Bank Bailout Fraud On the Rise, Probes Continuing, Says TARP Cop

The top U.S. bailout cop said evidence of fraud among banks that sought taxpayer funds was on the rise, and some of his investigations involve amounts exceeding $550 million.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, told the Reuters Washington Summit on Tuesday that his office has 120 open investigations of banks that “reflect the full array of banks that applied for and received TARP funding.”

These cases are likely to lead to criminal charges for more bank executives and founders, Barofsky said.

“I just see those numbers going up,” he added.

Investigations by the SIGTARP, as his operation is known, so far have led to charges against eight bank executives, including Lee Farkas, former head of bankrupt mortgage lender Taylor, Bean and Whitaker.

Farkas is facing federal charges related to his participation in a scheme to fraudulently obtain $553 million in TARP funds for Montgomery, Alabama-based Colonial Bancshares. The investigation prevented the funds from being disbursed, and Colonial subsequently failed.

Barofsky said that some cases could top the Colonial case in terms of the dollar amount of attempted or actual theft from taxpayers. “We have investigations in, above, and below that range,” he added.

The SIGTARP operation is expanding its staff and has opened branch offices in New York, Atlanta, Los Angeles and San Francisco to pursue these investigations, even as the $700 billion bailout program is set to cease new investments on Oct. 3.

Barofsky, who rides around Washington in a black “plainclothes” Chevrolet Impala equipped with a siren and emergency lights, said SIGTARP will hit its peak staff and activity in the next two years, roughly trailing TARP’s peak activity by about a year.

The operation will stay in business until the last dollar of bailout investments is repaid or written off, and because some programs could last 10 years, SIGTARP may have another eight to run. But Barofsky said it would likely scale back within a few years as investments are exited.

Barofsky also said he will audit the General Motors Co. initial public offering soon after it is completed, with the aim of correcting any deficiencies in the process to aid the government’s exit from other investments, such as Chrysler Group, insurer American International Group and automotive lender GMAC Financial Services..

AIG PROBE CONTINUING

Barofsky also said his staff is deep into an investigation of the New York Federal Reserve Bank’s disclosures about controversial taxpayer-funded payments to AIG counterparty banks as part of the insurer’s massive bailout.

Last January, the U.S. House of Representatives Committee on Oversights and Investigations, subpoenaed hundreds of thousands of pages of Fed documents involving the $62 billion in payments to Wall Street and foreign bank to liquidate credit default swap contracts written by AIG. However, the Fed did not provide the same documents to SIGTARP for a previous audit it conducted on the same bank payments.

Disclosure of the payments, often referred to as a “back door bailout” for banks, came months after they were made and fueled public anger over the $180 billion AIG rescue. Treasury Secretary Timothy Geithner, who ran the New York Fed at the time, denied any involvement in the disclosure decisions, but faced calls in Congress to resign over the controversy.

Barofsky’s team is now poring over the documents for clues as to why the New York Fed did not produce them for the SIGTARP audit last year.

“The answer can be (it was a) mistake, it could be a failure of communication, it could be incompetence, it could be obstructive criminal conduct,” he said. “We have to find out the universe of what we didn’t have before we can really effectively interview people and find out what the explanations were.”

He declined to estimate when the AIG probe might be completed. A New York Fed representative could not be immediately reached for comment.

(For more on the Reuters Washington Summit, see) (Reporting by David Lawder; Editing by Tim Dobbyn, Gary Hill)