Bank Bailout Exposes Taxpayers To Massive Losses and Fraud

You don't say. The Treasury Department's Inspector General announced that the massive bank bailout is ripe for massive losses and fraud.

In a 250-page quarterly report to Congress, the rescue program's special inspector general concludes that a private-public partnership designed to rid financial institutions of their "toxic assets" is tilted in favor of private investors and creates "potential unfairness to the taxpayer."

The report, which examines the six-month old, $700 billion Troubled Asset Relief Program, is scheduled for release Tuesday.

Using blunt language, Inspector General Neil Barofksy offers a series of recommendations to protect the public and takes the Treasury to task for not implementing previous advice. The report also commends Treasury and the Federal Reserve for creating some safeguards.

The report's warnings about the public-private plan's potential for losses echoes alarms raised by some lawmakers and economists, but Barofksy has significant credibility in Congress and his views are likely to carry ample weight.

Overall, the report says the public-private partnership -- using Treasury, Federal Reserve and private investor money -- could total $2 trillion. The financial markets responded positively to the program when the Obama administration announced it last month, but the administration is still putting final touches on its implementation.

"The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report states.

In particular, the report cited the private-public partnership that would purchase troubled real estate-related securities from financial institutions. Under plans unveiled by Treasury, for every $1 of private investment, Treasury would invest $1 and could provide another dollar in a nonrecourse loan. That money could then leverage a loan from another government fund backed mostly by the Federal Reserve, a step that Barofsky says would dilute the incentive for private fund managers to exercise due diligence.

The stock market responded positively because they saw that the government was removing the risk of loss from the businesses and putting it on taxpayers. The fact that business and industry is beginning to realize the true nature of the government bailout as a back door to nationalization of those industries is a wake up call that this kind of intervention will only result in bad things for the economy in the long run.

It should come as no surprise that investigators are already finding fraud in the program:

In the first major disclosure of corruption in the $750-billion financial bailout program, federal investigators said Monday they have opened 20 criminal probes into possible securities fraud, tax violations, insider trading and other crimes.

The cases represent only the first wave of investigations, and the total fraud could ultimately reach into the tens of billions of dollars, according to Neil Barofsky, the special inspector general overseeing the bailout program.

The disclosures reinforce fears that the hastily designed and rapidly changing bailout program run by the Treasury Department and Federal Reserve is going to carry a heavy price of fraud against taxpayers -- even as questions grow about its ability to stabilize the nation's financial system.

Throw in the fact that the federal government keeps changing the rules on the banks and how they can withdraw from the TARP program and repay those obligations, and you've got a major mess on President Obama's hands.

There is no reason not to allow those banks to repay the TARP obligations and exit the program unless the government is intent upon sinking its teeth deeper into the financial sector and determining outcomes of business transactions. The government's record on valuing financial businesses isn't particularly good; they've consistently gotten it wrong.