• Expansion of TALF: The announced expansion of TALF to permit the posting of MBS as collateral poses significant fraud risks, particularly with respect to legacy residential MBS ("RMBS"). SIGTARP has made a series of recommendations to mitigate these risks, including, among others, that Treasury should require a security-by-security screening for legacy RMBS; that any RMBS should be rejected as collateral if the loans backing particular RMBS do not meet certain baseline underwriting criteria or are in categories that have been proven to be riddled with fraud, including certain undocumented subprime residential mortgages (i.e., "liar loans"); and that Treasury should require significantly higher haircuts for all MBS, with particularly high haircuts for legacy RMBS.(via Wizbang, TPMMuckraker)
• PPIP Fraud Vulnerabilities: Aspects of PPIP make it inherently vulnerable to fraud, waste, and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering. SIGTARP has made a series of recommendations to address these concerns, including, among others, that Treasury should (i) impose strict conflict-of-interest rules upon Public-Private Investment Fund ("PPIF") fund managers, (ii) mandate transparency with respect to the participation and management of PPIFs, including disclosure of the beneficial owners of the private equity stakes in the PPIFs and of all transactions undertaken in them, and (iii) that all PPIF fund managers have stringent investor-screening procedures, including comprehensive "Know Your Customer" requirements at least as rigorous as that of a commercial bank or retail brokerage operation.
• Interaction Between PPIP and TALF: In announcing the details of PPIP, Treasury has indicated that PPIFs under the Legacy Securities Program could, in turn, use the leveraged PPIF funds (two-thirds of which will likely be taxpayer money) to purchase legacy MBS through TALF, greatly increasing taxpayer exposure to losses with no corresponding increase of potential profits. Such an expansion could cause great harm to one of the fundamental taxpayer protections in the original design of TALF by significantly diluting the private party’s personal stake, the "skin in the game," and therefore reduce their incentive to conduct appropriate due diligence. Treasury should not allow Legacy Securities PPIFs to invest in TALF unless significant mitigating measures are included to address the dilution of this incentive, which could include prohibiting the use of leverage for PPIFs investing through TALF or proportionately increasing haircuts for PPIFs that do so.
Wednesday, April 22, 2009
From the April 21st Quarterly Report of the Special Inspector General of the Toxic Assets Relief Program, on TARP and the Troubled Asset Lending Facility and Public-Private Investment Program (at 6-7):