PULLING THE TARP ON TARP

Note: a tarp, in traditional use, is a sheet of canvas used to cover something up.

BBC - A watchdog for the US's $700bn bail-out plan for banks, said some aspects could be "unfair" to taxpayers. Neil Barofksy, the special inspector general for the Troubled Asset Relief Program, has delivered a 250-page report to Congress on the plan.

Part of Tarp is a "Public-Private Investment Program" to buy troubled mortgages and securities that have been at the root of the credit crunch.

But Mr Barofsky said taxpayer risk was many times that of the private parties.

He also warned that the initiative, which includes giving private parties government subsidies to buy the troubled assets, could lead to more scope for fraud.

"The sheer size of the program. . . 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," his report stated.

Business Insider - Neil Barofksy, the special inspector-general for the TARP, tells Financial Times he intends to examine whether banks lied in order to be eligible for TARP.

"I hope we don't find a single bank that's cooked their books to try to get money but I don't think that's going to be the case,"� said Mr Barofsky, who has been dubbed the "Tarp cop"�.

Just how banks value mortgage-backed securities and other assets on their books has been an issue of intense debate as the financial crisis has unfolded.

Yves Smith explains exactly what this means: "Remember, bank had to fall into this funny construct of being sick enough to need help, but not so sick as to be terminal." . . .

Barofsky's whistleblowing could mess up the plot for Geithner. As we've noted, the whole point of the TARP, PPIP, TALF, etc. is to let banks and investors game the system, so that private sector debt can be moved over to the public ledger. That's the whole idea, and the hope is that the public balance sheet can withstand the blow, while the private sector, cleansed of its toxicity, returns to health.

Maya Jackson Randall, Wall Street Journal - The TARP watchdog also renewed its call for the Treasury to provide the public more information on how firms that have received bailout funds are using that cash. The Treasury already is conducting surveys of banks' lending activities, but that isn't enough, said Special Inspector General Neil Barofsky. His office recommends that the Treasury require TARP recipients to account for the use of government cash and regularly report the results to the Treasury.

The special inspector general also raised questions about the Term Asset-Backed Securities Loan Facility, or TALF, which he said remains vulnerable to fraud. The TALF program was established to boost the market for consumer loans by providing investors up to $200 billion of financing. The government plans to increase the size of TALF to as much as $1 trillion, accepting certain real-estate-related securities as collateral.

The inspector general's office said the Treasury should abolish its plan to have credit-ratings firms determine the quality of loans, and instead screen each residential mortgage-backed security it takes as collateral.

"Arguably, the wholesale failure of the credit-rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis," the report said.

Robert Scheer, Truth Dig - We are being robbed big-time, but you can't say we haven't been warned. Not after the release 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 20 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.

He pointed to the example of AIG, which has acted as a conduit of funds to the banks it had insured without being required to tell the government what it is doing: "Failure to impose this requirement with respect to the injection of yet another $30 billion into AIG would not only be a failure of oversight, but could call into question the credibility of the government's efforts."�. . .

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. Charging that the plan carries "significant fraud risks,"� the inspector general's report pointed out that almost all of the risk in this new trillion-dollar plan is being borne by the taxpayers. The so-called private investors would be able to put up money they borrowed from the Fed through "nonrecourse"� loans, meaning if the toxic assets purchased prove too toxic and the scheme failed, the private investors could just walk away without repaying the Fed for those loans. . .

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