The ERM Current™

Yesterday, the U.S. House Committee on Oversight and Government Reform conducted a hearing into the oversight and administration of the U.S. Treasury’s Troubled Asset Relief Program (“TARP”).  The committee was highly critical of the lack of internal controls related to the use of TARP related funds.  Here is a summary of their recent review of the program.

Section 116 of EESA requires Treasury io conduct oversight over the use TARP monies. Specifically, Treasury must “establish and maintain an effective system of internal control” of TARP monies in such a manner as to ‘provide reasonable assurance of the effectiveness and efficiency of operations, including the use of the resources of the TARP” and the “reliability of financial reporting.” ‘The Act mandates that this system of internal control be consistent with the standards prescribed under the Federal Managers Financial Integrity Act of 1982 (FMFIA).

Federal agency heads are required by law to prevent waste and loss of federal monies they administer. FMFIA requires executive agency heads to “establish internal accounting and administrative controls that reasonably ensure that… all assets are safeguarded against waste, loss, unauthorized use, and misappropriation…”

Under existing agreements between Treasury and TARP recipient financial institutions, Treasury has broad contractual authority to scour company books in search of, among other things, waste and abuse by TARP recipients. But in practice, Treasury is not doing so. In the absence of statutory or regulatory definitions of waste and abuse or explicit conditions for use of TARP funds – either promulgated in term agreements by Treasury under its broad authority, or prescribed by Congress in EESA – Treasury’s oversight will not find them and cannot enforce them. In other words, Treasury is not now conducting oversight of TARP monies disbursed through the Capital Purchase Program to prevent their use for perks for company management, loans to foreign governmental authorities, investments in outsourcing jobs held by Americans, investments in foreign company operations overseas, and the repurchase of company common stock, or any other potential example of waste and abuse. 

With such a massive amount of taxpayer money funding the program, the U.S. Treasury must ensure that the funds are administered appropriately.  A tiny fraction of the $700 billion within the TARP could be used to provide the necessary controls to prevent fraud and waste.  It seems to be a very small price to pay to protect the interests of U.S. taxpayers.

The Government Accountability Office (“GAO”) released an interim progress report on the U.S. Treasury’s management of the Troubled Asset Relief Program (“TARP”).  For the most part, the GAO reported that the program continues to be a work in process with a good deal of work remaining.  Here is a summary of their viewpoint.

Treasury has taken important steps to implement all nine previous recommendations, but has yet to fully address eight. This report includes recommendations that Treasury further expand its efforts to monitor how CPP recipients are using program funds and more clearly articulate and communicate a strategic vision for the program. Addressing these and other recommendations would help ensure greater accountability and transparency and better enable Treasury to effectively manage TARP. Treasury generally agreed with the contents of the report and noted that while progress has been made in overseeing the program, it agreed that more work needs to be done.

Given the recent transition in administration and the myriad of activities that have already occurred (see timeline below), it is not surprising that the strategy for TARP is still unclear.  However, now that the new leadership team is on board, the progress will need to be accelerated.  Stay tuned.   

The lack of transparency into the TARP program is well known and a primary source of criticism.  The Wall Street Journal has presented new information into the side deals by our elected officials that are plaguing the rescue effort. In an article yesterday, they noted the following:

The goal of aiding only banks healthy enough to lend — laid out by the Treasury when the program began — clearly seems to have shifted, but in a way that’s hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states.

One of those politicians is none other than Barney Frank, chairman of the U.S. House Financial Services Committee. According to the Wall Street Journal, Rep. Frank directed the issuance of $12 million in TARP funding to OneUnited, a small bank in Rep. Frank’s home state of Massachusetts.  Just prior to issuing this money, OneUnited had been given a “cease and desist” order by the FDIC due to poor lending practices and executive compensation abuses.  In addition, the bank was ordered to dispose of a 2008 Porsche sports-car that had been reserved for executive use.  Given the depreciation of high-end sports-cars, the Porsche must have qualifed as a “troubled asset”.  

Back door dealings and excessive pay practices led us into this current financial crisis.  Continuing these practices under the guise of a rescue effort will certainly doom it to failure.  Here is Rep. Frank discussing his planned bill to place restrictions on use of TARP funds.  Let’s hope he includes a Porsche restriction provision in the bill.

President Obama’s nominee for Secretary of Treasury, Timothy Geithner, finally testified at his Senate confirmation hearing yesterday after a week delay caused by the disclosure of his failure to pay income taxes several years ago. Evidently, this issue was discovered in early December and disclosed to the Senate panel responsible for examining Mr. Geithner’s nomination.  However, it was not disclosed to the public until last week.  Only then did the Senate Finance Committee decide to delay his confirmation hearing to investigate further.  

Whether or not paying his taxes was just an honest mistake on Mr. Geithner’s part is not the larger issue here. The larger issue is the lack of disclosure and transparency into the nomination process.  Mr. Geithner’s comments to the committee were ironic given the situation.  Here is an excerpt from his prepared testimony about the much maligned TARP program.

I know there are serious concerns about transparency and accountability, confusion about the goals of the program, and deep skepticism about whether we are using the taxpayers’ money wisely.  Many people believe the program has allowed too much upside for financial institutions, while doing too little for small business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners.  

We have to fundamentally reform this program to ensure that there is enough credit available to support recovery.  We will do this with tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.  And we are going to do that.  This is an important program and we need to make it work.

Mr. Geithner is right in his comments.  We need to make the TARP program work and the only way to do that is to provide full disclosure and transparency.  Without it, investor confidence will not return to our financial markets anytime soon.

Last Friday, the Congressional Oversight Panel (“COP”) released its second report on the management of the Troubled Asset Relief Program (“TARP”) by the U.S. Treasury.  The COP was recently established by the United States Congress to review the current state of financial markets and the regulatory system.  The COP is empowered to hold hearings, review official data, and write reports on actions taken by the U.S. Treasury and financial institutions and their effect on the economy.

Through regular reports, COP must:

• Oversee Treasury’s actions
• Assess the impact of spending to stabilize the economy
• Evaluate market transparency,
• Ensure effective foreclosure mitigation efforts
• And guarantee that Treasury’s actions are in the best interest of the American people.

The report was scathing and highly critical of both the U.S. Treasury as well as U.S. financial institutions that are benefiting from TARP.  Below are two focus areas of the report and related comments.

Bank Accountability

The Panel still does not know what the banks are doing with taxpayer money. Treasury places substantial emphasis on the importance of restoring confidence in the marketplace. So long as investors and customers are uncertain about how taxpayer funds are being used, they question both the health and the sound management of all financial institutions. The recent refusal of certain private financial institutions to provide any accounting of how they are using taxpayer money undermines public confidence.  

Transparency & Asset Evaluation

The bubble that caused the economic crisis has its foundations in toxic mortgage assets. Until asset valuation is more transparent and until the market is confident that the banks have written down bad loans and accurately priced their assets, efforts to restore stability and confidence in the financial system may fail.

Based on this report, it seems that the two main causes of the financial crisis – lack of accountability and lack of transparency – continue to plague our financial system.  Until these two issues are fully confronted and addressed at all levels, the crisis will continue unabated.