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Bailout watchdog kicks Timmy in the nads: PPIP can be gamed, 20 criminal investigations open on TARP

About time:

The U.S. Treasury's plan to purge toxic assets from banks' balance sheets is vulnerable to fraud and abuse and needs tough rules against conflict of interest, the government's bailout watchdog said on Tuesday.

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program (TARP), said in a report that subsidies for public-private investment partnerships (PPIP) to buy assets could expose taxpayers to higher losses without corresponding increases in the potential for profit.

"Aspects of PPIP [the program Elizabeth Warren couldn't pronounce on Jon Stewart] make it inherently vulnerable to fraud, waste and abuse, [Silly, that's the whole point!] including significant issues relating to conflicts of interest facing fund managers [ditto!], collusion between participants [ditto!] and vulnerabilities to money laundering [ditto!]," said Barofky's second quarterly report since he took office in December.

Fucking straight arrows. What's wrong with these guys?

He called on the Treasury to impose strict rules to screen investors in such funds and for the disclosure of ownership stakes and all transactions in them. [quis custodiet ipsos custodes? I mean, Treasury's a branch of Goldman Sachs -- heck, the government is -- so how does that work, exactly?] And Managers running them should comply with "know your customer" requirements [They all know each other! That's the whole point!] for banks and brokers under anti-money-laundering* laws.

The Treasury is accepting, through Friday, asset managers' applications to run public-private investment funds to buy illiquid securities backed by troubled mortgages that are owned by banks. [Perhaps there's still time for us to apply!] This is part of its plan to sell off up to $1 trillion in toxic assets that are constraining bank lending.

The Treasury is expected to name initial fund managers on May 15, with asset purchases to commence sometime in the ensuing weeks and months [pretty vague...].

Barofsky's report called the plan, and a corresponding expansion of a Federal Reserve securities loan program to up to $1 trillion, a "tremendous expansion in the scope, scale and complexity of the TARP."

It warned of higher risks associated with investing in toxic securities, and said taxpayers could suffer bigger losses if public-private investment funds were allowed to finance securities purchases by borrowing from the Fed's Term Asset-Backed Securities Loan Facility.

The taxpayers' subsidies could dilute private investors' financial commitments, or "'skin in the game' and therefore reduce their incentive to conduct appropriate due diligence," [But since all the insiders know it's a scam, how exactly is due diligence to be conducted?].

In a response to a draft of the report, the Treasury's administrator for TARP, Neel Kashkari, said the Treasury will consider [haw!] the suggestions.

"As you recommendations make clear, there are risks associated with investing in or lending against legacy assets, which is in part why markets for them are currently frozen," Kashkari said in an April 14 letter attached to the report.

Barofsky's report confirmed that his office has opened nearly 20 preliminary and full criminal investigations associated with the $700 billion bailout program. These range from large corporate and securities fraud matters affecting TARP investments to insider trading, public corruption and mortgage modification fraud. It did not disclose any specific cases.

Light posting from me today, so no time to add the linky goodness, but you regular Corrente readers have heard all this before.

NOTE Interesting the money laundering focus. Remember this?

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