TARP IG Reports Underscore Need for Better Transparency in Financial Bailout

Two recent reports by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP [1]), Neil Barofsky, provide useful information and stand in sharp contrast to the Treasury Department's attempt to provide comparable transparency for the program, also known as TARP. One report clearly presents existing TARP information, while the other supplies new data that Treasury should be providing. In both cases, the reports highlight changes Treasury should make to how it conducts and presents TARP data.

To date, TARP, the most prominent element of the larger initiative colloquially known as "the bailout," has been a relatively secretive program. The Treasury Department, which is responsible for administrating the program, has kept many details secret, such as how banks are using the funds given to them. During the week of July 20, however, Barofsky released two reports on TARP as part of his efforts to bring more transparency and accountability to the program.

One report, released July 21, is the Quarterly Report to Congress [2], a massive, 252-page overview of all the programs within TARP, as well as the related programs outside of TARP that are considered part of the bailout effort. The second report, released July 20, titled SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds [3], contains the results of a survey Barofsky conducted of the 364 recipients of TARP funding. In the survey, he asked these institutions to report on their use of TARP funds.

These two reports work well in tandem. The quarterly report provides the public with the "big picture" view of TARP and shows the relative importance of each of the programs, while the survey shows why the government needs to do a better job of disclosure, especially for information related to the largest of the TARP programs, the Capital Purchase Program [4] (CPP). Prior to these reports, the public knew little about the current status of TARP, and together, the reports help make the argument for comprehensive reporting requirements for TARP recipients.

The Quarterly Report [2] is a useful primer on TARP; everything about TARP is located in one easily accessible place. It provides a general background on TARP and then describes each of the twelve programs under TARP. These descriptions are useful for those who are looking to learn about the various aspects of the program. TARP is complicated, with many different, highly technical parts, and Barofsky's report breaks down these complicated terms and issues.

Much of this information is also available online but in a less cohesive format through FinancialStability.gov [5], the Treasury's website for TARP. FinancialStability.gov lists and describes the various TARP programs but under a tab labeled "Road to Stability [6]." The descriptions are often cursory as well, without a great deal of context for each program. Indeed, the description for the Systemically Significant Failing Institution (SSFI) Program, a $75 billion program which has only been used by AIG, is only a sentence long on FinancialStability.gov, and it does not mention AIG.

[7]
(click to enlarge)

Additionally, FinancialStability.gov does not provide dollar totals for each program. Instead, in the description of each program, the site gives only the maximum amount each program could use. Barofsky's report, however, shows the amount each program has actually expended to date. For instance, the report states that thus far, only $441 billion of the $700 billion has been spent, not including the $70 billion that certain banks have paid back to the government. The Capital Purchase Program, which seeks to encourage lending by increasing the capital base of participating banks, accounts for 46 percent of spent funds. Such information is not readily available on FinancialStability.gov.

While the Quarterly Report [2] shows how Treasury should be presenting information, Barofsky's other report, the bank survey [3], demonstrates how Treasury should be collecting more data. Since starting as SIGTARP in December, Barofsky has been pushing the Treasury for increased TARP transparency and accountability, and Treasury has been resistant to enacting some of his proposed changes. In particular, Barofsky recommended that institutions should be required to report regularly on their use of TARP funds. Treasury, however, has said that such a requirement would be impossible to comply with, since all funds are fungible, and even if such accounting were possible, it would not be useful. Instead, Treasury only requires banks to report on their lending activities, which does not provide as full of a picture of the effect of TARP.

Faced with Treasury's inaction to obtain useful information, Barofsky sent out a letter asking banks to detail their usage of TARP funds. The survey was voluntary and applied only to CPP funds. It asked for responses in an open-ended format, which means that while Barofsky received a 100-percent response rate, numerical analysis of the information is impossible. However, the survey results do provide insight on how banking institutions are using CPP funds, which, according to the Quarterly Report, account for almost half of all TARP funds.

Barofsky found that 83 percent of institutions used their TARP funds to support lending activities, which is the primary intended use of CPP. Additionally, 43 percent of banks used their funds for capital reserves, 31 percent for investments (such as purchasing mortgage-backed securities), 14 percent for debt repayments, and four percent used their TARP funds to acquire other institutions. The banks also reported significant influence from regulators, such as the FDIC and the Federal Reserve, with some institutions saying that regulators have encouraged them to use their funds for capital reserves or acquisitions.

Contrary to Treasury's protests, it is clear that the survey yielded useful information, which could be used in future oversight hearings in Congress. With this information, Congress might decide that it did not intend for TARP funds be used for acquisitions and make changes to the program. Regardless, without this survey, Congress would have even less understanding of how TARP funds are being used by banks.

Barofsky has promised to publish the survey responses online within 30 days of the report's publication. The institutions surveyed have requested anonymity, so the responses may be published in a redacted format. Despite this, it would be immensely useful to read the full results of the surveys for more detailed information on how each institution is using its TARP funding.

Barofsky's survey demonstrates that not only is such reporting possible, but it is also valuable. It provides a strong argument for mandatory reporting requirements, which Barofsky again recommends the government institute. Treasury should heed this recommendation and begin instituting a monthly reporting requirement based on Barofsky's survey. Additionally, Treasury should restructure the entire FinancialStability.gov site, such that TARP information is more readily accessible and clearly presents relevant financial data. Without such reforms, Congress, the news media, government watchdogs, and the general public will lack basic tools for understanding how the Treasury Department is using the $700 billion Congress mandated [8] it to deploy to "restore liquidity and stability to the financial system of the United States; protects home values, college funds, retirement accounts, and life savings; and preserves homeownership and promotes jobs and economic growth."