The Treasury Department failed to document how decisions were made regarding its involvement in a Federal Reserve loan program, and it hasn't planned for a scenario that could leave the department on the hook for billions of dollars, according to a new Government Accountability Office report released Friday.
The Term Asset-Backed Securities Loan Facility (TALF) was designed to reopen the securitization market to facilitate consumer and business lending. Managed by the Federal Reserve Bank of New York, TALF will provide up to $200 billion in loans to institutions seeking to purchase asset-backed securities and commercial mortgage-backed securities, in exchange for collateral in the form of securities, which would be forfeited if the loans are not repaid.
The Treasury has pledged $20 billion in TARP funds to purchase the TALF loans' underlying collateral if participants default. As of December, the New York had made $61.6 billion in TALF loans and received $100 million in TARP funds for the program.
The report generally gave high marks to the TALF program itself, nothing that it "appears to be contributing to measured improvements in the securitization markets."
However, the GAO concluded that TALF still poses risks.
"A return to 2008 conditions could have adverse impacts on the program, such as significantly reducing the value of TALF collateral, providing an economic incentive for borrowers to walk away from their loans, and requiring TARP funds to be used to buy TALF collateral," the report said.
But more significantly, the GAO report blasted Treasury for a lack of transparency surrounding its involvement in the program. It notes that officials were unable to provide documentation on how decisions regarding its role in TALF were made.
"As we noted in past TARP reports, Treasury has yet to develop systems to ensure the transparency and accountability for TARP activities by implementing a strong, transparent strategic framework with the appropriate oversight mechanisms," the report said.
The report urged the creation of a system to track why Treasury officials make certain decisions and how those decisions fit with the overall goals of the government's economic stability efforts.
"Unless Treasury documents the rational for major program decisions that it made with the Federal Reserve, it cannot demonstrate accountability for meeting the goals of TALF and could unnecessarily place TARP funds at risk," the GAO wrote.
The report also said Treasury failed to develop a plan to track and report on the performance of TALF collateral. The GAO explained that because Treasury considers it unlikely that it will have to use TARP funds to purchase the collateral, it did not develop plans for that contingency.
The watchdog was especially critical of the lack of planning, noting that Treasury had time to do so, as TALF's first activity did not occur until March 2009.
In its response to the GAO, included as an appendix in the report, Assistant Secretary for Financial Stability Herbert Allison wrote that the Treasury appreciates GAO's suggestions regarding stronger documentation. "Treasury is committed to ensuring that not only TALF but TARP as a whole is administered in a way that protects the taxpayer," Allison wrote.
"Treasury will also continue to enhance its existing reporting on its investments in TALF that strikes an appropriate balance between our goal of transparency and the need to avoid compromising either the competitive positions of investors or Treasury's ability to recover funds for taxpayers," Allison added.
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