In a report due later today, Inspector General Neil Barofsky (pictured here) excoriates the Treasury department for a failure to implement recommendations that would limit the fraud potential inherent in TARP, and warns that some of the incentives included in the new public-private toxic asset purchase plan are so skewed toward participants that they invite further moral hazard:
"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," the report states.
In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky says would dilute the incentive for private fund managers to exercise due diligence.
It's anyone's guess whether or not the powers that be will listen to Barofsky this time around, but he's pretty highly-regarded on the Hill, so we can always hope. Either way, the taxpayer is getting stuck with the tab yet again.
I just find it ironic that the stated purpose of TARP (namely, buying the toxic assets off the banks' balance sheets) was determined to be a bad idea in lieu of capital injections, and now that the banks are sitting on all the capital injections, the government says, "Aw, shucks. I guess we have to buy the bad assets anyway." Meanwhile, the taxpayer is out trillions.
Should be an interesting report.
