TOPICS > Economy

TARP Inspector Probes Bailout Fraud, Warns of Program’s Pitfalls

April 22, 2009 at 6:40 PM EST
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Neil Barofsky, the special inspector general assigned to monitor the banking bailout, discusses his office's ongoing investigations into potential fraud in the TARP program and recent warnings on taxpayer risk.
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JEFFREY BROWN: It has a mouthful of a name, the Office of the Special Inspector General for the Troubled Asset Relief Program, and a whale of a task: to be a watchdog over what’s now grown to 12 separate bailout-related programs involving government funds and commitments of almost $3 trillion.

Its latest findings have just been released in a report that warns of the risks of fraud and abuse in the bailout programs and questions whether taxpayers are getting enough information about how their money is being used.

Neil Barofsky, a former federal prosecutor, heads the office and joins me now.

And welcome to you.

NEIL BAROFSKY, special inspector general, TARP: Thank you.

JEFFREY BROWN: Enormous amounts of money that we’re talking about. How hard is it to keep track of? Who is doing it? Or is that the issue that you are addressing?

NEIL BAROFSKY: Well, when I first took the job in late December, one of the first recommendations I made to Treasury was that they start to require TARP recipients to report on how they’re using the funds.

JEFFREY BROWN: Recipients, meaning the banks that we hear about, or all kinds of institutions?

NEIL BAROFSKY: Banks, auto companies, everyone who is receiving TARP funds. The Treasury has refused to adopt that recommendation, so as a result we went out and did our own survey. And we’ve asked all the financial institutions as of the end of January to report to us how they’re using the money.

And we’ve gotten back 100 percent response rate, and we’re preparing an audit that’s going to report on how they indicate they’ve used the money. So it’s a challenge.

JEFFREY BROWN: Now, this has been a continuing issue from the last administration when these bailouts began, correct? You’re saying that the current Treasury still is not asking enough of where the money is going.

NEIL BAROFSKY: That’s correct. This is a recommendation we’ve made, we continue to make. As I said, we sort of took matters in our own hands because it wasn’t being adopted.

We think it’s really important. We announced this week that there’s another $30 billion going to AIG, but they’re not going to be required to report on how they’re using that money. We think it’s a problem that needs to be addressed and, in the meantime, we’re going to address it ourselves.

Banks describe use of funds

Neil Barofsky
Special Inspector General for TARP
What we saw, not surprisingly, was that financial institutions that took the trouble to put in controls very early on about how they're going to use the money are able to report how they use the money.

JEFFREY BROWN: So what's a concrete example of what you have found, for example, in asking these questions?

NEIL BAROFSKY: Well, we're still analyzing all of our responses. But what we saw, not surprisingly, was that financial institutions that took the trouble to put in controls very early on about how they're going to use the money are able to report how they use the money.

And what we're seeing is, some give us granular detail -- loans that they would have not been able to make if they had not received TARP funds, acquisitions that they made because of TARP funds. This is a level of transparency that can and should be done by Treasury, but we're going to do it in the meantime.

JEFFREY BROWN: And what does Treasury tell you? And why do you think there is not the kind of oversight that you are calling for?

NEIL BAROFSKY: Well, initially, they told us they thought it was impractical, it would be a waste of time, because money is fungible. And we disagreed with that. And basically...

JEFFREY BROWN: You mean, it would be hard to know exactly which -- how these particular funds were used?

NEIL BAROFSKY: Exactly.

JEFFREY BROWN: Yes.

NEIL BAROFSKY: And I think the responses to our survey indicates that that just wasn't the case. Banks are able to keep track of the funds, especially if they keep -- they establish controls beforehand, which is also part of our recommendation, not only to require banks to report on the use of funds, but also to put in controls so that they can report.

Potential for fraud and abuse

Neil Barofsky
Special Inspector General for TARP
Well, a lot of these programs are still under development. And if there aren't the right protections that are built into them, we think that they're extremely vulnerable to fraud.

JEFFREY BROWN: Now, another thing that you raise in this report is the potential for fraud and abuse in these programs. Explain generally, first, what does that mean? What are you worried about?

NEIL BAROFSKY: Well, a lot of these programs are still under development. And if there aren't the right protections that are built into them, we think that they're extremely vulnerable to fraud.

We're talking about, as you mentioned, up to $3 trillion. If you use just the normal prediction that law enforcement has for fraud in a government program of 10 percent, that's a potential for $300 billion of fraud.

JEFFREY BROWN: Just to explain, that $3 trillion, people are familiar with the $700 billion TARP, but then it's all these other programs we've been reporting on for months and months and months, right, Federal Reserve, FDIC, all kinds of things?

NEIL BAROFSKY: Exactly. Treasury took the $700 billion of TARP money, used it basically as seed money, and has combined that with Federal Reserve loans, FDIC guaranteed debt, to magnify the impact of the TARP up to $3 trillion.

JEFFREY BROWN: All right, so I interrupted you. So the kind of fraud you're looking at would be what? Who would be using the money in illegal ways?

NEIL BAROFSKY: Well, just to give you an example, the newly announced programs involve a combination of private equity -- it's private investors -- and TARP funds. And they're going to create these large funds that have billions and billions of dollars of purchasing power that is going to be about, on the Treasury side -- about 75 percent is going to be government money, and 25 percent is going to be private money.

And these programs are riddled with opportunities for conflict of interest, for price collusion, and other types of white-collar fraud that, if the right protections are not there, it's going to be a problem.

Enforcing the regulations

Neil Barofsky
Special Inspector General to TARP
We're the sole law enforcement agency created in the bailout act, and it's our responsibility to make sure that people who do steal get caught and go to jail.

JEFFREY BROWN: One of the things, if I understand right, that distinguishes your panel from several other oversights, including the one we've talked about on this program, Elizabeth Warren oversees, you have actual investigative powers, or that's part of your mandate, right, to go after civil and criminal wrongdoing? And you are doing so?

NEIL BAROFSKY: That's absolutely right. We are a law enforcement agency, as well as an audit agency. We're the sole law enforcement agency created in the bailout act, and it's our responsibility to make sure that people who do steal get caught and go to jail.

JEFFREY BROWN: And you announced one action today, relatively small, but tell us what that is and how that fits into the larger thing you're worried about?

NEIL BAROFSKY: It's relatively small. It was a $10 million securities fraud. Basically...

JEFFREY BROWN: Small for, you know, in the larger realm of things, right?

NEIL BAROFSKY: Yes, in the larger realm. Basically, there was a fellow named Gordon Grigg down in Tennessee who was selling something called TARP-backed securities. Now, these things don't exist. It was a scam. It was a fraud. He was ripping people off, selling something that didn't exist.

We got the referral back in January from the SEC. They discovered this. And they brought us in. They asked us for our assistance, and we got it shut down in January. And then we used our role as law enforcement investigators to help coordinate a criminal investigation, which led to the filing of the charges today.

Calls for more transparency

Neil Barofsky
Special Inspector General to TARP
It's a lot harder to commit fraud when the sun is shining down on you.

JEFFREY BROWN: Now, I've been through the report, and there's a lot of stuff you're calling for. But if you have to boil it down to what you would most like to see from Treasury -- you mentioned at the beginning about more information -- but specifically on the issue of stopping fraud or abuse, what actions do you want from Treasury? What would help?

NEIL BAROFSKY: I think that adopting our recommendations, particularly when it comes to transparency. Transparency is a word we hear a lot in connection with the bailout.

And it's more than just providing information to taxpayers. Transparency also helps with fraud. If we are provided -- and "we," I don't mean just us, I mean the American people -- with information about these transactions, decisions that go behind them, it's going to make it easier to detect fraud and it's going to deter fraudulent behavior. It's a lot harder to commit fraud when the sun is shining down on you.

JEFFREY BROWN: But to be fair, I mean, the Treasury has a lot on its plate. There's a lot of stuff they're doing. Do they have the resources? For that matter, do you have the resources? I think I read you have a fairly small staff. Is anybody able to really be a watchdog and go after people who are committing wrongdoing?

NEIL BAROFSKY: Absolutely. We about 37 strong right now. We're building to about 150.

But it's not just us standing between those who would steal and the $3 trillion. We leverage our resources. We work closely with the FBI, the SEC, the Postal Inspection Service, the IRS, our law enforcement partners. We work together to make sure that we've got this covered.

JEFFREY BROWN: All right, Neil Barofsky, we'll stay in touch and see how this develops. Thank you very much.

NEIL BAROFSKY: Thank you.