spent to administer the program, SIGTARP will be coming late to the game. Any complaints submitted to SIGTARP or any investigations into alleged misconduct will hinder Congress's ability to conduct oversight. Unfortunately, Congress is also tardy in implementing its own oversight body.

The Congressional Oversight Panel is to be composed of five members appointed by the Speaker of the House and majority and minority congressional leaders. On Friday, Nov. 14, House Speaker Nancy Pelosi (D-CA) issued a press release stating that the Democrats had selected their three panel members. Republican congressional leadership has yet to announce their selections.

The panel's first report to the relevant congressional committees — on "the use of contracting authority and administration of the program;" "impact of purchases made under the Act on the financial markets and financial institution;" "extent to which the information made available on transactions under the program has contributed to market transparency;" "effectiveness of foreclosure mitigation efforts;" and the "effectiveness of the program from the standpoint of minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers" — is due Nov. 25. It is doubtful the panel will be able to issue a meaningful oversight report within in the legislated time frame.

Speaking to The Washington Post, the Inspector General of the Treasury Department, Eric M. Thorson, called oversight of TARP a "mess." While EESA gives the Treasury Secretary the ability to suspend certain contracting rules in hiring firms to implement TARP activities, he is still obliged to avoid conflicts of interest and ensure program activities remain above-board. Contracts for several firms that have been hired to execute TARP are available on the EESA website, yet portions of the contracts — specifically staffing costs — are redacted.

Further, there is little proof that sufficient conflict-of-interest screening has been conducted in the execution of these contracts. Reports indicate that delays in forming the Congressional Oversight Panel were caused by difficulty in finding individuals with the necessary knowledge of the financial industry who would not have conflicts of interest. The reports also suggest that such conflicts are more likely than not to exist. An article in The New York Times on the bevy of lobbyists who are lining up to influence Treasury officials underscores the urgent need for an independent oversight body.

Despite the lack of EESA-mandated oversight institutions, Congress has already begun holding hearings on the implementation of TARP. Last week, on Nov. 13, the Senate Banking Committee conducted a hearing entitled "Examining Financial Institution Use of Funding Under the Capital Purchase Program." Committee chairman Sen. Christopher Dodd (D-CT) and his fellow committee members questioned executives of CPP-participating banks on their use of TARP funds. The following day, the House Committee on Oversight and Government Reform Subcommittee on Domestic Policy held a hearing to determine if TARP was, as specified in EESA, working to mitigate foreclosures. Bipartisan ire was raised at Treasury Assistant Secretary Neel Kashkari as lawmakers questioned Treasury's emphasis on assisting banks over homeowners. In addition, in late October, House Committee on Oversight and Government Reform Chairman Henry Waxman (D-CA) sent letters to the eight banks that received the first cash installment of CPP, inquiring after executive compensation.

The blog BailoutSleuth, which has also been tracking TARP activities, notes that some banks participating in CPP have increased their dividend payments to shareholders, essentially passing taxpayer funds to the wealthier corners of the economy that receive dividend payments rather than increasing the liquidity of the banking system.

With the first tranche nearly exhausted — the first $350 billion of the $700 billion originally authorized by Congress — both the executive and legislative branches have yet to implement the systematic oversight that was written into EESA. Unsurprisingly, there are already allegations that banks are not using TARP funds for their intended purposes. Implementation of the program remains opaque, and if the experience of congressional Democratic leadership's Congressional Oversight Panel selection is an indicator, the federal government must remain vigilant of conflicts of interest in TARP. Disturbingly, hasty writing and passage of EESA has not been matched with equally quick action on enacting its oversight institutions.

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