WASHINGTON -(Dow Jones)- The special inspector general for the government's $700 billion financial-sector rescue plan and the Treasury Department are battling over a program to deal with toxic assets, after a fund manager involved in the program conducted what the inspector general called "unusual trades" last year.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said in a report released Saturday that his office is investigating the actions of a fund manager involved in the Treasury's Public-Private Investment Program, which combines government and private capital to purchase mortgage-backed securities.
The report said the portfolio manager in question controls both the government-backed fund to invest in the securities, as well as a separate fund that invests in similar securities. In late October, the manager sold a certain portion of a recently downgraded mortgage security from the separate fund to a dealer and then minutes later purchased, for the government-backed fund, the same amount of the mortgage security at a higher price.
Though the Treasury and the management company, which was not named pending the investigation, found there was nothing inappropriate about the trades, the report said it raised questions about whether the trades were "designed to push the risk of this downgraded security from the private...fund onto the taxpayer-supported [fund]."
"How can a manager conclude that it is wise to sell a security at one price but then almost simultaneously repurchase the same securities at a higher price," the report from Barofsky's office said.
Herbert Allison, the Treasury's assistant secretary for financial stability, said in a letter to Barofsky responding to the report that the fact the trades were reviewed show the Treasury has adequate controls in place for the program.
"Our view of the example described in your report is that the comprehensive controls established in our PPIP compliance rules are working properly," Allison said in the Jan. 28 letter.
The episode highlights a running battle between the Treasury and Barofsky, who have locked horns over the transparency of the government's efforts to rescue Wall Street firms with taxpayer dollars, as well as the government's arrangement with private-sector financial firms helping to operate the government's programs.
On the PPIP, Barofsky has suggested there should be "walls" between managers controlling taxpayer dollars and those operating similar funds within the same company. According to the report, the Treasury has said requiring such walls "is simply not practical in the context of PPIP," even though some fund managers involved in the program have voluntarily adopted information barriers. Barofsky challenged the Treasury's position.
"In an environment in which large portions of the public already view the fairness of Government programs with skepticism, whether fairly or unfairly, the reputational risk associated with this review is a wholly unnecessary cost," the report said.
A Treasury spokeswoman said requiring separate investment teams for PPIP fund managers "is not necessary and would be detrimental to the program."
More broadly, the report raised concerns about whether the original goals of the TARP were being met. Though the financial system has been stabilized, unemployment remains at extremely high levels, lending by banks has fallen despite the hundreds of billions of dollars injected into the sector, and the government has been unable to effectively address the issue of foreclosures.
"Whether these goals can effectively be met through existing TARP programs is very much an open question at this time," the report said. "And to the extent that the Government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP."
Copyright 2009 Dow Jones Newswires
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