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April 21st, 2009

Report: Taxpayers Vulnerable Via Gov. Programs



Inspector General Neil Barofsky, the man in charge of overseeing the $700 billion bailout of the nation’s largest banks, reported to Congress today that the government’s rescue initiatives pose significant risk to taxpayers while at the same time exposing the government to potential fraud. The Inspector General’s 250-page quarterly report also presented several suggestions on how to improve Washington’s strategies.

The report explained that the Treasury’s plan to team up public and private investors to purchase banks’ toxic assets poses a particular risk to taxpayers. A strategy that was designed to benefit taxpayers could not only wind up hurting them, but could also “dilute the incentive for private fund managers to exercise due diligence”:

“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.

The Treasury continues to respond to such criticisms much the way they have since the program was first announced, standing by their reasoning that inaction with regard to these toxic assets will only serve to make the banks’ financial situations worse. Officials also reassured lawmakers that profits would be shared fairly among both public and private investors.

Here are some of Barofsky’s suggestions:

–Treasury should set tough conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at taxpayer expense.

–Treasury should disclose the owners of all private equity stakes in a public-private fund.

–Fund mangers should have “investor-screening” procedures to prevent asset purchase transactions from being used for money laundering.

As investors (taxpayers), are you confident that the Treasury’s program to purchase toxic assets will benefit you and private investors equally?

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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