Thursday, November 13, 2008

Bailout Lacks Oversight Despite Billions Pledged

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111202846_pf.html

Bailout Lacks Oversight Despite Billions Pledged
Watchdog Panel Is Empty; Report Is Unfinished

By Amit R. Paley
Washington Post Staff Writer
Thursday, November 13, 2008; A01

In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric M. Thorson, the Treasury Department's inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

In approving the rescue package, lawmakers trumpeted provisions in the legislation that established layers of independent scrutiny, including a special inspector general to be nominated by the White House and a congressional oversight panel to be named by lawmakers themselves.

Some lawmakers and their aides fear that political squabbling on Capitol Hill and bureaucratic logjams could delay their work for months. Meanwhile, the Congressional Budget Office, which also has some oversight responsibilities, is worried about the difficulty of hiring people who can understand the intensely complicated financial work involved.

The legislation grants the special inspector, who is expected to be the primary overseer of the program, a budget of $50 million. The measure calls for him to conduct audits and investigations of how the government spends money under the bailout program, including on equity investments in firms. In particular, he is to report about any assets acquired and their value, plus an explanation of why they were acquired and details on individuals or companies involved in the transactions.

The leading candidate for the post is Neil M. Barofsky, a federal prosecutor in New York, and his nomination could come as soon as this week, according to people familiar with the matter.

Barofsky, an assistant U.S. attorney in the Southern District of New York, is the chief of the office's mortgage fraud group and the lead prosecutor in the $2.4 billion accounting-fraud case against former executives of the collapsed financial firm Refco. He was formerly a white-collar criminal defense attorney in New York.

It is unclear that Barofsky would be confirmed by the Senate, as required, anytime soon. One complicating factor is a battle between the Finance and Banking committees over which has jurisdiction over the confirmation process. Spokeswomen for both panels said the issue has not been resolved and may not be until after President Bush names his choice.

Nonetheless, the finance committee has scheduled a hearing for Monday afternoon in the event that a nominee is named.

Several congressional aides, however, said they did not understand how the Senate could possibly do all the proper vetting for such a critical appointment in just a few days. Thorson's confirmation process, for example, took nearly a year. But Treasury officials and Senate aides worry that if the nominee is not confirmed next week, when Congress is back in town for a lame-duck session, then the process might be delayed well into next year.

Some Republican lawmakers have said they are also concerned that Democrats may avoid acting on the nomination so that Barack Obama can choose his own special inspector general after he becomes president. But people familiar with the matter said Barofsky, the leading candidate for the position, would be palatable to the incoming administration because he supported Obama.

In the meantime, Thorson is trying to oversee the program in addition to his other responsibilities. Treasury Secretary Henry M. Paulson Jr. asked him to take on those duties. Thorson has a few dozen people working on the program, but none are doing so full time. He said there should be at least 100 people in the new special inspector general's office.

Lawmakers from both parties have criticized the White House for not moving more quickly to name an appointee.

"Considering how taxpayers' money around Washington isn't respected, a day shouldn't go by without having an inspector general checking on it," said Sen. Charles E. Grassley (R-Iowa), the ranking member on the Finance Committee.

Tony Fratto, deputy White House press secretary, declined to comment on the nominee or when he or she would be named but said there is adequate scrutiny of the bailout.

"No program in the history of the federal government has had more layers of oversight and reporting and transparency," he said.

For their part, lawmakers have yet to nominate the five-member Congressional Oversight Panel, though leaders of both parties said they hoped they would be named by the end of the month and start work by December. People familiar with the matter said possible nominees included current and former government and industry officials, though some had to recuse themselves because of conflicts of interest.

The panel's mandate is to look at the use of Paulson's authority and the impact of the program on the financial markets and mortgage crisis.

Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, said his concerns about oversight diminished after the Treasury program's focus shifted from purchases of financial firms' troubled assets to capital injections into companies. "The concern was they'd be buying assets and we wouldn't know the price," Frank said. The revised bailout program "doesn't have the conflicts of interest and the other things people were concerned about."

The delays in selecting both the special inspector general and the congressional oversight panel have prevented the release of a detailed oversight report required in the legislation. Under the law, the congressional panel was required to release a report 30 days after the bailout program began, a deadline that has passed. It is supposed to issue a more elaborate report on the financial regulatory process by Jan. 20, a deadline congressional aides said will be nearly impossible to make.

The special inspector general is supposed to release a report within 60 days of his confirmation. Though Thorson, the Treasury inspector general, is not required to prepare a report, he said he might feel obligated to issue one if the Senate does not confirm a special inspector by Monday.

The Government Accountability Office, the investigative arm of Congress, is also required by the legislation to conduct oversight of the program. The agency's mission is to look at the overall performance of the initiative and its effect on the financial system.

The GAO has dedicated about 20 people to look at the bailout and has office space at the Treasury Department. Agency officials said they expect to issue a brief report on the program, as mandated by the legislation, within the next month.

The legislation also created a body called the Financial Stability Oversight Board, whose five members include Paulson and Federal Reserve Chairman Ben S. Bernanke. But it has no staff of its own, and few expect that policymakers can conduct oversight of themselves. "It's sort of a joke in terms of oversight," a congressional aide said.

Staff writers Lori Montgomery and Dana Hedgpeth contributed to this report.

1 comment:

B2 said...

http://online.wsj.com/article/SB122658994035824547.html

Bush Defends American Capitalism Ahead of G-20 Summit

NOVEMBER 13, 2008, 4:54 P.M. ET Bush Defends American Capitalism Ahead of G-20 Summit
By JOHN D. MCKINNONArticle
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more in Politics »President Bush offered a comprehensive defense of capitalism and the American financial system in a speech in New York today, in the run-up to a weekend meeting of the Group of 20 nations that is likely to feature tough criticisms of the U.S.
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President Bush speaks during an address on the financial markets and world economy in New York on Wednesday.
Citing "outdated regulatory structures" in the U.S. and elsewhere, Mr. Bush said that "reforms in the financial sector are essential," and offered a series of specific responses, including:
Making financial markets more transparent, including improved accounting rules for securities so investors can better understand what they're buying.
Proper regulation of sophisticated financial products. That includes processing of credit default swaps -- which insure investors against potential losses -- through centralized clearinghouses rather than through unregulated over-the-counter markets.
Enhanced national regulation of financial markets around the world.
Better coordination of national laws and regulations, as well as reform of the International Monetary Fund and World Bank, which are viewed by many critics as unfairly dominated by industrialized countries of Europe and North America.
But Mr. Bush also warned against the danger of overregulation, noting that some European countries oversaw their mortgage markets more extensively than the U.S., yet experienced "problems almost identical to our own." (Read the full text of the speech.)
He added that the "long-term solution to today's problems is sustained economic growth. And the surest path to that growth is free markets and free people."
Mr. Bush spoke at Federal Hall on Wall Street, before members of the Manhattan Institute, a conservative think tank. The text of his remarks was released by the White House earlier Thursday.
"It is true that this crisis included failures -- by lenders and borrowers, by financial firms, by governments and independent regulators," Mr. Bush said, according to the prepared text. "But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system. It is to fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people around the world."
Mr. Bush called the weekend G-20 meeting in Washington in response to persistent and widespread calls among European leaders for tougher regulation of the global financial system, and particularly what some European leaders view as the overly-volatile U.S. system. French President Nicolas Sarkozy, for example, has referred to the U.S. devotion to free-market principles as "mad" and has called for an international financial regulator.
But Mr. Bush's remarks on Thursday -- as well as recent comments of other officials -- reflect that expectations for action at the weekend summit are diminishing, given the current administration's opposition to a global financial regulator, as well as the leadership vacuum that's emerging as the incoming administration of President-elect Barack Obama prepares to take office. Neither Mr. Obama nor any of his senior advisers are expected to attend the summit.
Leaders now expect a series of such meetings stretching into next year, and possibly beyond, as they wrestle with difficult decisions about increased international oversight.
In the meantime, this weekend's meeting is shaping up as a largely political event, one that's giving some beleaguered figures such as U.K. Prime Minister Gordon Brown a chance to show themselves as leaders on the world stage. For many, particularly leaders in Europe, it's also a chance to lay the blame for the crisis at the feet of the U.S. -- a charge that Mr. Bush is likely to continue to try to deflect. White House officials have noted for example that European banks showed themselves to be even more vulnerable in the crisis than U.S. banks, although they were supposedly much more tightly regulated.
For his part, the outgoing U.S. president seems to be concerned not only with the U.S. public, but also with people in developing countries who might be put off by the financial chaos that's currently on display.
"Ultimately, the best evidence for free market capitalism is its performance compared to other economic systems," Mr. Bush said Thursday. "Free markets allowed Japan -- an island nation with few natural resources -- to recover from war and grow into the world's second-largest economy. Free markets allowed South Korea to make itself one of the most technologically advanced societies in the world. Free markets turned small areas like Singapore, Hong Kong, and Taiwan into global economic players. And today, the success of the world's largest economies comes from their embrace of free markets.
"Meanwhile, nations that have pursued other models have experienced devastating results. Soviet communism starved millions, bankrupted an empire, and collapsed as decisively as the Berlin Wall. Cuba, once known for its vast fields of cane, is now forced to ration sugar. And while Iran sits atop giant oil reserves, its people cannot put enough gasoline in their cars.
"The record is unmistakable: If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way. The triumph of free market capitalism has been proven across time, geography, culture, and faith. And it would a terrible mistake to allow a few months of crisis to undermine 60 years of success."
Mr. Bush is also in New York to address a United Nations conference on religious tolerance and to meet with King Abdullah of Saudi Arabia.
Write to John D. McKinnon at john.mckinnon@wsj.com