Neil Barofksy, the special inspector-general for the TARP, tells FT he intends to examine whether banks lied in order to be eligible for TARP.
“I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case,” said Mr Barofsky, who has been dubbed the “Tarp cop”.
Just how banks value mortgage-backed securities and other assets on their books has been an issue of intense debate as the financial crisis has unfolded.
Yves Smith explains exactly what this means
Remember, bank had to fall into this funny construct of being sick enough to need help, but not so sick as to be terminal.
And since we are widely reading reports of banks carrying lots of mortgage paper at higher than 80 cents on the dollar (we’ve even seen reports of over 90 cents on the dollar being common) it would appear that Barofsky’s suspicions are well founded.
The upshot, as Smith notes, is that Barofsky may be on a collision course with the Treasury, given that it’s Treasury’s desire to use the PPIP to overpay for bank assets.
Barofsky’s whistleblowing could mess up the plot for Geithner. As we’ve noted, the whole point of the TARP, PPIP, TALF, etc. is to let banks and investors game the system, so that private sector debt can be moved over to the public ledger. That’s the whole idea, and the hope is that the public balance sheet can withstand the blow, while the private sector, cleansed of its toxicity, returns to health.
It hasn’t be sold this week — instead we get pablum about price discovery and frozen markets or whatnot — but this is the idea. So it does not behoove anyone, except, oh, the taxpayer, for someone like Barofsky to call foul, and argue that perhaps some banks haven’t been dealing honest with the government.