In the first major disclosure of corruption and fraud in the $750 billion federal bailout program, investigators said Monday that they have opened 20 criminal probes into possible securities fraud, tax law violations, insider trading and mortgage modification fraud.
Neal Barofsky, the special inspector general overseeing the bailout program, said in an interview that the investigations are just the first wave of cases by his office. He expects the first criminal indictments to occur later this year.
The disclosures reinforce the worst fears that the hastily designed and rapidly changing bailout program run by the Treasury Department and Federal Reserve is going to carry a heavy price of fraud against taxpayers - even as questions grow about whether it can accomplish its goal of stabilizing the nation's financial system.
Ultimately, fraud could run into the tens of billions of dollars, according to Barofsky. The risk of those kinds of criminal activities is growing as the bailout becomes bigger and more complicated.
A 247-page report released by Barofsky's office said that the very character of the bailout program makes it "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering." In a series of recommendations, Barofsky asked the Treasury Department for greater transparency and better protections against fraud.
Among the toughest recommendation is for the Treasury to abandon its current proposed method of buying certain toxic assets from banks and investors.
In response to those recommendations, the Treasury Department's bailout chief Neel Kashkari said in a letter dated April 14 that the intent of the program is to help stabilize the nation's financial system, but that the recommendations would be "considered" and that his staff would contact the inspector general's office for more detailed discussions.
The Barofsky report said little about who is under investigation and how the fraudulent schemes work. But Barofsky said that in some cases the fraud involved complex accounting issues that could take a long time to fully investigate.
"You don't need an entirely corrupt institution to pull one of these schemes off," he said. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off collusion or a kickback scheme."
So far, the office has not executed any publicly known searches or subpoenas.
The report lays out just how complicated the program has become. What started out last October as a single-purpose $750 billion effort to buy toxic securities has morphed into 12 separate programs that covers up to $3 trillion in direct spending, loans and loan guarantees.
The program has now committed an amount equal to the entire annual federal budget.