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« Thoughts On A $2 Trillion Annual Deficit And Collective Tea-Bagging | Main | Insomnia Cure: Listen To Larry Summers Talk About The Economy »

TARP Inspector Neil Barofsky Smells Bank Fraud 

Treasury Special Inspector General Neil Barofsky wants to know if banks committed fraud in order to qualify for TARP.  “I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case,” said Mr Barofsky.

Barofsky spoke recently with the Financial Times and gave a glimpse of one of his various investigations.

From the FT:

Holed up in a corner of the Treasury with cardboard boxes stacked against a wall, Neil Barofsky is trying to keep track of $3,000bn of taxpayers’ money.

As a New York prosecutor, the 38-year-old took on drug dealers and white-collar fraudsters. His new role is making sure money given to Wall Street and the wider financial sector at the behest of the White House is not misused.

The job of special inspector-general for the troubled asset relief programme – Tarp – is as big as the title is unwieldy. Moreover, Mr Barofsky’s reputation for determination and a strong work ethic belies the fact that it is impossible to keep every Tarp dollar under observation.

Fighting fraud after a financial mess partly created by too much leverage, the strategy of the so-called “Tarp cop” is to leverage his own position – using investigations, public comments and, in the future, criminal charges to deter more fraudsters than he could hope to catch.

“Ultimately, if all we did was sit back, wait for fraud and then try to address it there would be a tsunami of fraud,” he said. The most drastic weapon is clearly primed for use: “Indictments can serve as great deterrents.”

Mr Barofsky said he was investigating whether banks had “cooked their books” to get some of the $700bn (€540bn, £475bn) in Tarp fund bailout money. He declined to go into specifics but said possible criminal offences included “securities fraud, wire fraud, false statement”.

FT 2:

The official policing the $700bn Tarp fund says he is investigating whether banks have “cooked their books” to secure bail-out money.

Neil Barofsky, special inspector-general for the troubled asset relief programme, told the Financial Times he was seeking evidence of wrongdoing on the part of banks receiving help from the fund, which was designed to ease credit conditions and support distressed industries.

“I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case,” said Mr Barofsky, who has been dubbed the “Tarp cop”.

Just how banks value mortgage-backed securities and other assets on their books has been an issue of intense debate as the financial crisis has unfolded.

Large banks from Citigroup to Goldman Sachs and hundreds of regional banks have taken billions from Tarp to rebuild balance sheets weakened by the financial crisis.

But institutions applying for Tarp money had to show they were fundamentally sound, potentially prompting them to mis-state their assets and liabilities.

Mr Barofsky also said the Treasury’s expanded term asset-backed securities loan facility (Talf) was ripe for fraud.

The former New York prosecutor said the decision to expand the Talf to encourage investors to buy distressed, or “legacy”, assets from banks could put public money behind investments that were backed by fraudulent mortgages.

“One of our strongest recommendations of the last report was do not expand the Talf to buying legacy assets. If its structure is not changed considerably it’s very, very dangerous,” he said.

“We know the triple A rating [ascribed to the securities by credit rating agencies] was a sham. We could be buying securities that are backed with assets that we know were likely riddled with fraud.”

Mr Barofsky revealed at a Congressional hearing earlier this month that he was involved with “probably more than a dozen” investigations into possible wrongdoing and fraud. He told the FT that potential fraudsters would pay attention when his team began seeking indictments. “Indictments can serve as great deterrents,” he said.

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Reader Comments (6)

I hate Bank of America and CIti everytime I pass by the branches I want to puke!
Apr 16, 2009 at 12:35 PM | Unregistered CommenterSell Short
Bank of America (BAC) will need to find more capital following its stress test, says Credit Suisse analyst Moshe Orenbuch.

Apr 16, 2009 at 12:35 PM | Registered CommenterDailyBail
By Sarah O’Connor in Washington and Greg Farrell in New York

The Securities and Exchange Commission is reviewing whether Bank of America broke the law by not telling shareholders about Merrill Lynch’s plan to pay out $3.6bn in bonuses before they voted for a government-backed merger of the two banks.

Merrill paid the bonuses in December, days before it was acquired by BofA and a month before bonuses were normally dispensed.

BofA has said it was not required to tell its shareholders about the bonuses.

But Mary Schapiro, chairman of the SEC, wrote in a letter to a Democratic congressman that the regulator was “carefully reviewing the Bank of America disclosure” and had not yet expressed a view on whether the bonus plan should have been revealed.

Federal securities law prohibits institutions from “omitting material facts” in connection to the purchase or sale of securities.

The incident has stirred controversy because Merrill was racking up record losses of $27.5bn for the year when it paid the bonuses, and Ken Lewis, BofA chief executive, eventually asked for $20bn in taxpayers’ money to complete the takeover.

The pay-out, revealed by the Financial Times this year, has prompted an investigation by Dennis Kucinich, chairman of an investigative House sub-committee, shareholder lawsuits and an investigation by Andrew Cuomo, New York’s attorney-general.

Mr Kucinich wrote to the SEC last week to ask whether BofA should have told its shareholders about the bonuses. He has also demanded that the Treasury and Federal Reserve reveal what they knew about the plan, given their close involvement in the merger discussions.

In response to Mr Kucinich, Ms Schapiro wrote: “Where the SEC believes that there has been an omission of material facts necessary in order to make the statements not misleading, we will carry out our enforcement responsibilities with vigour and vigilance.”

If the SEC decided that BofA was derelict in not informing its shareholders of the bonuses before they voted for the takeover on December 5, the bank would be exposed to civil penalties.

It would also add fuel to Mr Cuomo’s investigation, which has expanded beyond the bonuses and into the question of whether BofA treated its shareholders fairly.

BofA declined to comment.

Apr 16, 2009 at 12:38 PM | Registered CommenterDailyBail
Foregone Conclusion.....FRAUD WAS COMMITTED! Now move along....nothing more to see here.
Apr 16, 2009 at 5:39 PM | Unregistered CommenterAin't Bullshittin'

Keep posting on Neil Barofsky. I could still change my mind a join the fan club. However, I still have my doubts. He could be just as much of a tool the thwart good governance at good banks than his grandiose claims [sarcasm].

Probably more than a dozen investigations into possible wrongdoing and fraud? Really, those exact words?

PROBABLY? Barofsky is uncertain of the specific number of investigations his own department is conducting? Well that inspires confidence [sarcasm]. If he can't even keep track of the "more than a dozen" investigations, why should we expect him to keep track of $3tn? You have to learn to walk before you can run Neil. Practice counting your fingers and toes first.

MORE THAN A DOZEN? Is that all? Wow! At this pace Barofsky's team will be doing more than the SEC, which isn't saying much. I wonder if Barofsky's staff helped write the thirteen letters (I just made that specific number up, but it fits) or if they are too busy going room to room at the White House and House/Senate brothels for conjugal visits.

INVESTIGATIONS? Barofsky uses the term loosely here as any elementary school child can write to all of the TARP reicipeints to ask how the funds were spent. Heck, it would make a great second grade pen-pall/writing project for a special needs class. Doesn't mean they are compelled to respond or be truthful if responding. Why not just use subpoena power? It is compelling and legally binding with any discovery produced. I call BS. Spitzer would have subpoenaed.

INTO POSSIBLE WRONGDOING AND FRAUD? Like Ain't Bullshittin' already said, and for the avoidance of doubt, wrongdoing and fraud are a foregone conclusion. The only remaining questions are: which actors at which corporations for how much? It is probable that the majority if not all of the financial institutions have committed wrongdoing and fraud to some degree.

I would include the Fed, Treasury, FDIC, FASB, SEC, CFTC (but not under Brooksley Born - at least she tried), NASD, FINRA, OCC, OTS, FHFB/FHFA, Moody's, Fitch, S&P, and dozens of others too numerous to name with the institutions guilty of wrongdoing and fraud. But that is another story for another day.


"The Federal Home Loan Banks face potentially “substantial” losses on mortgage bonds, and in a worst-case scenario only four of the 12 would remain above regulatory capital minimums, Moody’s Investors Service said."

I know it's a paradox that I just cited Moody's after vilifying them, but what other authority do you want me to use?

Once I see a couple hundred indictments, followed by convictions and orange jumpsuits by the busload to Gitmo, then maybe I'll consider revising my thoughts on Barofsky. And yes, I mean transportation by unmodified Wackenhut G4S buses. Hey, if they sink, they sink. They could implement a wet foot, dry foot policy. If the future inmates make it to Gitmo with dry feet, they have the options of a firing squad or continuous waterboarding. If wet feet, well maybe not so lucky. Consider the tax dollars saved and reliable intelligence gathered [sarcasm]!
Apr 17, 2009 at 2:49 AM | Unregistered Commenterspideydouble

Dennis Kucinich and Andrew Cuomo = decent men IMHO

Mary Schapiro = corporate whore

“Where the SEC believes that there has been an omission of material facts necessary in order to make the statements not misleading, we will carry out our enforcement responsibilities with vigour and vigilance.”

Wouldn't an omission of material facts make statements misleading rather than the obverse as stated? Did Mary "the Whore" Schapiro just admit to facilitating fraud? One can only expect so much from a NASD/FINRA shill. Another good pick Obama [sarcasm].

Enforcement responsibilities with vigour and vigilance? Harry Markopoulos would beg to differ you literal douche.
Apr 17, 2009 at 4:02 AM | Unregistered Commenterspideydouble

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