U.S. Rescue May Reach $23.7 Trillion, Barofsky Says
Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.
Other diarists have commented on that already. So let's instead read the full report.
Treasury has indicated, however, that it will not adopt SIGTARP’s recommendation
that all TARP recipients be required to do the following:
• account for the use of TARP funds
• set up internal controls to comply with such accounting
• report periodically to Treasury on the results, with appropriate sworn certifications
Sure this tragedy was started by former President Bush but imagine, right now, a country wide Katrina with news blacked out except for one poorly informed quarterly report!
Although other bodies have provided some valuation analysis (the Congressional Oversight Panel has estimated that Treasury overpaid by $68 billion in its acquisitions of assets and the Congressional Budget Office estimated that taxpayer loss in TARP will ultimately be as high as $356 billion), SIGTARP believes that Treasury should provide its own estimates on the value of the preferred shares, warrants of common stock, notes,
and other instruments that it now holds as a result of TARP.
As SIGTARP noted in the Initial Report, there are three particular aspects of asset management that Treasury needs to address:
• Treasury should formalize its going-forward valuation methodology and begin
providing values of the TARP investments to the public.
• Treasury should develop an overall investment strategy to address the vast portfolio of securities that it holds.
• Treasury should decide whether it has any intention of exercising warrants in
order to hold the common stock. SIGTARP asked Treasury what its intentions
are on this point in January 2009, and it has not yet indicated its strategy on this issue.
In light of the previous discussion, SIGTARP thus recommends that:
• Treasury and the Federal Reserve should provide to SIGTARP, for public disclosure in SIGTARP’s quarterly reports, the identity of the borrowers who surrender collateral in TALF.
• Treasury should dispense with rating agency determinations and require a
security-by-security screening for each legacy RMBS. Treasury should refuse to
participate if the program is not designed so that RMBS, whether new or legacy,
will be rejected as collateral if the loans backing particular RMBS do not meet
certain baseline underwriting criteria or are in categories that have been proven to be riddled with fraud, including certain undocumented subprime residential mortgages (i.e., "liar loans").
• Treasury should require significantly higher haircuts for all MBS, with particularly high haircuts for legacy RMBS, or other equally effective mitigation efforts.
• Treasury should require additional anti-fraud and credit protection provisions, specific to all MBS, before participating in an expanded TALF, including minimum underwriting standards and other fraud prevention measures.
• Treasury should design a robust compliance protocol, with complete access
rights for itself, SIGTARP, and other relevant oversight bodies, to all TALF
transaction participants.
In announcing the details of PPIP, Treasury has indicated that PPIFs under the Legacy Securities Program could, in turn, use the leveraged PPIF funds (two-thirds of which will likely be taxpayer money) to purchase legacy MBS through TALF, greatly increasing taxpayer exposure to losses with no corresponding increase of potential profits. By way of example, a PPIF manager could raise $500 million of private equity, which would be matched with $500 million of TARP funds, and a loan of an additional $500 million from TARP funds (according to the term sheet, loans will only be given up to 50% of the total equity if investments will be made through TALF rather than 100% otherwise). The PPIF could then take the total $1.5 billion, bring it to the TALF window, and effectively use that money as the "haircut" amount in a TALF financing to purchase legacy RMBS. Assuming that the haircut will be 20% (larger than any existing haircut), the PPIF will be able to receive a non-recourse loan from FRBNY for an additional $6 billion, enabling the PPIF to purchase $7.5 billion in legacy RMBS. The private investors would thus enjoy 50% of the profits from this enhanced buying power, but only be exposed to less than 7% of the total losses if the fund were wiped out.
Treasury, you're doing a heck of a job. Not only are you sucking out all of the money America could have used for real change but simultaneously proving that the government cannot be trusted and so no new real, as opposed to financial, programs should be launched. Now you might be thinking the Treasury hasn't had the time or the money to do the oversight so I leave you with this nugget
Treasury stated that it had incurred $13.3 million in TARP-related administrative expenditures through March 31, 2009.
Assuming its keeping at that administrative burn rate you could hire a whole army of accountants. Or, God forbid, employ some United States programmers (full disclosure I am one) to write some sunlight software. Our only idea here seems to be force feeding the fox so many hens that he dies of indigestion.