NY Fed Cited in Cover-Up By SIGTARP's Barofsky - Possible Criminal Charges

It's never the crime, it's always the cover up.

This is beyond a doubt the story of the week. Neil Barofsky has been a thorn in the side of the Treasury Department and the Fed since he first took office.

I doubt there will be criminal charges filed against Turbo Tim personally, since in his case the clueless CEO defense may obtain some traction. Unless, that is, they have wiretaps and/or emails showing collusion with some of the bailed out banks, in either insider trading or the manipulation of assets for extraordinary gains.

It is a boiling scandal, and emblematic of the hidden corruption that has pervaded financial regulation in Washington for the past ten years at least. It did not start with Obama, but it may still bring down key members of his Administration.

Reform the financial system, audit the Fed.

Bloomberg
Barofsky Says Criminal Charges Possible in Alleged AIG Coverup
By Richard Teitelbaum
28 April 2010

April 28 (Bloomberg) -- ...That tense relationship [between Treasury and Barofsky] has grown out of Barofsky’s mandate to monitor and root out fraud and waste in the management of TARP, the $700 billion program passed in October 2008 to remove toxic debt from the banks. The special inspector general, in a series of reports, interviews and congressional hearings, has heaped criticism on the Treasury Department’s operation of the program.

Barofsky’s most recent broadside came on April 20, when a SIGTARP report labeled a housing-loan modification program funded with $50 billion of TARP money as ineffectual.

...The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.

The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.

In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment
bank on April 16.

...Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP
money, for example.

“There was a time when, if you got that word the stock price would go up, and if you were to trade on that information prior to the public announcement, that would be classic insider trading,” Barofsky says.

A Democrat named by a Republican president, Barofsky says missteps by both the George W. Bush and Barack Obama administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about,” says Barofsky, referring to the anti- Obama political movement. “This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an October 2009 report, saying Paulson publicly described the initial nine TARP bank recipients as healthy when he knew that at least one of them risked failure.

...SIGTARP has more than 40 agents, including former Secret Service, Federal Bureau of Investigation and Internal Revenue Service investigators, who sport blue windbreakers emblazoned with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky does not --make arrests, and subpoena and seize records.

In its late-January report, SIGTARP said that the banks rescued by TARP remained “too big to fail.” They still have an incentive to make risky wagers in order to generate the profits that will reward their executives, the report says.

“The definition of insanity is repeating the same actions over and over again and expecting a different result,” Barofsky says. “If the goal of TARP was to make sure we don’t have another financial collapse, well, obviously it’s made the likelihood of that much, much greater.”

....In a December report, Barofsky showed how insurance giants Hartford Financial Services Group Inc. and Lincoln National Corp. bought tiny thrifts -- one with just $7 million in assets -- to qualify for the TARP Capital Protection Program, which is designed to encourage bank lending. Hartford and Lincoln used the more than $4.3 billion in TARP funds they received almost entirely to finance insurance operations,
according to the report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., says Barofsky hasn’t been aggressive enough. She says SIGTARP should be running criminal probes of the bankers who underwrote and managed the collateralized debt obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt sold to investors. Tavakoli says the CDO managers sometimes replaced relatively high-quality securities with new ones that were more likely to default.

“It is securities fraud if you take securities and package them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting and sale of CDOs are ongoing.

...Barofsky says he’s battling an entrenched culture of secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned from this entire financial crisis is that the reflexive reaction against transparency, that disclosure will bring
terrible things, has not been proven true,” he says.

He offers the AIG bailout as an example. For more than a year, the New York Fed kept key aspects of the AIG bailout secret, including details of its own involvement and its decision to have AIG pay the insurer’s bank counterparties 100 cents on the dollar on the credit protection they’d bought against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed efforts to obtain discounts from the banks.

After the banks had been
paid in late 2008, a lawyer from the New York Fed sought to have AIG keep the banks’ identities under wraps, as well as data about the CDOs that would have revealed which firms had underwritten the toxic bonds and which ones had managed them.

“There’s a lot of things about AIG that were not disclosed, based on the assumption that the sky would fall,” Barofsky says. “Transparency does a lot more good than bad.”

Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against
individuals or we’re going to have a report,” Barofsky says. “This is too
important for us not to share our findings.”

He won’t say whether the investigation is targeting Geithner personally.

In a statement, the New York Fed said: “Allegations that the New York Fed engaged in a coverup of its intervention in AIG are not true. The New York Fed has fully cooperated with the Special Inspector General.”

The First Year of Obama's Failed Economic Policies: The Worst May Yet Be Avoided

"The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be any sustained recovery."

We have been saying this for some time. The report below from Neil Barofsky says essentially the same thing.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

The US is heading towards a double dip recession, and the next leg down may be more fundamentally damaging than before.

The reason for the decline will be the abject failure of the Obama Administration to address the roots of the problem, instead wasting trillions to prop up a banking system that is a useless distortion.

Worse than useless really, because it actually presents a huge negative influence by stifling the recovery, channeling funds to the crony capitalists and non-producing wealth extraction sector, who tax the people like feudal lords under license of a corrupt government.

So far, Obama has failed the people, but preserved the banks. A source of his failure has been his weakness in listening to Larry Summers and Tim Geithner, the Rubin-Clinton wing of Democrats, who have well established their incompetence and inability to act at a level suitable to their positions. They are captive to special interests, locked into the ways of thinking that brought the world to the point of crisis.

In response to the next leg down, Bernanke will monetize debt at an even more furious and clever pace, perhaps in alliance with the Bank of England and Bank of Japan. The ECB resists, and all who balk will be chastised by the monied powers and their demimonde, the ratings agencies and global banks. This is modern warfare of a sort.

We do not expect the corruption of the world's reserves to be so blatant that the inflation will immediately appear, except in more subtle manner. At some point it may explode, especially if Ben is particularly good at concealing its subtle growth.

Monetary inflation is the growth of the money supply in excess of the demands of the real economy, not nominal growth of the supply. The US has been shifting its growth into the reserves of other central banks for the past twenty years or so, and those eurodollar present an overhang that will egulf the Treasury should they come home to roost too quickly. The great nations see the US problem, most surely. The question is how to handle it, gracefully, since the US is still the world's sole superpower, and given to covert pre-emptive action when it feels threatened.

It is not a pretty picture. We had high hopes for Obama, because he was capable of rising to the challenge. He had the backing of his people. And he is choosing failure, for whatever reason. That is certainly is the template of a modern tragedy.

“Given the same amount of intelligence, timidity will do a thousand times more damage than audacity.” Karl von Clausewitz

ReviewJournal
Watchdog: Bailouts created more risk in system
By DANIEL WAGNER and ALAN ZIBEL
AP Business Writers

WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky's investigation.

Barofsky renewed a call for Treasury to enact clearer walls so that such apparent conflicts are less likely.

Treasury said it welcomed Barofsky's oversight but resisted the call to erect new barriers against conflicts of interest. The new rules "would be detrimental to the program," Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules "are a rigorous and effective method of protecting taxpayers," she said.

Much of Barofsky's report focused on the government's growing role in the housing market, which he said has increased the risk of another housing bubble.

Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

"The government has stepped in where the private players have gone away," Barofsky said in an interview. "If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of" artificially pushing up home prices in the coming years.

The report warned that these supports mean the government "has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor."

Barofsky's report echoed concerns raised by housing experts in recent months, as home sales and prices rebounded. They warn that the primary reason for the turnaround last year has been billions of dollars in federal spending to lower mortgage rates and prop up demand.

Once that spigot of cash is turned off, they caution, the market will be vulnerable to a dramatic turn for the worse. Daniel Alpert, managing partner of investment bank Westwood Capital, wrote in a report that national home prices are bound to fall 8 to 10 percent below the lows of last spring.

"The lion's share of the remaining decline will occur in markets that saw sizable bubbles but have not yet retrenched," he wrote.

Officials from the Obama administration counter that massive federal intervention has helped the housing market stabilize and prevented more dire consequences.

Barofsky's report also disclosed that, while the Obama administration has pledged to spend $75 billion to prevent foreclosures, only a tiny fraction - just over $15 million - has been spent so far. Under the Making Home Affordable program, only about 66,500 borrowers, or 7 percent of those who signed up, had completed the process as of December.

He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. He stopped short of endorsing specific proposals for overhauling financial regulation, but said many of the proposals would go far to improving the system.