Special Inspector General For The Troubled Asset Recovery Program: Audits, Investigations, Recommendations And Criminal Referrals
Created by the Economic Stabilization Act or 2008, the Special Inspector General for the Troubled Asset Recovery Program (“SIGTARP”) has the powers to audit and investigate TARP awards and to make recommendations to the Treasury Department on how it should manage TARP programs. Acting with the attention of the Congress, oversight over Treasury, the authority to deal directly with TARP recipients, and the required cooperation of the Federal Reserve, the Securities and Exchange Commission and federal and state law enforcement, SIGTARP Neil Barofsky has a broad jurisdiction and extensive powers. While his formal power of compulsion ends with court-enforced subpoenas and he must refer criminal matters for prosecution to the Department of Justice, in two months of activity, he has initiated 20 criminal investigations, audited the use of TARP funds and the executive compensation of its 364 recipients, and set a schedule of audits and investigations across the spectrum of TARP programs.
There is a natural tension between the SIGTARP and Treasury. SIGTARP is concentrating on fraud risk and prevention; Treasury is focusing on use of federal funds, agencies and guarantees to thaw the credit markets. As SIGTARP investigates recipients’ use of TARP funds and executive compensation limitations imposed by the provision added for TARP in the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), Treasury is designing new programs to attract private investors and money managers into its mission.
TARP Rescue Morphs into Public-Private Programs
Initial Troubled Asset Recovery Program (“TARP”) funding to assist financial institutions (Capital Purchase Program (“CPP”), Capital Assistance Program (“CAP”), Targeted Investment Program (“TIP”), Asset Guarantee Program (“AGP”)), to AIG (Systemically Significant Failing Institutions (“SSFI”)) and to the auto industry (Automobile Industry Financing Program (“AIFP”), Auto Supplier Support Program (“ASSP”) and Auto Warranty Support Program (“AWSP”)) are all direct-infusion rescue plans designed to avoid failure of important domestic sectors and businesses. For the Treasury Department, how TARP funds were specifically used has been less important than prospective success of its rescue efforts and their presumed beneficial effect on the revival of credit markets for businesses and consumers. Concerned that TARP funds have only been applied to proper uses, SIGTARP has asked thes 364 TARP recipients to provide a narrative on how they used their federal assistance. The recipients’ responses have given a wide range of uses from adding to capital, to reducing debt, to purchasing mortgage-backed debt, and increasing loans.
Pursuing its mission of moving toxic loans and securities off the books of financial institutions and hopefully into a market, the Treasury Department has solicited the private sector to participate in the process by expanding the Term Asset-Backed Loan Program (“TALF”) to include a Public-Private Investment Program (“PPIP”), whereunder private investors would provide one element of the equity funding for a special purpose vehicle (“SPV”) to purchase toxic assets, the Federal Reserve would provide funding for a substantially larger equity element, and additional federal lending would be available. Because there is no direct Treasury payment of TARP funds in this structure, the issue arose whether the executive compensation limitations added to TARP funding in the Recovery Act apply to the private investors or money managers of the SPV. Treasury has formally concluded that they do not. SIGTARP has recommended, however, that Treasury should issue regulations for executive compensation limitations under TALF.
Some Preliminary Guidance
Because SIGTARP acts as an independent entity with three constituencies – the Treasury Department, the Congress and the American public – its mission is broader than Treasury’s alone, and its requests for information have reflected that. How one responds to SIGTARP inquiries, however, depends on the context. Where SIGTARP is seeking generic information for which there is no specific reporting or record requirement – as his inquiry about the use of TARP funds – recipients can fashion a response that is as explicit or general as their particular situation indicates. As with all such responses, care should be taken for accuracy, as SIGTARP will usually require certification of the response. In circumstances where the Treasury and SIGTARP appear to have different views on applicable law – as with the application of executive compensation limitations to PPIP programs – participants in programs designed by Treasury may be faced with SIGTARP inquiries that presume a different rule than Treasury. Before submitting a response, prudence counsels ascertaining how firm and explicit the positions of each agency are. The recipient can then decide how best to craft its response. Where SIGTARP requests documents or information that must or should be maintained by the recipient, care should be taken to be thorough, accurate and timely in the response.
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