NEWSFLASH: TARP inherently vulnerable to fraud

[we vs us]

The special inspector of the $700 billion TARP fund will release a report today stating that the fund is "inherently vulnerable to fraud and should not be started without stronger safeguards."

Mr. Barofsky was particularly critical of the Treasury Department's refusal to demand detailed information from banks and other financial institutions about what they are doing with the money they receive.

Noting the widespread public outrage unleashed over the Treasury's huge payments to the American International Group, the failing insurance conglomerate, Mr. Barofsky warned that Treasury officials were jeopardizing the credibility of their efforts by not requiring companies to disclose far more about their use of taxpayer money.

"Failure to impose this requirement with respect to the injection of yet another $30 billion into A.I.G. would not only be a failure of oversight, but could call into question the credibility of the government's efforts," he said. He was referring to bailout money that had been pledged, but not yet delivered, to the insurance giant.

Not too surprising a finding, when you consider the speed with which they pushed the TARP funds out the door.  The size of the bailout is problematic, too, it being too massive to keep ahold of.  The obvious solution is to further monitor and regulate the funds being injected into banks from here on out. 

But Goldman Sachs perfectly illustrated the conundrum last week when it announced it would start repayment on the $10 billion of TARP funds it received late last year.  Obviously, after reporting a surprisingly strong quarterly profit, Goldman stands as a TARP success, and in many respects it's following what you might consider the "classic" TARP trajectory:  accept funds; guarantee solvency, repay the federal gov.  But at the same time, "analysts are cautioning that the repayments should not be viewed as an indication that the economy is rebounding; rather as a sign of how worried bankers are about legislation that imposes limits on banks that take TARP money." 

[Bankers] say they were pushed by changes in The American Recovery and Reinvestment Act, which imposes limits on pay and bonuses and places restrictions on hiring foreign nationals and training programs.

For instance, New York-based Signature Bank CEO Joseph DePaolo said the restrictions would make it difficult to recruit and retain "highly talented banking professionals throughout the metropolitan New York area."

So on one hand, the government's own auditors see the TARP as an invitation to fraud on a massive scale, while the investment banks already see the TARP as too restrictive and want to get it off the books ASAP, regardless of how much they may or may not need the capital backstop. 

I'm starting consider this a war between "Old Order" and "New Order,"  or between a limping financial system that wants to preserve its way of life (lax oversight and payola for the major players), and the government who is trying to reimpose some structure and accountability to the proceedings.  Or, as Simon Baker, a former chief economist for the IMF wrote in a recent Atlantic article: 

. . .[E]lite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.