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Feb 16

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TARP’s IG reports a reality different than the public’s perception

The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) has the statutory duty to conduct, supervise and coordinate audits and investigations of any actions taken under the Troubled Asset Relief Program. SIGTARP just issued a report to Congress, dated January 26, 2012.

For most people, TARP is a forgotten program, having been successfully wrapped up by the Obama Administration. The reality is just the opposite. In this just-issued report, SIGTARP describes TARP’s status as follows:

TARP will continue to exist for years. TARP programs that support the housing market and certain securities markets are scheduled to last until as late as 2017, and Treasury can spend an additional $51 billion on these programs during those years. Taxpayers are still owed $132.9 billion in TARP funds, and taxpayers will never get back some of these funds. Some programs were designed as a Government subsidy with no return to taxpayers. Treasury has already written off or realized losses of $12 billion and Treasury predicts losses on other TARP investments. The Congressional Budget Office recently increased its estimated cost of TARP to $34 billion. One fallout of slow economic recovery is that it slows Treasury’s progress in recouping outstanding TARP funds. Unwinding Treasury investments in 458 institutions, including American International Group, Inc. (“AIG”), General Motors Corp. (“GM”), Ally Financial Inc. (“Ally Financial”), and community banks, in the near term could prove challenging as markets remain volatile and banks struggle to stay on their feet. Financial stress continues to pose obstacles to economic recovery, in part due to an 8.5% unemployment rate, decreased consumer confidence, non-performing mortgages, and job cuts and asset sales by some of the nation’s largest institutions. …

When the largest banks repaid and exited TARP, the mistaken public perception was that TARP was essentially over. TARP exit by the largest banks did not end TARP. TARP morphed beyond a bank bailout into 13 programs, some of which are scheduled to last until as late as 2017.”

Why would the public have this mistaken perception? It is because President Obama and Treasury Secretary Geithner provided misleading (or worse) information. Some of TARP’s lending authority was set to expire December 31, 2009, but was extended by the Obama Administration through October 2010. When some of the lending authority expired, the American public was told that TARP was both profitable and complete. For example, a widely-reported article by Secretary Timothy Geithner, dated Sunday, October 10, 2010, stated:

The Troubled Asset Relief Program expired last week, ending what was perhaps the most maligned yet most effective government program in recent memory. … The TARP is over. And as we put it behind us …”

More than a year later, far from being behind us, SIGTARP’s current report describes TARP’s status as follows:

At the beginning of TARP, the Government’s focus was on supporting the largest banks and the public perceived TARP as primarily a bank bailout. SIGTARP recently reported on the Government’s efforts to exit the largest banks out of TARP because of a desire to ramp back the Government’s stake in financial institutions. When the largest banks repaid and exited TARP, the mistaken public perception was that TARP was essentially over. TARP exit by the largest banks did not end TARP. TARP morphed beyond a bank bailout into 13 programs, some of which are scheduled to last until as late as 2017…”

Regarding the investment that the Obama Administration made in private companies using TARP funds, SIGMA comments on the exit plan as follows:

Although Treasury’s complete plans for exiting these investments remain unclear, if Treasury’s plan is to sell this stock at or above the break-even price, it may take a significant amount of time for markets to rebound to that level. Market conditions have slowed Treasury’s progress. Treasury did not sell any of its shares in GM in 2011, or any of its shares in AIG in the latter half of 2011. Treasury has never sold its stock in Ally. This strategy is also heavily dependent on market demand for the enormity of Treasury’s stake, and it could take a number of years to reach that level of market demand. According to the Congressional Oversight Panel (“COP”), the GM IPO was the largest IPO in U.S. history, and Treasury holds more GM shares than it sold in that IPO. Even if Treasury is able to sell a significant amount of its Ally stock in an IPO, as reported by COP, Treasury expects that it is likely to take one to two years following the IPO to dispose completely of Treasury’s ownership stake. It may also take a significant amount of time for the market to be able to purchase Treasury’s 77% stake in AIG.”

The Obama Administration assured the American Public that TARP was unprecedented, and the passage of Dodd-Frank will prevent a recurrence. In its current report, SIGMA tells us otherwise. For example:

There has been little fundamental change in the compensation structures at the largest institutions. The integrity of our financial system remains at risk, with many former TARP recipients now designated as systemically important financial institutions (“SIFIs”) that continue with compensation structures that may encourage risk taking. The implicit guarantee that came from the Government’s unprecedented intervention resulted in moral hazard, and companies continue to engage in risky behavior. SIFIs have a responsibility to discipline risk taking that could potentially trigger systemic consequences, including as it relates to compensation. Because companies generally have shown little or no appetite for reforming executive compensation practices, the economy remains at risk that compensation could play a material role in the event of a future crisis.”

SIGTARP is also responsible for investigating TARP misuse and fraud. Although plenty of details exist, SIGTARP headlines this as follows:

SIGTARP’s investigations have resulted in orders of restitution of $3.6 billion and orders of forfeiture of $126.8 million. While the ultimate recovery remains to be seen, SIGTARP has already assisted in the recovery of $151.5 million.”

Notably, although $3.6 billion has been stolen or otherwise misused, only $151 million has been recovered. Most of SIGTARP’s success in this area involves criminal convictions, although more jail time hardly gets money returned to the taxpayers.

We provide additional detail about the SIGTARP in this article.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

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