The U.S. taxpayer can breathe more easily, as the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) is going after those who perpetrated fraud under the Troubled Asset Relief Program (TARP), according to the SIGTARP quarterly report to Congress released on Oct. 27.
The numbers of those caught with their hands in the till is increasing. During this quarter alone, 13 people were facing criminal charges and three more were convicted. So far, 51 people have been investigated, and court proceedings have been initiated; 28 people were pronounced guilty, and 19 received prison terms.
SIGTARP also initiated civil charges against a number of individuals. To date, civil charges have been filed against 37 people and 18 firms.
Just to name a few, Ebrahim Shabudin and Thomas Yu, former United Commercial Bank executives, were charged with fraud against the U.S. taxpayer, resulting in an unrecoverable loss of over $298 million in TARP funds. Additionally, as the bank went bankrupt, the U.S. deposit insurance fund had to pay out $2.5 billion to insured depositors. Both could receive a 15-year prison term and be fined up to $250,000.
“Shabudin and Yu are the first senior executives of a TARP bank charged in connection with a scheme to defraud investors, which included the Treasury, and by extension the American taxpayer,” said Christy L. Romero, acting special inspector general for TARP, in an October press release.
Letting Banks Off the Hook Prematurely
“Federal banking regulators relaxed repayment criteria for banks only weeks after the criteria were established, bowing at least in part to a desire to ramp back the Government’s stake in financial institutions and to pressure by institutions seeking a swift TARP exit,” according to the quarterly SIGTARP report, released Oct. 27.
The report accused Treasury of caving in to lending institutions that wanted to limit the government’s control over executive pay and because they were afraid of being humiliated by having accepted taxpayer funds.
Federal regulators and Treasury, instead of fulfilling their fiduciary responsibility to the U.S. taxpayer, eased the stress test criteria for financial institutions that received TARP funds, allowing the banks to repay earlier than originally planned, without having fulfilled the long-term goal of improving the banks’ health.
To improve a bank’s net worth, regulators advised that the criteria for exiting the TARP program would call for the handing over of $2 of TARP Funds before being allowed to issue $1 in common stock. This criterion was lowered shortly after the criteria was established, and the ratio or repayment to issuing stocks was lowered to 1:1 for Bank of America, Citigroup, PNC, and Wells Fargo.
“SIGTARP found that Treasury encouraged TARP banks to expedite repayment, opening Treasury to criticism that it put accelerating TARP repayment ahead of ensuring that institutions exiting TARP were sufficiently strong to do so safely,” according to the SIGTARP quarterly report.
SIGTARP called the process incompatible with the intent of the program, which in short, is the goal of establishing a well-capitalized banking sector. The government’s Office of the Comptroller, which is in charge of the U.S. Government Accountability Office and has the responsibility to keep the government, including Congress, honest, didn’t agree with most of SIGTARP’s conclusions, with the exception being the need for creating a strong and resilient banking sector.
Some bank financial experts accused Treasury through media articles of being in league with the banks instead of fulfilling their fiduciary responsibility to the taxpayer.
“The official releases on the stress test results and process weren’t honest and complete. … How many other winks and nods were there between the Treasury and banks that weren’t leaked to the press?” accused a September article on the website naked capitalism.
The article continues to say that in the near future, the public will become privy to “how well Treasury’s secret pact with the banks worked. And unfortunately, if they are proven to have gambled and lost, no one in the officialdom or at the banks will suffer all that much.”
Community Banks Trapped in TARP
“Smaller and medium size banks are not exiting TARP with the same speed as the larger banks, with approximately 400 still in TARP,” according to the SIGTARP report.
SIGTARP points fingers at Treasury for not developing programs that would help smaller banks exit the TARP program, with the exception of a Small Business Lending Fund (SBLF), established by Treasury.
Treasury allowed 137 smaller-sized TARP banks to switch to the SBLF, with about 320 banks waiting to be accepted into the program.
“Treasury should commit to prudent stewardship of its TARP investments and take immediate action to ensure that as many banks as possible repay taxpayers and to prepare to deal with the banks that cannot,” SIGTARP advises.
Treasury Negligent in Its Fiduciary Duties
Treasury hired five law firms to handle legal matters arising out of the TARP fund program. The firms charged over $27 million for services rendered.
In reviewing the billing procedures, SIGTARP found slipshod accounting for services in 89 percent of invoices, totaling $9.1 million.
Treasury was remiss in reviewing invoices and didn’t question certain charges, which may or may not have been legitimate.
“The bills that SIGTARP reviewed were substandard by industry standards and so there was no way for Treasury to know whether they were reasonable,” according to the SIGTARP report.
Out of 85 improvement recommendations from SIGTARP, Treasury refused to comply with 22 and implemented 10 only partially.
To stress its responsibility, SIGTARP stated in the report, “One of the critical responsibilities of the Office of the Special Inspector General for the Troubled Asset Relief Program (”SIGTARP“) is to provide recommendations to the U.S. Department of the Treasury (”Treasury“) and other Federal agencies managing the Troubled Asset Relief Program (”TARP“) to facilitate transparency and effective oversight and to prevent fraud, waste, and abuse.”
Tracking the TARP Funds
As of Oct. 3, 2010, no more TARP funds could be committed, however funds already committed could be distributed. The original amount of $700 billion was reduced to $475 billion.
SIGTARP stated in its report that as of Oct. 3, 2010, $474.8 billion had been committed and as of Sept. 30, 2011, $122 billion in TARP funds, already reduced by losses and write-offs, had not been repaid.
The majority of TARP fund recipients, a total of 266 firms, repaid the principal and/or repurchased the stock held by the Treasury.
The taxpayer was compensated for propping up problem banks with $17.3 billion in dividends, $2 billion in interest, as well as other income, resulting in a total of $39.8 billion in earnings.
In March 2009, the Congressional Budget Office (CBO) estimated the cost of TARP to come to about $356 billon, while the Office of Management and Budget (OMB) suggested a cost of $341 billion in August of that year. By February 2011, OMB had lowered its estimate to $48 billion, according to its budget proposal. CBO announced on March 3, 2011, that TARP would carry a $19 billion cost.
To make it more interesting, Treasury announced on June 30, 2011, that the TARP program would cost the taxpayer $53.2 billion, according to its report to Congress.
“The highest losses from TARP are expected to come from housing programs and from assistance to AIG and the automotive industry. A notable difference exists between CBO’s estimate for TARP housing programs, which assumes that only $13 billion of the $46 billion obligated will be spent, and Treasury’s and OMB’s assertions that all of the obligated funds will be expended,” according to the SIGTARP report.
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