Whistleblower Lawyer Blog

In this report, the Office of the Special Inspector General for the Troubled
Asset Relief Program (“SIGTARP”) endeavors to (i) explain the various TARP
programs and how the Department of the Treasury (“Treasury”) has used those
programs through March 31, 2009, (ii) describe what SIGTARP has done since its
Initial Report to Congress, dated February 6, 2009 (the “Initial Report”), to oversee
this historic program with respect to both audits and investigations, and (iii) set
forth a series of recommendations for the operation of TARP.

TREMENDOUS EXPANSION IN THE SCOPE,
SCALE, AND COMPLEXITY OF TARP

TARP, as originally envisioned in the fall of 2008, would have involved the purchase,
management, and sale of up to $700 billion of “toxic” assets, primarily troubled mortgages
and mortgage-backed securities (“MBS”). That framework was soon abandoned,
however, and the program’s scope, size, and complexity have dramatically increased. As
of the writing of this report, TARP funds are being used, or have been announced to be
used, in connection with 12 separate programs that, as set forth in Table 1.1, involve
a total (including TARP funds, Federal Reserve loans, Federal Deposit Insurance
Corporation (“FDIC”) guarantees, and private money) that could reach nearly $3
trillion.

Treasury has announced, as of March 31, 2009, the parameters of how
$590.4 billion of the $700 billion in TARP funding authorized by the Emergency
Economic Stabilization Act of 2008 (“EESA”) would be spent through the 12
programs. Of the $590.4 billion that Treasury has committed, $328.6 billion has
actually been spent as of March 31, 2009. This report provides an update on those
TARP programs that had been announced as of SIGTARP’s Initial Report, as well
as descriptions of programs that have subsequently been announced.

SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM
OVERSIGHT ACTIVITIES OF SIGTARP

Since the Initial Report, SIGTARP has been actively engaged in fulfilling its vital investigative
and audit functions as well as in building its staff and organization.
On the investigations side, SIGTARP’s Hotline (877-SIG-2009 or accessible
at www.SIGTARP.gov) is staffed, operational, and providing an interface with the
American public to facilitate the reporting of concerns, allegations, information,
and evidence of violations of criminal and civil laws in connection with TARP. As of
the drafting of this report, the SIGTARP Hotline has received and analyzed nearly
200 tips, running the gamut from expressions of concern over the economy to
serious allegations of fraud. Both from the Hotline and from other leads, SIGTARP
has initiated, to date, almost 20 preliminary and full criminal investigations.

Although the details of those investigations generally will not be discussed unless
and until public action is taken, the cases vary widely in subject matter and include
large corporate and securities fraud matters affecting TARP investments, tax matters,
insider trading, public corruption, and mortgage-modification fraud.

SIGTARP has been proactive in dealing with potential fraud in TARP. For
example, to get out in front of any efforts to profit criminally from the Term
Asset-Backed Securities Loan Facility (“TALF”), which, as announced, involves
up to $1 trillion of lending by the Federal Reserve backed by up to $80 billion in
TARP funds, SIGTARP has organized and leads a multi-agency task force to deter,
detect, and investigate any instances of fraud or abuse in the program. In addition
to SIGTARP, the TALF Task Force consists of the Office of the Inspector
General of the Board of Governors of the Federal Reserve Board, the Federal
Bureau of Investigation, Treasury’s Financial Crimes Enforcement Network, U.S.
Immigration and Customs Enforcement, the Internal Revenue Service Criminal
Investigation division, the Securities and Exchange Commission, and the U.S.
Postal Inspection Service. Representatives from each member organization participate
in regular briefings about TALF, collectively identify areas of fraud vulnerability,
engage in the training of agents and analysts with respect to the complex issues
surrounding the program, and will serve as points of contact for leads relating to
TALF and any resulting cases that are generated. The TALF Task Force represents
a historic law enforcement effort with an ambitious goal: to redefine the policing of
complex Federal Government programs by proactively arranging a coordinated law
enforcement response before fraud occurs.

On the audit side, SIGTARP has initiated and is in the process of conducting
six audits:

• Use of Funds: SIGTARP’s first audit examines the use of TARP funds by TARP
recipients, and is based upon a survey that SIGTARP sent to 364 TARP recipients
that had received funds as of January 31, 2009.

• Executive Compensation Compliance: SIGTARP’s second audit, also based
on SIGTARP’s survey, examines how TARP recipients are implementing controls
with respect to applicable executive compensation restrictions.

• Bank of America: The third audit examines the review and approval processes
associated with TARP assistance to Bank of America under three different
TARP programs and examines Treasury’s decision making related to additional
TARP assistance provided in connection with Bank of America’s acquisition
of Merrill Lynch. Since its commencement, the audit’s scope has expanded to
examine broadly Treasury’s decision making regarding the first nine institutions
to be considered for funding under TARP.

• External Influences: The fourth audit examines whether, or to what extent, external
parties may have sought to influence decision making by Treasury or bank
regulators in considering and deciding on applications for funding from individual
banks seeking TARP funds. This audit seeks to determine what procedures
are in place to avoid undue outside influence on the process, whether there are
any indications of any undue influence, and what actions might be needed to
strengthen existing processes to avoid such undue influences in the future.

• AIG Bonuses: The next audit examines Federal oversight of executive compensation
requirements, with a particular focus on recent payouts of large bonus
payments to American International Group, Inc. (“AIG”) employees. Accordingly, SIGTARP
has undertaken an audit to determine: (i) the extent to which the recent bonus
payments were made in accordance with conditions imposed in return for TARP
assistance, and (ii) Treasury’s monitoring of AIG’s executive compensation
agreements and whether it was aware of the full range of executive compensation,
bonus, and retention payments throughout AIG’s corporate structure.

• AIG Counterparty Payments: AIG, which has received the largest amount of
financial assistance from the Government during the current financial crisis,
reportedly made counterparty payments to other financial institutions, including
foreign institutions and other TARP recipients, at 100% of face value. SIGTARP
will examine the basis for the counterparty payments and seek to determine
whether any efforts were made to negotiate a reduction in those payments.

SIGTARP’S RECOMMENDATIONS ON THE
OPERATION OF TARP

One of SIGTARP’s oversight responsibilities is to provide recommendations to Treasury
so that TARP programs can be designed or modified to facilitate effective oversight
and transparency and to prevent fraud, waste, and abuse. In Section 4 of this report,
SIGTARP details instances in which Treasury has addressed recommendations made in
and since the Initial Report, and makes a series of new recommendations, including:

• Use of Funds: SIGTARP continues to recommend that Treasury require all
TARP recipients to report on their actual use of TARP funds. This recommendation
is particularly important with respect to the potential application of
the Capital Purchase Program (“CPP”) to large insurance companies that may
have purchased banks eligible for CPP in order to access TARP funds, and to
Treasury’s recent announcement of an additional $30 billion investment in AIG.
Simply put, the American people have a right to know how their tax dollars are
being used. This recommendation applies not only to capital investment and
lending programs involving banks and other financial institutions, but also to
programs in which TARP funds are used to purchase troubled assets, including
transactions in the Public-Private Investment Program (“PPIP”) and surrenders
of collateral in TALF.

• Expansion of TALF: The announced expansion of TALF to permit the posting
of MBS as collateral poses significant fraud risks, particularly with respect to
legacy residential MBS (“RMBS”). SIGTARP has made a series of recommendations
to mitigate these risks, including, among others, that Treasury should require
a security-by-security screening for legacy RMBS; that any RMBS should
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”); and that Treasury should require significantly
higher haircuts for all MBS, with particularly high haircuts for legacy RMBS.

• PPIP Fraud Vulnerabilities: Aspects of PPIP make 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. SIGTARP has made a series of recommendations to address
these concerns, including, among others, that Treasury should (i) impose strict
conflict-of-interest rules upon Public-Private Investment Fund (“PPIF”) fund
managers, (ii) mandate transparency with respect to the participation and management
of PPIFs, including disclosure of the beneficial owners of the private
equity stakes in the PPIFs and of all transactions undertaken in them, and (iii)
that all PPIF fund managers have stringent investor-screening procedures, including
comprehensive “Know Your Customer” requirements at least as rigorous
as that of a commercial bank or retail brokerage operation.

• Interaction Between PPIP and TALF: 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. Such an
expansion could cause great harm to one of the fundamental taxpayer protections
in the original design of TALF by signifi cantcantcantly diluting the private party’s
personal stake, the “skin in the game,” and therefore reduce their incentive to
conduct appropriate due diligence. Treasury should not allow Legacy Securities
PPIFs to invest in TALF unless significant mitigating measures are included
to address the dilution of this incentive, which could include prohibiting the
use of leverage for PPIFs investing through TALF or proportionately increasing
haircuts for PPIFs that do so.