Auditors fault US government’s $700-billion bailout supervision

The US government under the Bush administration has been quite liberal in its handouts to beleaguered institutions during this current global crisis, but evidently it is not doing enough to ensure that these funds are being spent as promised and required.

The first official review of the government's $700-billion financial rescue plan said that the US Treasury has yet to address "critical" oversight issues to ensure the plan is working (See: Paulson for immediate approval of $700-billion package)

The Government Accountability Office's (GAO) study, presented to the Congress yesterday, found that the Treasury programme needs more staff, better management, an improved transition effort and facilities to ensure banks are using bailout funds effectively.

"Without effective oversight, Treasury cannot ensure that those receiving funds are complying with [the capital purchase programme's] requirements," the report said.

The 72-page report called for a consistent process for monitoring participating institutions, so that Treasury can identify and address any potential compliance issues with banks receiving funds from the Troubled Asset Relief Program, or TARP.

The auditors specifically cited weaknesses in determining whether institutions that received bailout money are complying with limitations on executive compensation and dividend payments. For instance, some top executives at institutions that receive rescue funds must repay any incentives or bonus pay that was based on inaccurate financial statements.

"Treasury has not yet determined how it will monitor compliance with this or other requirements such as limitations on dividend payments and stock repurchases," the report states.

In addition, the GAO recommended that the Treasury speed hiring in its office that oversees the rescue effort and keep top positions filled during the transition to the Obama administration next month. The department also needs to develop internal safeguards that "are robust enough to protect taxpayers' interests."

The auditors acknowledged that the program, created on 3 October to help stabilize a rapidly faltering banking system, was less than 60 days old and has been adjusting to an evolving mission. But the 72-page report was bound to feed congressional concern that banks and other institutions are not being properly monitored and are not using the money to increase lending.

In a response to the GAO, Neel Kashkari, who heads the department's Office of Financial Stability, said the agency was developing its own compliance program and indicated that it disagreed with the need to work with regulators.

"The GAO's discouraging report makes clear that the Treasury Department's implementation of the (rescue plan) is insufficiently transparent and is not accountable to American taxpayers," said House Speaker Nancy Pelosi.

The Treasury so far has injected $150 billion in capital into the financial system by buying preferred shares in 52 institutions. Treasury Secretary Henry Paulson said Monday that the department is reviewing hundreds of applications from banks seeking funding.

The GAO is one of three watchdogs that Congress has assigned to monitor the dispensation relief under the TARP. A congressional oversight panel is scheduled to issue its report on 10 December. In addition, Congress created an office of inspector general to oversee the program, but the appointment to the post has been anonymously blocked in the Senate.