Last week, Jake Tapper interviewed Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), who just this week released a report on the whopping potential federal obligation of the bailout and other programs the Obama administration is using to jumpstart the economy. This is a transcript of the podcast.

Jake:  Hello, and welcome to the ABC News shuffle.  I’m Jake Tapper in the White House booth and joining us today for a very special podcast is Neil Barofsky; he is the SIGTARP.  SIGTARP stands for “Special Inspector General for the Troubled Asset Relief Program”. That’s the hundred of billions of your tax dollars going to help shore up the financial system, and he is charge of making sure those dollars are spent wisely and with accountability.  So Mr. Barofsky, thank you for joining us.

Neil:  It’s a pleasure to be here.

Jake:  You, this week, testified that the bailout could reach far more than $700 billion, but actually $23.7 TRILLION dollars. How did you arrive at that figure?

Neil:  Well, basically what we did is, you know my oversight responsibility is over the TARP.  And the TARP, which started out to be a $787 billion program, it itself has expanded.  It’s now with other programs; the Federal Reserve, the FDIC, covers about $3 trillion.

Jake:  How did that happen?  How is it $3 trillion all of a sudden?

Neil:  Well, basically, what happened was is that the TARP money was the seed money for other programs.  So, for example, you have a program called the TALF, which is used to buy asset-backed securities and it’s a program that’s run by the Federal Reserve, but up to $100 billion of it is going to be TARP money and then the Federal Reserve is going to kick in the other $900 billion.  Similarly…a guarantee of Citibank’s assets, that’s about a $300 billion asset guarantee.  TARP money is about $5 billion, the rest is going to be chipped in by the FDIC or the Federal Reserve.  So programs like that, they sort of expanded our initial oversight of $700 billion so now we’re looking at, if everything goes as expected, to almost $3 trillion.

Jake:  And when you say “we”, how many people are in your office? 

Neil:  We have about 70 people on board right now; we’re building, with a target of about 160 by early next year.

Jake:  So, $23.7 trillion; I didn’t even know $23.7 trillion existed?

Neil:  They may not, so what we did, we thought it was necessary because so many of the financial institutions that participated in the TARP also participated in other, non-TARP programs. Things like guarantees of debt from the FDIC, or they borrow money from the Federal Reserve, so we thought it was important in bringing transparency to summarize all these programs.  And it is an alphabet soup of programs, every one has a different acronym and I think there’s a lot of confusion.  So what we decided to do in our most recent quarterly report is put them all together in one section, and we lay out approximately 50 different programs that have been announced by the federal government and what we thought would be helpful is to put down 3 numbers with respect to each program. One, how much money is currently oustanding under the program; two, what the high-water mark has been since the inception of the bailout; and then three, what is the total amount that the federal government has said they’re willing to commit to each program.  And at the end we add them all up, and that’s where the $23.7 trillion number comes from.  It’s what the federal government has said would be the maximum number for each of the apprximately 50 programs that we detail in our report if they were all subscribed to, if they were all maxed out, all at the same time.  Now, that doesn’t mean that that’s what the taxpayer’s currently on the hook for; we’ve never said that.  We just wanted to put it in perspective, of what all the different programs were and that is a very accurate number as to what the total commitment and support the federal government has pledged the financial system.

 

Jake:  Now, the Treasury Department called your figure of $23.7 trillion “inflated”.  Not only that, but they’ve questioned how you reached the numbers, your methodology; even, in a way, you’re credibility.  What’s your response to that?

Neil:  I think the Treasury Department ought to read the report before they make comments. At least the spokesperson’s office.  Because the Treasury itself did read the report before it went out. We vet our reports with the Treasury and the other federal agencies involved before they go out.  We take their comments, we incorporate their comments.  So it’s a little surprising, having had a chance to comment on the report before it went out and not using words like “inflated” or “misleading”, that now they’re saying that.  As far as their criticism of our methodology, our methodology is laid out in black and white in the report.  It’s actually kind of funny, some of their criticisms are actually pulled from our methodology, where we explain some of the limitations of this number.  We explain what I just explained to you right now, that we’re not saying that this is the total amount of money that’s outstanding right now, this was all laid out in black and white.  As far as the numbers being “inflated”, where do you think we got the numbers from?  We got it from the Treasury Department, we got it from the Federal Reserve.  We got it from their websites,from statements they’ve made to Congress.  If these numbers are inflated, it’s because they inflated them when they put them out in the public.  Not because of us. All we’ve done is gather the 50 programs, put them in one place, and told the American people what the government has said about the maximum of each of these programs.  You know, we joke, I don’t think the Treasury’s really criticizing our attempt to gather these all in one place, and I can’t think they can really criticize the fact that we’re saying what the maximum number is, so perhaps their criticism is that we dare to do math?

Jake:  The President, and I don’t know, I imagine you’re a non-partisan?  Are you a Democrat or a Republican?

Neil:  Well, it’s been reported and it’s true I’ve been a registered Democrat since I turned 18.

Jake:  Ok.  Is it fair to say that you voted for President Obama?

Neil:  It’s been in the press reports and on my thing, I actually contributed to the President’s campaign.

Jake:  Ok.  So you’re not rooting against President Obama and you’re not an opponent of his, one would say.  He promised unprecedented transparency and accountability.  From what you have seen, from your perch as Special Inspector General for TARP, is he abiding by that promise?

Neil:  I can’t really assess him individually but from the Treasury’s perspective, no. Treasury is not being transparent with respect to the TARP.  They failed to adopt some very basic recommendations we’ve had towards transparency and, frankly, this recent attack on my report is really, in many ways, an attack on basic transparency.  Of not wanting the American people in a certain way to see exactly what’s going on in their government, as included in our report. So I think no, they’ve not met, at least in the Treasury Department and at least with respect to this program, they’ve not met their claim that this was going to be “unprecedented transparency”.

Jake:  As somebody who contributed to President Obama, is this disappointing on any sort of personal or professional level?

Neil:  You know, you can’t really do the job that I have and let any sort of personal feelings or really any political feelings enter into your thought process.  The job we’re entrusted to do by the American people doesn’t have anything to do with Democrat, Republican, and left, right, or middle.  It’s just a question about bringing the truth to the surface, pushing for maximum transparency, providing the necessary oversight for these programs.  So I don’t really engage in those types of thoughts because they’re not really helpful.

Jake:  Robert Gibbs, the White House Press Secretary, was asked this week about your report and he said the TARP is, and the Treasury Department are, transparent and accountable, they do make reports, and one of the issues he said is that these dollars are fungible, that you can’t necessarily “trace”, his argument would be, you can’t necessarily trace a dollar as it goes from the Treasury Department to a bank and then out into the world. What would your response to that be?

Neil:  Well, this is what his response was when we made this recommendation last December and first we tried to convince Treasury that they were wrong, that although money is certainly fungible, banks can and should be required to report on their use of funds.  When Treasury refused, we took matters in our own hands and we sent out a voluntary survey and just asked the banks a simple question, “Hey, can you tell us how you use the money?”  And the response was overwhelming.  We put an audit report out this week with the results and the answer is yes, they CAN say what they did with the money.  And we put out the report and what did we see?  We saw the banks used it to shore up lending, some increased lending; a lot of them said they would have had to reduce lending significantly absent TARP funds, but that’s not all.  They explained, a certain percentage explained how they used it to make investments and others talked about how they used the funds to acquire other banks, or just kept it on their books as a cushion for future losses. So my response to the White House, and my response to Treasury is that you don’t believe what I have to say, if you don’t believe, really, a common sense approach to fungibility of money, look at the audit report.  Look at the responses from the individual banks who’ve told us how they’ve used that money.  This is a basic form of transparency and it’s going to be helpful, I think. Helpful to the administration to know what’s going on, how these banks are using the money.  It’s going to be helpful, also, to give the American people some  degree of comfort that somebody, their government, is going out and bringing this transparency, is looking to see how these funds are being used.  The money’s not being thrown into a black hole.

Jake:  You got into…I don’t know if “tiff” is the right word? But a disagreement with the Treasure Department a few months ago that came to light a few weeks ago about seeking some information.  I believe it was information about AIG.  What can you tell us about that and why do you think Treasury was pushing back on giving you the information you sought?

Neil:  I think the dispute that’s really percolating right now is a lot more about our independence and where we fit within the government.  I think that is a serious concern for us.  Ultimately, the question about the particular documents or having access to particular individuals, I think that’s long resolved.  Treasury has committed and they have, in fact, given us access to the necessary documents that we sought and they’ve given us access to the people that we need to speak to.  But what is still percolating is Treasury seeking an opinion from Department of Justice that we are subject to the supervision of the Secretary, and implicit in that is that the Secretary would have the ability to shut down an audit or an investigation.  And that’s obviously something that we’re very, very concerned about.  If the Secretary decided, let’s say, that this recent report that we put out, that he didn’t like the fact that we were going to be diclosing numbers of $23.7 trillion, that we’re going to sum up all these programs and put this information out there, if they had this authority, would he order us not to do it?  I don’t know the answer to the question but I don’t want to find out the answer to that question and I think that Congress made it very clear that they intended for us to be an independent agency and not subject to such supervision.  So we’ll see what happens.

Jake:  So when the Obama administration referred this to the Justice Department to have them weigh in, can you interpret that as anything other than them challenging your independence and then saying they want Secretary Geithner to be able to squash your reports if he sees fit?

Neil:  You know, I think to now we’ve provided to Congress and they’ve made it public, the back and forth as far as the written submissions to the Department of Justice, but it certainly seems that wanting to seek to have supervisory authority over us, there has to be some reason behind it.

Jake:  About that $23.7 trillion, I’m wondering, since the Congress only authorized $700 billion of it, and the last, as you know, $350 billion of it was somewhat under duress; in fact President Obama issued his first veto threat before he was even president for that $350 billion. Do you see the fact that the taxpayers are now theoretically on the hook for almost $24 trillion, even though the Congress only authorized $700 billion?  As a kind of circumvention of the system, of going behind closed doors, using what has been authorized to put taxpayers on the hook, even if the goal is ultimately a lofty one, to put taxpayers on the hook for much more than that, and if you DO see it that way, is that inappropriate?

Neil:  You know, I don’t think that we’ve seen anything illegal or contrary to law.

Jake:  No, no, I’m not saying that. Certainly I’m not impugning anybody’s…I’m not saying anybody broke the law, but do you think it’s a “legal way” of circumventing Congress’ appropriate role?

Neil:  I hate to get too far outside of my lane, outside of the world of the TARP, but I think it’s a really important question that you’re asking, and I think that when we get criticized for putting this information together in our report, this is our response as to why we did it.  Because these are important questions that people should be able to ask, and the only way you can ask these questions and raise these very significant issues about whether there is technically getting around rules is if the information is out there. And that’s why we do it, that’s why we try to bring transparency to this level, so the people can have this discussion and have this debate.

Jake:  Back to the survey you just did of the banks and how they are spending the TARP money; do you think that taxpayer funds were misused with TARP funds?

Neil:  That’s a hard question to answer because the conditions that were put on these funds when they went out were so minimal.  There’s nothing we see coming back from the survey that would be in any way a violation of their contract with Treasury, in that sense, that would be a misuse.  The other question is, though, whether from a policy perspective policy makers should or should not be pleased with the fact that TARP banks are using the funds to acquire other institutions or maintaining capital cushions; those are important policy questions and I hate to sound like a broken record on this but that’s why we think it’s so important, so that policy makers can make informed decisions about what’s going on, so they can decide if they want to put on certain conditions.  I’ve heard arguments on both sides that I think are pretty credible about why acquisitions, why acquiring other banks is a good use of TARP funds and I’ve heard arguments of why it wasn’t what it was intended to be and is not a good use.  But to have this debate you need to have the information and that’s why we keep pushing for this expanded transparency.

Jake:  Congress is holding a hearing today and you’ll be there, along with the Congressional oversight panel and a Treasury official to look at how the government is going to sell back stock warrants to banks that participated in the original bailout program and some analysts say the Treasury’s process for selling them is flawed; one analyst even said the Treasury could cost taxpayers $9 billion by not getting good enough deals on these warrants.  What’s your view?

Neil:  My view is, again, I think that it’s important that, and GAO actually made this recommendation and I agree with them wholeheartedly, that the process has got to be more transparent.  I thought the Congressional oversight panel in their recent report raised some very interesting and provocative issues regarding this.  We, ourselves, actually have an ongoing audit looking into the process, so I don’t want to jump ahead of the audit, until we’ve gathered the necessary facts, but there certainly is concern and increased transparency, being more upfront and laying out there exactly how the process works, again, I think will give a lot more coverage to what’s actually going on, so some of these accusations, and I’ve heard them, too, that they’re cutting sweetheart deals, that there’s some sort of backroom dealings; we can know the answers to those questions a lot better if more is put out into the public realm.

Jake:  One last question for you and then I know you have a busy day ahead of you.  Does this take a personal toll on you at all?  The reason I ask is because as a White House reporter doing a much…I don’t want to compare what I do to what you do, but asking questions of powerful people is not always comfortable, and certainly when you have a president with high personal approval ratings, even if his job approval ratings are going down a little, you can be put in a position where you’re made to feel like you’re being a pain just for being a pain’s sake and that what you’re doing has no worth, and asking questions is nothing more than being an irritant.  And I know I get this, all my colleagues here at the White House get this on occasion, but you are doing it much more so than any of us are.  What kind of personal toll does it take on you?

Neil:  It’s never fun to be personally attacked by the Department of Treasury.  I mean, obviously that’s not something you look forward to or enjoy, but on the flip-side, Jake, you know, I never thought that I would have an opportunity to serve my country in the way I’m now being given the option and every day, while there are certainly some very, very difficult days, I’m so thankful that I get an opportunity to really make a difference, to protect this historic outlay of American taxpayer dollars; to root out and seek those who are trying to steal or take advantage and to make these recommendations, to try to make them better, more resilient to fraud, to bring that transparency to the American people. I really am truly thankful I have this opportunity and it more than outweighs the unpleasantness that also comes with this job.

Jake:  All right, then.  Thank you so much for the that you do, we hope that we can continue to bring you back on the podcast here, check in with you, this money is, as you say, unprecedented and its important that people are keeping an eye out for it.  So thank you very much for joining us.

——

Key issues from the report:

Transparency in TARP Programs

Although Treasury has taken some steps towards improving transparency in TARP programs, it has repeatedly failed to adopt recommendations that SIGTARP believes are essential to providing basic transparency and fulfill Treasury’s stated commitment to implement TARP “with the highest degree of accountability and transparency possible.” With one new recommendation made in this report, there are at least four such unadopted recommendations:

Use of Funds Generally:   One of SIGTARP’s first recommendations was that Treasury require all TARP recipients to report on the actual use of TARP funds.  Other than in a few agreements (with Citigroup, Bank of America, and AIG), Treasury has declined to adopt this recommendation, calling any such reporting “meaningless” in light of the inherent fungibility of money. SIGTARP continues to believe that banks can provide meaningful information about what they are doing with TARP funds — in particular what activities they would not have been able to do but for the infusion of TARP funds. That belief has been supported by SIGTARP’s first audit, in which nearly all banks were able to provide such information.

Valuation of the TARP Portfolio:   SIGTARP has recommended that Treasury begin reporting on the values of its TARP portfolio so that taxpayers can get regular updates on the financial performance of their TARP investments.  Notwithstanding that Treasury has now retained asset managers and is receiving such valuation data on a monthly basis, Treasury has not committed to providing such information except on the statutorily required annual basis.

Disclosure of TALF Borrowers Upon Surrender of Collateral:   In TALF, the loans are non-recourse, that is, the lender (Federal Reserve Bank of New York) will have no recourse against the borrower beyond taking possession of the posted collateral (consisting of asset-backed securities (“ABS”)). Under the program, should such a collateral surrender occur, TARP funds will be used to purchase the surrendered collateral. In light of this use of TARP funds, SIGTARP has recommended that Treasury and the Federal Reserve disclose the identity of any TALF borrowers that fail to repay the TALF loan and must surrender the ABS collateral.

Regular Disclosure of PPIF Activity, Holdings, and Valuation:   In the PPIP Legacy Securities Program, the taxpayer will be providing a substantial portion of the funds (contributing both equity and lending) that will be used to purchase toxic assets in the Public-Private Investment Funds (“PPIFs”).  SIGTARP is recommending that all trading activity, holdings, and valuations of assets of the PPIFs be disclosed on a timely basis. Not only should this disclosure be required as a matter of basic transparency in light of the billions of taxpayer dollars at stake, but such disclosure would also serve well one of Treasury’s stated reasons for the program in the first instance: the promotion of “price discovery” in the illiquid market for MBS.  Treasury has indicated that it will not require such disclosure.

Treasury has declined to adopt one of SIGTARP’s most fundamental recommendations — that Treasury should require imposition of an informational barrier or “wall” between the PPIF fund managers making investment decisions on behalf of the PPIF and those employees of the fund management company who manage non-PPIF funds. Treasury has decided not to impose such a wall in this instance, despite the fact that such walls have been imposed upon asset managers in similar contexts in other Government bailout-related programs, including by Treasury itself in other TARP-related activities, and despite the fact that three of the nine PPIF managers already must abide by similar walls in their work for those other programs.

April Quarterly Report Recommendations

In the April Quarterly Report, SIGTARP observed that many aspects of PPIP (Public-Private Investment Program) could make it inherently vulnerable to fraud, waste, and abuse, identifying four areas of particular vulnerability:

Conflicts of Interest:   PPIF managers might have a powerful incentive to make investment decisions that benefit themselves at the expense of the taxpayer. By their nature and design, including the availability of significant leverage, the PPIF transactions in these frozen markets will have a signifi cant impact on how any particular asset is priced in the market. As a result, the increase in the price of such an asset will greatly benefi t anyone who already owns or manages the same asset, potentially including the PPIF manager who is making the investment decisions.

Collusion:   A closely related vulnerability is that PPIF managers might be persuaded, through kickbacks, quid pro quo transactions, or other collusive arrangements, to manage the PPIFs not for the benefit of the PPIF (and taxpayers), but rather for the benefit of themselves and their collusive partners. The significant non-recourse, Government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby the taxpayer may be exposed to a significant loss while others profit.

Money Laundering:   Because of the significant leverage available and the inherent imprimatur of legitimacy associated with PPIP and TALF, these programs present an ideal opportunity to money-laundering organizations, which are continually looking for opportunities to make their illicit proceeds appear to be legitimate, thereby “laundering” those proceeds.

Interaction with TALF:   In announcing the details of PPIP, Treasury has indicated that PPIFs under the Legacy Securities Program could, in turn, use the leveraged PPIF funds to purchase legacy MBS through TALF, thereby greatly increasing Government exposure to losses with no corresponding increase of potential profits. This leverage upon leverage would magnify the incentives for conflicts of interest and collusion and could severely undermine the validity of the methodology that the Federal Reserve has used to build the haircut percentages in TALF. 

To address these vulnerabilities, SIGTARP made a series of recommendations in the April Quarterly Report. In summary form, SIGTARP recommended the following:

Treasury should impose strict conflicts-of-interest rules upon PPIF managers that specifically address whether and to what extent the managers can (i) invest PPIF funds in legacy assets that they hold or manage on behalf of themselves or their clients or (ii) conduct PPIF transactions with entities in which they have invested on behalf of themselves or others.

Treasury should mandate transparency with respect to the participation and management of PPIFs, including disclosure to Treasury of the beneficial owners of all of the private equity stakes in the PPIFs, public disclosure of all transactions
undertaken in them, and reporting to Treasury on any and all holdings and transactions in the same types of legacy assets on their own behalf or on behalf of their clients.

Treasury should require PPIF managers to provide PPIF equity stakeholders (including TARP) “most-favored-nations clauses,” requiring that the fund managers treat the PPIFs on at least as favorable terms as given to all other parties with whom they deal and acknowledge that they owe the PPIF investors — both the private investors and TARP — a fiduciary duty with respect to the management of the PPIFs.

Treasury should require that all PPIF managers have stringent investor-screening procedures, including comprehensive “Know Your Customer” requirements at least as rigorous as that of a commercial bank or retail brokerage operation, and require that the identities of all of the beneficial owners of the private interests in the fund be disclosed to Treasury so that Treasury can do appropriate diligence to ensure that investors in the funds are legitimate.

Treasury should not allow Legacy Securities PPIFs to invest in TALF unless significant mitigating measures are included to address the increased dangers presented by the interaction, such as prohibiting TARP lending if the PPIF invests through TALF or proportionately increasing haircuts for PPIFs that do so.

 

This is how our federal government operates, folks.  “A few good men” standing up against above-it-all know-it-alls who think that we, the people, are too stupid to understand how they do what we’ve charged them with doing for us.  “Transparency”, “accountability”, and even “bipartisanship” are words that mean something.  Kudos to people like Neil Barofsky and Gerald Walpin, who fight for them.