Uncle Sam's New Piggy Bank: Confronting Crisis through TARP and Federal Oversight

• Author: Sandra Seitman
• Position: Senior Business Editor of the Business Law Brief
• Pages: 07

Page 53

I Introduction

In response to last year's financial crisis, Congress enacted the Emergency Economic Stabilization Act of 2008 (EESA)¹ which gave the Treasury Department access to $700 billion through the Troubled Asset Relief Program (TARP).² In addition to this access, Congress created a system to oversee Treasury's management of TARP³ The work of the oversight bodies has resulted in a number of recommendations, investigations, and public reports, some of which have highlighted the ever-increasing need for transparency and accountability in TARP expenditures, and some of which have changed, and have the potential to significantly change, the government's role in corporate governance. With so much taxpayer money at stake, it is important to critically examine the role of these oversight bodies, whether they have fulfilled their mandates as set out in EESA over one year ago, and if not, whether they have been empowered with the means to do so.

II Background of eesa and tarp

The purpose of EESA—to "immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States"⁴ —reflects the great amount of power that Congress granted to the Treasury to stem the financial crisis. EESA grants Treasury the authority to establish TARP in order to purchase and fund commitments to purchase troubled assets from any financial institution.⁵ In line with this broad mandate, Treasury can take the actions necessary to carry out the authorities in EESA,⁶ but such actions must be used in a manner that "maximizes overall returns to the taxpayers of the United States."⁷

As originally envisioned in 2008, TARP would have involved the purchase, management, and sale of up to $700 billion in toxic assets, primarily troubled mortgages and mortgage-backed securities.⁸ Although President Obama's recent announcement of a new economic plan to be funded from over $200 billion in unused TARP funds⁹ suggests a decrease in TARP spending, these funds were once projected to have been used in connection with 12 separate programs, reaching a total of $3 trillion dollars¹⁰— just short of what the entire Federal Government spent in Fiscal Year 2008.¹¹ TARP has evolved into a program of "unprecedented scope, scale and complexity," with individual programs involving large capital infusions into hundreds of banks and financial institutions, mortgage modifications, and public-private partnerships that use tens of billions of taxpayer dollars to purchase banks' "toxic assets."¹² In the midst of TARP's evolution, the progress of the stated policy goal of "maximizing] overall returns"¹³ is unclear and, moreover, it is extremely unlikely that taxpayers are going to get a full return on their TARP investment.¹⁴ This uncertainty is likely to make taxpayers question the decisions of the government, and more specifically, the mechanisms Congress has implemented to oversee the distribution of such an extraordinary amount of money.

III Tarp oversight mechanisms

In granting Treasury this broad authority in EESA, Congress also created an expansive system of oversight.¹⁵ EESA established two new oversight boards, both of which are responsible for reviewing the Secretary's actions in carrying out the requirements of EESA and examining the effect of those actions on home ownership, financial markets, and costs to taxpayers.¹⁶ The Financial Services Oversight Board (FSOB),¹⁷ a five-member board comprised of the heads of certain executive branch departments and agencies,¹⁸ is charged with making recommendations to the Secretary of Treasury regarding the use of its authorities under EESA, and reporting any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General or the Attorney General of the United States.¹⁹ Although the statutory language is not clear about where the FSOB falls within the structure of the government, its membership suggests that the FSOB is an executive branch entity.²⁰

Page 54

The Congressional Oversight Panel (COP), on the other hand, is an "establishment of the legislative branch,"²¹ and is "permitted to hold hearings, take testimony, receive evidence, and administer oaths and affirmations to witnesses; and required to report on the extent to which the information on transactions has contributed to market transparency"²² Congress appoints the COP, participation on which is not limited to government officials or members of Congress.²³ Of note, however, is that "neither the FSOB or [sic] the COP has subpoena authority, and neither is authorized to request the Attorney General to compel agencies to provide needed information."²⁴

In addition to the oversight boards, EESA places audit responsibilities for TARP with two individuals.²⁵ The first is the new Special Inspector General for TARP (SIGTARP).²⁶ SIGTARP has the duty to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under TARP.²⁷ Aside from typical audit responsibilities, SIGTARP is charged with describing why the Secretary deemed it necessary to purchase each asset, and to list each person or entity hired to manage the troubled assets.²⁸ Unlike other agency inspectors general, "SIGTARP is not required to report to or be supervised by any agency head, including the Secretary of Treasury," and there are no explicit requirements that the Treasury Secretary be allowed to comment on the reports that SIGTARP submits to Congress.²⁹ SIGTARP is also the sole oversight body charged with criminal law enforcement authority,³⁰ and carries out "criminal and civil enforcement against those who waste, steal, or abuse TARP funds."³¹

The second office with audit responsibilities is the Comptroller General (CG) of the Government Accountability Office (GAO), which has the authority to commence ongoing oversight of the activities and performance of TARP.³² The CG "is the only entity specifically required to examine the internal controls of the TARP, to examine the efficiency of TARP's operating procedures, and to review TARP's efforts to minimize conflicts of interest."³³ The CG is also required to determine the "extent to which leverage and sudden deleveraging of financial institutions was a factor behind the financial crisis.³⁴

IV Criticisms of tarp oversight

Broadly, there are two areas in which the TARP oversight structure can be criticized. First, statutory reporting requirements can be criticized as being unorganized, duplicative, and not comprehensive. For instance, EESA requires eighteen types of reports, and no single entity receives them all.³⁵ In addition, the duties and responsibilities of both oversight panels and both audit mechanisms overlap in key areas.³⁶ Some of the requirements overlap even for the same entity.³⁷ Although it may have been the intention of Congress to overlap these responsibilities to offer different perspectives on the same issues, these requirements could be counterproductive if the bodies are not sharing information or are reaching different conclusions.³⁸ Furthermore, no individual or organization is currently statutorily required to disclose how TARP recipients are using TARP funds,³⁹ and this information is perhaps the most useful to Congress.

Second, there is uncertainty surrounding Treasury's cooperation with the oversight bodies, which could have significant implications for the effectiveness of the oversight program. For example, the COP Chairman testified that Treasury has been non-responsive to requests for information, and when information has been provided, responses have been "incomplete" and "elusive."⁴⁰ Another panel member testified that Treasury failed to produce certain important requested documents.⁴¹ Furthermore, SIGTARP testified that the success of TARP's oversight has been mixed, reporting that Treasury's basic attitude towards Congress' stated goal of providing "public accountability" for the exercise of authority under EESA "remains a significant frustration."⁴² SIGTARP has specifically identified one recommendation of "basic transparency" that Treasury refuses to implement: requiring financial institutions to report on how they are using TARP funds.⁴³

V Signs of progress

TARP oversight has been a success in some respects. For instance, Treasury contends that it welcomes review by thePage 55oversight bodies,⁴⁴ has implemented over seventy-five percent of the recommendations made by SIGTARP, and has routinely integrated the oversight bodies into its everyday activities.⁴⁵ The CG contends that Treasury has been cooperative, and agrees that it has taken action to address several, if not all, of their recommendations.⁴⁶ Moreover, Treasury has assigned a special liaison to work with COP to improve information-sharing,⁴⁷ which is an indication that Treasury is willing to correct its perceived shortcomings.

With regard to reporting requirements, the oversight bodies have testified that they have coordinated work efforts and information-sharing to "complement, not duplicate, one another," and meet on a regular basis.⁴⁸ The agencies coordinate with each other to ensure "maximum coverage and to minimize duplicative requests of TARP managers."⁴⁹ The bodies also have joint projects planned to assess different aspects of TARP⁵⁰

In some respects, Congress has been responsive to the concerns of the TARP oversight committees by enacting legislation that broadens the committees' authority.⁵¹ Until April, SIGTARP had been acting with arguably not enough authority,⁵² and inadequate resources and staff.⁵³ Upon the prompting of SIGTARP, Congress passed S.383⁵⁴ to clarify SIGTARP's authority to "conduct, supervise, and coordinate audits" of any...