TARP datapoint of the day

By Felix Salmon
April 21, 2009

The SIGTARP’s quarterly report to Congress (that’s Neil Barofsky, for those keeping track at home) runs to 250 densely-written pages. The news coverage is concentrating, rightly, on the fact that Barofsky is already investigating no fewer than 20 fraud cases associated with TARP funds, and also the rather alarming fact that PPIP fund managers might actually be forced to accept compensation caps after all. (If that does happen, you can be sure that Pimco, BlackRock, and the rest will immediately pull out of the scheme, leaving it doomed to failure.)

But there’s lots more where that came from. Not only is Barofsky worried about PPIP participants gaming the system, he’s also worried that the whole thing could easily become a front for money launderers:

Because of the significant leveraging available and the inherent imprimatur of legitimacy associated with PPIP and TALF, these programs present an ideal opportunity to money-laundering organizations. If a criminal organization can successfully invest $10 million of illicit proceeds into a PPIF, not only does the organiza- tion enjoy the possibility of profi ting through the Government-backed leverage, but any eventual distributions from the PPIF are successfully laundered because they appear to be PPIF investment gains rather than drug, prostitution, or illegal gambling proceeds.

The good news is that Congress has people like Barofsky and Elizabeth Warren’s Congressional Oversight Panel staffed up and keeping a close eye on Treasury’s bright ideas. The bad news is that it’s far from clear that Treasury has either the staffing or the inclination to pay much attention, let alone to implement their recommendations. Maybe once Treasury’s political appointeees are in place it will be a bit more helpfully responsive to (and grateful for) these extremely good reports.

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Comments
3 comments so far

I don’t get the money laundering angle. Just buying an asset with dirty money and then selling it doesn’t conceal the source of the funds. If I put $10 of dirty money in the PPIP and then get (say) $12 out, there’s still an audit trail – I have $2 of legitimate investment gain, but I still can’t explain where the $10 came from.

On the other hand, if I could (plausibly but falsely) say that I invested only $1, then I still end up with $12, but it would look like $11 was investment gain. I still have $1 to explain, but I’ve laundered the other $9. But that only works if there’s no record of the investment – PPIP investments won’t be made with bags of cash.

What am I missing?

Posted by cjh | Report as abusive

“Saturday, October 4, 2008
Problems With The Bailout
From the NY Times article “For Treasury Dept., Now Comes Hard Part of Bailout”, I see the following problems with the plan as envisaged:

1) Possible conflicts of interest with the administrators of the plan.

2) Overpaying for assets.

3) Doesn’t do enough to ease credit markets or makes it worse.

4) When the assets are eventually sold, there is a huge and unanticipated loss.

5) Lobbying by hedge funds, etc.

Are there others? ”

These are inherent problems in any government/private sector hybrid plan. The recent past has shown this. You cannot rid the arrangement of them. All that you can do is get people to try and supervise the process closely. These issues also turned up in the Fed’s MBS purchases program.

“Conflicts of Interest
The first area of vulnerability is that the private parties managing the PPIFs might
have a powerful incentive to make investment decisions that benefit themselves at
the expense of the taxpayer”

“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.”

Both of these I call Conflict Of Interest. They are inherent in hybrids.

“Money Laundering
National and international criminal organizations — from organized crime, to narcotics
traffickers, to large-scale fraud operations — are continually looking for opportunities
to make their illicit proceeds appear to be legitimate, thereby “laundering”
those proceeds.”

And? This applies to any financial business in the US.

The solutions:

“Treasury should impose strict conflict-of-interest rules upon PPIF managers across all programs…

Treasury should mandate transparency with respect to the participation and management of PPIFs.

Treasury should require PPIF managers to provide PPIF equity stakeholders (including TARP) “most-favored nations clauses,” requiring that the fund
managers treat the PPIFs (and the taxpayers backing the PPIFs) on at least as favorable terms as given to all other parties with whom they deal.

In order to prevent money laundering and the participation of actors prone to abusing the system, Treasury should require that all PPIF fund managers have
stringent investor-screening procedures, including comprehensive “Know Your Customer” requirements”

In other words, watch out. Come on. If you don’t like the plan, it’s riddled with demons. These same kinds of problems turn up in all areas of government largess. Fraud, Collusion, Negligence, and Fiduciary Mismanagement, are essential areas of worry in financial concerns. Period.

If you don’t trust the FDIC and Treasury and the Fed now, why would you trust them to do anything right, including seizing banks?

Amazingly, congress seems to be the only part of our government displaying any sense of responsibility. With the Feds and Treasury handing out free money hand of fist, congress has used its powers to impose compensation limits as a test to see if the companies receiving the payouts are as desperate as they claim. Congress called the bankers bluff. And since the compensation limits were put in place, no one seems to think their company is in the dire straits they claimed just a few months ago.

Posted by Tom Cole | Report as abusive
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