Virus-Bailout Watchdogs Face Immense Task With Echoes of TARP

(Bloomberg) -- The federal watchdog that will oversee thousands of small-business rescue loans worth roughly $350 billion will have to ramp up in a hurry: Last year, it investigated only eight such loans.

“To say the amount of money that’s going out is large, that’s kind of an understatement,” said Hannibal “Mike” Ware, the inspector general of the Small Business Administration, which is scheduled to open the spigot on the small-business bailout Friday.

The $2.2 trillion stimulus bill that Congress adopted last month will give Ware’s office $25 million – more than double its annual budget – to beef up its auditing and investigative capacities over the next four years. Overall, the legislation also establishes a $500 billion bailout fund for large businesses and expands unemployment benefits. To police that spending, it creates layers of oversight that would be paid for with more than $155 million in new funding.

In racing to craft the legislation while building in ways to protect taxpayers, lawmakers borrowed heavily from protections that were put in place for federal bailouts in 2008 and 2009. Already, though, some question whether the bill’s oversight provisions will work in harmony - and whether the watchdogs’ funding will be robust enough.

“Hopefully, they’ll get more,” said Neil Barofsky, a former federal prosecutor who served as the first special inspector general for the Troubled Asset Relief Program. Barofsky’s office, called SIGTARP, received $50 million in seed money in 2008 to examine $435 billion in spending – most of it loans to banks and financial institutions that were concentrated in New York City.

This time around, the big-business bailout provisions will provide as much as $500 billion in loans from the U.S. Treasury and Federal Reserve – and create a new inspector general to oversee them, with start-up funds of just $25 million. Barofsky noted that this new office, called the Special Inspector General for Pandemic Recovery, will have a nationwide purview. That will require a large travel budget and expertise in an array of industries, not just the financial knowledge that SIGTARP’s employees had to have.

“The organization cannot succeed with $25 million,” he said.

Layers of Scrutiny

To be sure, there are additional sources of scrutiny – and more money – tucked into the bill. The Department of Labor’s inspector general received $25 million in new funds to oversee the roughly $250 billion in expanded unemployment benefits that will offset unprecedented job losses.

And, to sit atop the oversight efforts, the bill appoints a “Pandemic Recovery Accountability Committee” of federal inspectors general from 11 different agencies. That panel will receive $80 million in funding to coordinate, support and oversee the other IGs. The committee’s first meeting took place Thursday.

A Congressional Oversight Commission – modeled on a similar panel created for the 2008-09 bailouts – will provide yet another set of eyes on loans issued by the Treasury and the Federal Reserve.

Tensions have already begun to flare between the executive and legislative branches, after President Trump issued a statement last Friday in conjunction with signing the bailout bill, known as the Coronavirus Aid, Relief and Economic Security, or CARES Act. Trump’s signing statement insists the new inspector general must get approval from the White House before telling Congress when it’s been denied information by government agencies.

That triggered stern reactions from congressional Democrats, including House Speaker Nancy Pelosi, Senate Minority Leader Chuck Schumer and Senator Elizabeth Warren.

“Unfortunately, the president has made clear that he intends to disregard critical oversight provisions that hold the administration accountable to the law,” Pelosi said during a live digital town hall on Facebook on Tuesday.

That controversy centers on the inspector general that the law will set up for the big-business loans from the Treasury and the Fed – an office whose role will be almost identical to the 2009-vintage SIGTARP. The 11-year-old forerunner still exists. In February, one of its investigations led to a conviction and a five-year prison sentence.

Since 2009, SIGTARP says, its investigations have sent 300 people to prison and recovered more than $11 billion in taxpayers’ funds.

‘Bound to be Fraud’

“Any time you have a lot of money going out the door that fast in an emergency crisis, there is bound to be fraud,” said Christy Goldsmith Romero, the office’s current chief. “That’s why there has to be a long-term commitment to finding criminal activity and civil fraud.”

SIGTARP and its oversight have had their critics. Some point out that most of its cases involved small community and regional bankers, not high-profile Wall Street figures. Others say it slowed the distribution of funds to failing banks by focusing too much on investigations, fueling a backlash against the 2008-09 bailouts that’s widely believed to have helped spawn the Tea Party and Occupy Wall Street movements.

A SIGTARP spokesman responded by pointing to investigations of banks that refused to lend TARP money to struggling homeowners.

For the general public, the CARES act creates a website to track the anticipated $2.2 trillion in spending, another provision borrowed from the 2009 bailout legislation. The Obama-era website, recovery.gov, was slow to start offering detailed information about spending, but later won an appraisal from the Government Accountability Office as a “good practice.”

The new version will be better, according to Alan Boehm, the executive director of the Council of the Inspectors General on Integrity and Efficiency, or CIGIE. Boehm’s group, an independent agency founded in 2008 to coordinate oversight across government agencies, already has a site, oversight.gov, which is likely to become the CARES transparency tool.

“CIGIE was in its infancy in 2009. The organization has matured,” Boehm said. “We have the data analytics capabilities to provide effective oversight and resources for this.”

Meanwhile, non-government organizations that advocate for federal transparency say effective oversight will require more than expertise and money. At a time of great tension in Washington, Congress and the executive branch will have to exhibit a high degree of teamwork and coordination.

“For the oversight of the coronavirus bailouts to work, a lot of things have to go right,” said Carter Dougherty, a spokesman for Americans for Financial Reform, a policy group made up of 200 civil rights, consumer, labor and other civic groups. “It will demand cooperation with Congress and the various inspectors general that has, to put it mildly, not been a strong suit of this administration. Every Trump administration official needs to be accountable to the inspectors general, and those officials need to be accountable to Congress.”

©2020 Bloomberg L.P.