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Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal

Politics / Credit Crisis 2010 Apr 30, 2010 - 02:00 AM GMT

By: Mike_Shedlock

Politics

Best Financial Markets Analysis ArticleThe day that Tim Geithner lands in jail will be a day of celebration. Don't count on it soon or ever, but Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP), is now threatening criminal charges.


Please cheer the following headline: Barofsky Says Criminal Charges Possible in Alleged AIG Coverup

... [Neil Barofsky], 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.

“I’ve been in contact with the SEC,” he told the committee. “We’re going to coordinate with them, but we’re going to lead the charge. We’re going to review these transactions.”

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.

“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.

“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.

“The special inspector general for TARP hit the ground running,” says Senator Charles Grassley, an Iowa Republican who helped draft the legislation creating SIGTARP. “He’s the kind of watchdog taxpayers need and deserve.”

From the day Congress created it, TARP has been troubled. Paulson crafted it as an initiative to buy the toxic assets that were then threatening to capsize the world’s banking system. Since then, the Treasury and Congress have transformed it into a hydra-headed beast encompassing 13 financial aid plans.

Says Representative Jeb Hensarling, a Republican from Texas and former member of the Congressional Oversight Panel that guides TARP policy, “It’s almost a program that defies oversight.”

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.

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 April 2009, Treasury asked the Justice Department for a ruling on whether Barofsky and SIGTARP reported to Secretary Geithner. In a letter to Justice, Barofsky argued that he reported only to the president.

“We are absolutely an independent agency,” he says.

Treasury withdrew its request.

TARP’s Small Business

In February of this year, the department moved to exclude the Small Business Lending Fund from Barofsky’s oversight. The program is funded with $30 billion of TARP money.

“On its face, it looks like Treasury is trying to supersede SIGTARP’s position by having the program operate outside TARP,” says Smallberg of the Project on Government Oversight. “Barofsky is certainly a thorn in the side of Geithner.”

Meanwhile, Barofsky’s investigators continue to lay into TARP. In a January report, SIGTARP cited an unnamed money manager in TARP’s Public-Private Investment Program, which buys toxic assets, saying the person sold a recently downgraded mortgage-backed bond from a company fund, then promptly purchased the same security in the same amount at a higher price for a fund backed by TARP money.

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.

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.

Culture of Secrecy

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.

Barofsky’s to-do list grows. SIGTARP now has 120 employees, has initiated 20 audits and was involved with 84 investigations as of March 31. In January, it opened a New York office, with San Francisco and Los Angeles branches scheduled for later this year.

That is a significant snip, but there is still much more in the article. Richard Teitelbaum, writing for Bloomberg, compiled an admirable report. Please take a closer look.

In my opinion, back-to-back treasury secretaries Tim Geithner and Hank Paulson are guilty of fraud and/or coercion and belong in prison where they can meditate for the rest of their lives on how and why they are not above the law.

It will be interesting to see just what it takes to get Obama to dump this criminal.

April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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