By Tom Braithwaite in Washington
Neil Barofsky, the special inspector-general overseeing the US government’s financial rescue efforts, is to probe allegations of insider trading among bank executives and their associates.
Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.
Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.
“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”
Sig-Tarp, the office of the special inspector-general, published its quarterly report to Congress on Sunday, criticising the capital investments in banks as having failed to stimulate lending.
“Part of the problem is, when the Tarp funds were extended . . . although there was this public disclosure that the purpose of these programmes was to increase lending, very little, if anything, was done to encourage or direct lending,” said Mr Barofsky.
The Treasury is celebrating faster than expected Tarp repayments from the financial sector; it now expects relatively small losses, with some elements generating big profits.
While Mr Barofsky acknowledges this, he said there remained substantial problems with the struc-ture of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.
He said there should be walls between fund managers taking part in PPIP, which co-invests government funds with those of the private sector, and managers at the same firm buying and selling similar securities.
An example of suspicious activity at an unnamed firm showed a manager selling a security from a non-PPIP fund and then buying it back at a slightly higher price with a taxpayer-supported PPIP fund minutes later.
“The rules are insufficient,” said Mr Barofsky. He said even if the behaviour, which Sig-Tarp is investigating, was found to be within the rules “it still creates this credibility issue, this reputational damage, this appearance of fund managers gaming the system”.
The Treasury said it had identified the suspicious behaviour and brought it to the attention of Sig-Tarp, showing that the system was transparent.
In another example of the sometimes fractious relationship with Treasury, Herb Allison, the Treasury’s head of Tarp, said that Ken Feinberg, the so-called pay tsar, had initiated contact with the New York Federal Reserve to discuss pay at AIG long before Sig-Tarp had made the recommendation in a previous report.
Much of Sig-Tarp’s new report is given over to an examination of the housing market and the multitude of government schemes designed to support lending and help homeowners avoid foreclosure.
“The government has done more than simply support the mortgage market,” the report said. “In many ways it has become the mortgage market with the taxpayer shouldering the risk that had once been borne by the private investor.”
Mr Barofsky added: “All of the things that were broken in the housing market and the different roles that different private players have played, some of what we recognise now . . . actually contributed to the bubble and to the ensuing crisis are really being replicated by government actors.”
His latest report said Tarp was entering a transition as financial aid for banks including Bank of America and Wells Fargo & Co was recouped.
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