Bailout Ripe For Fraud

April 22, 2009|By JAY HANCOCK | JAY HANCOCK,jay.hancock@baltsun.com

When economic historians look back on the great age of financial fraud, they will marvel at Enron, WorldCom, Bernard Madoff, "liar-loan" mortgages and the rest. But what might really blow their minds are the shenanigans presided over by the U.S. government in the Great Bailout of 2008-2009.

After all, the WorldCom stakes were only a few billion dollars. The Treasury Department/Federal Reserve bailout is $3 trillion, "roughly equivalent to last year's entire federal budget," wrote Neil M. Barofsky, the poor guy who has to keep track of it all.

Barofsky is the special inspector general for the Troubled Asset Relief Program, or TARP, the formal name for Treasury's boondoggle. He and his staff are supposed to keep thieves from dipping ladles, buckets or industrial pumps into the TARP ocean.

Good luck. On Tuesday, they published their second report on how things are going.

"Federal law enforcement is ready ... to detect, investigate, and bring to justice any who would try to steal from this important program," they said of one aspect of the rescue.

Unfortunately, history and Barofsky's own report furnish evidence that the Feds may fall short. His office has gotten 200 tips on potential ripoffs and initiated 20 criminal investigations, but it's still building its staff. Much of the Fed bailout (also subject to Barofsky's oversight) hasn't even been disbursed yet.

The ways to steal from a $3 trillion government program are as numerous as digits in the U.S. national debt, according to the report.

Companies hired to manage toxic assets could manipulate the price of securities in which they own independent stakes. Somebody running a bailout fund could overpay for junk mortgages owned by a pal.

Banks could overprice securities they use for collateral to get government loans. Or they could overprice assets they sell to the Public Private Investment Partnership, a consortium of government and investors. Money launderers must be drooling.

Having spent years fraudulently inflating their incomes to get big mortgages, unscrupulous homeowners now have an incentive to understate what they make so they'll qualify for a government-sponsored modification that lowers principal or interest. Mortgage companies could charge loan-modification fees to homeowners even though the government isn't charging anything.

The fact that Barofsky's own employer won't make public details of where the bailout billions are going is maybe the least encouraging evidence of all.

"With the exception of Citigroup and Bank of America, Treasury has refused to seek further details on TARP recipients use of funds," said his report. "In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public be told how those funds have been used by TARP recipients."

(Treasury spokesmen have told news organizations that the department is beefing up "internal controls" over the funds.)

Barofsky told ABC News on Tuesday that 10 percent of the cost of a typical government program is lost to fraud. That means $300 billion could get stolen from the bailout.

Given what's at stake and the challenges faced by Barofsky and his staff, the Obama administration should try the best fraud preventive of all: sunshine, fresh air and disclosure of how the bailout money is being used.

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