SIGTARP January 2010 Report

The January 2010 SIGTARP report is released and if anything it's a validation of this sites many observations to date on TARP.

Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury.

Notwithstanding the fact that preserving home ownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.

SIGTARP notes that we are nowhere with financial reforms.

  • To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
  • To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to proitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
  • To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
  • To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inlating that bubble in light of
    the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Wow. Bear in mind this is the official inspector general of the TARP stating clearly what many blogs have been saying for months, the government is trying to re-inflate the housing bubble, banks just paid back TARP so they could get back to their outrageous bonuses and it's just business as usual until the next crisis comes.

SIGTARP makes a point to be even more blunt:

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.

 

Look at this statement on the Federal Reserve buying mortgage backed securities:

In other words, the Government has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.

So, we get stuck with the bill and a huge percentage of people do not even get to keep the houses. Foreclosures are expected to be about 4 million in 2010 and were greater than 2.8 million in 2009, representing about 2.2% of all housing.

Onto a few details on the state of the funds:

As of December 31, 2009, 67 TARP recipients had paid back all or a portion of their principal or repurchased shares for an aggregate total of $165.2 billion of repayments and a $5.0 billion reduction in exposure, leaving $368.8 billion, or 52.8%, of TARP’s allocated $698.8 billion available for distribution.

Among CPP participants, 74 have missed dividend payments to the Government, some of which made the payments on a later date. As of December 31, 2009, there was $140.7 million in outstanding unpaid CPP dividends. Finally, three TARP recipients that received a combined $2.6 billion in TARP funds have filed for bankruptcy

This is interesting, SIGTARP again mentions civil and criminal investigations, most of which are ongoing. This was mentioned also in a recent hearing on the AIG payout/CDO purchase debacle.

Frankly as much as a bombshell as this report is, I suspect we're going to be seeing neutron bombs if SIGTARP is successful in it's investigations. Note this quote:

SIGTARP’s Investigations Division has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

Most of the investigations are ongoing but look at the results of just one and note how the Treasury says this all isn't a problem.

Two circumstances have come to light over the past quarter that relate to the conflict-of-interest wall issue, both of which are subject to ongoing reviews by SIGTARP’s Audit or Investigations divisions and will be described further in subsequent reports. First, notwithstanding Treasury’s refusal to require a wall in PPIP, one of the PPIF managers — AllianceBernstein L.P. (“AllianceBernstein”) — has imposed an ethical wall or informational barrier on its own initiative because it felt that it was best practice to do so; indeed, AllianceBernstein informed Treasury of its intent to do so at the same time that Treasury was insisting that the imposition of such walls was, among other things, “simply not practical.”

AllianceBernstein’s ethical wall, along with the previously discussed fact that three of the nine managers already operate similar walls in connection with their activities in other Government programs, simply belies that walls would not have been possible in PPIP.

Second, a series of unusual trades undertaken in one of the PPIFs just weeks after trading began has highlighted the problems that can arise in the absence ofca robust conlict-of-interest wall. The basic facts relating to these trades, initially brought to SIGTARP’s attention by OFS oficials, are as follows. The PPIF management company in question operates both a PPIF and one or more non-PPIF funds that invest in similar securities (i.e., mortgage-backed securities (“MBS”)).

In the case of this fund management company, the same person is the portfolio manager for both the PPIF and the non-PPIF fund. In late October, the portfolio manager directed that a particular MBS from the non-PPIF fund be sold after the security — in this case a residential MBS — had been downgraded by a rating agency. According to the company, multiple bids were received, and a quantity of the security was sold to a dealer. Within minutes of the sale, however, the same portfolio manager purchased, for the PPIF, the same amount of the same security from the dealer at a slightly higher price. Later in the day , the portfolio manager bought more of the security for the PPIF from the dealer at the original price.

From the above it's obvious SIGTARP and the U.S. Treasury at not only at odds, but is the implication the U.S. Treasury endorses a free ride for a few chosens with taxpayer money? Stay tuned obviously.

The complete report is attached to this post. It is 127 pages and goes into great details, including smaller fraud investigations and a recap of AIG to date.

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Comments

Outstanding piece, thanks!

It should be pretty obvious to all by this time that this financial system was indeed meant to fail.

That what they are doing now is simply trying to squeeze as much ill-gotten gain out of it while they still can.

One still hears the same tired, moronic drivel from the likes of the media critters, even Bloomberg (that Reilly person) who proclaim: "I don't want to sound like a conspiracy theorist or a tin hat fashionista...."

After all the info about Timothy Geithner (the clown) at NY Fed, and all the collusion among private equity firms (Citadel, et al.) and Goldman Sachs, JPMorgan Chase, et al., Henry Paulson (Goldman Sachs' on-site Treasury Secretary), etc., with regard to AIG, TARP, etc., nothing really more need be said: when all the evidence categorically says criminal conspiracy, anyone who denies a criminal conspiracy is either a paid professional liar or a complete jackass in denial.

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help out

This report was released probably midnight, EST, so I skimmed through the 127 pages and I am sure there is much more detail.

Now TARP is not at all the total taxpayer money (see our most popular blog post ever for what's at risk) but even TARP has 12(?) different programs...

it's so complex, there are all sorts of places to hide evil deeds.

I sure hope SIGTARP has a division of forensic accountants because it's amazing how convoluted all of the bail outs are.

If you see or read something of particular note, please post in the comments, I'm sure there is more deadly incriminating details w/in those 137 pages.

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On that SIGTARP stuff

From p. 11,

In particular, Section 5 provides a discussion of Treasury’s adoption of SIGTARP’s most fundamental transparency recommendation — that Treasury require TARP recipients to report on their use of TARP funds. Section 5 also provides an update on the issue of imposing conflict-of-interest walls in PPIP, including a discussion of a series of suspect trades that has already occurred within one of the Public-Private Investment Funds (“PPIFs”) in which a portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF. SIGTARP is reviewing these trades. The fact that these kinds of issues could arise in the first instance is the direct result of Treasury’s refusal to require information barriers or walls in PPIP, and in an environment in which large portions of the public already view the fairness of Government programs with skepticism, whether fairly or unfairly, the reputational risk associated with this review is a wholly unnecessary cost.

Among those PPIP players (which is what the fund's name, PPIF relates to) are Blackrock, of course, and Invesco, Marathon, Oaktree, etc.

From memory, I recall that everyone's fave, Wendy Gramm, used to be on the board of directors at Invesco -- forgot when she left. Also, Invesco is heavily invested in the Climate Exchange, PLC, the holding company registered in the Isle of Man (offshore haven, 'natch) which hopes the American cap-and-trade passes so it can go ahead with all that carbon derivatives stuff on all those worldwide climate exchanges they own.

But, the main point is that Prof. Michael Hudson (and, if memory serves, also Paul Craig Roberts) exactly predicted this would happen because that was the way it was structured. Period.

Two hundred and twenty-four pages to say the Treasury Secretary is a crook and much of this is being worked as yet another financial scam; certainly the PPIP is.

(Marathon sounds familiar, I'll have to research that one.)

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also the entire residential/mortgage/MBS stuff

Deserves it's own separate write up.

What we need on this PPIP and other exchanges is a very good flow chart.

I think this one said Geithner is a crook is about 12 pages in the front.

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One more item on SIGTARP

Sorry, forgot to mention that in the IG's report they stated that millions were lost when a bank has been lent TARP funds and then declares bankruptcy having zero net asset value.

Sounds like the smaller banks can't obtain those loans from the larger banks -- which effectively control that global financial virus of securitized "exotic" financial instruments they created (Goldman Sachs, JPMorgan Chase & Morgan Stanley, etc.) -- then fall accordingly.

Sure does sound like "last man standing" or a Ponzi-tontine scheme IMHO.

Don't mean to sound critical of IG Barofsky. He and Elizabeth Warren have done a magnificent job, all things considered, but don't have any power to render change.

Speaking of charts, Nomi Prins has an excellent series at (in conjunction with her recent book, It Takes a Pillage) this site as well as this other site with this web site the main one.

Also, a reference article regarding PPIP.

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Volcker over the weekend

There was a host of posts on Volcker's NYT's op-ed...

but I think one of the problems here is breaking down each issue by category. In other words, it's clear we need serious derivatives reform, but I think that needs to be separated out. It's complex enough, often mentioned on the sidelines and reforms are getting thrown under the bus. Volcker mentioned it briefly while his focus is on other topics (separating out Commercial from investment banking) and Yves Smith also states that one cannot simply create exchanges for all of these things because some are so specialized and rarely traded it won't work.

Short story long, if people need help on how to create graphs, extract graphs, data, charts from PDFs and post in their own blog piece and so on, I have a lot of info in the admin forum as well as the user guide but anyone can email me for help on how to do extract graphs, images, quotes, data and it's particularly nasty when the report is in PDF format.

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