City University of New York
Bernard Baruch College
Ethical issues found in TARP disclosure of information and how these have been
addressed
Luis S. Sued
February 2010
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Ethical issues found in TARP disclosure of information and how these have been
addressed
In response to chaos created by the current crisis, congress passed the Emergency
Economic Stabilization Act of 2008 (EESA). This act included the creation of the
Troubled Asset Relief Program (TARP), with the intention of providing $700 billion to
firms that were holding troubled assets and had difficulty in accessing credit. The rapidity
with which the act was proposed and passed was unprecedented. Because of the prompt
decisions and conclusions, ethical issues pertaining to TARP’s disclosure of information
had not been properly addressed. The Bush administration was aware of this, but it has
been the Obama Administration that started to address these ethical issues. Then
President-elect Barack Obama, as well as other politicians, criticized TARP regarding
issues ranging from the disclosure of information to the stated purpose of the program.
The Department of the Treasury and other agencies responded to some of the comments
and criticisms to correct the information policy issues found in the act.1
The Troubled Asset Relief Program was created in an effort to assist the economy
during the credit crisis. According to Nothwehr, “Congress passed the EESA with the
goal of stabilizing the economy by thawing frozen credit markets, both for consumer
lending and for lending between banks.” 2
The Financial Stability Oversight Board (FSOB), on which the Secretary of the
Treasury and the Chairman of the Federal Reserve Bank serve as officers, is responsible
for reviewing TARP’s operations and to recommend improvements. There is also a
Special Inspector General who keeps track of the institutions participating in TARP and
1
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
Stone P. Revamping The Bailout. National Journal. (2009)
2
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
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the Congressional Oversight Panel. President Barack Obama nominated Fannie Mae’s
CEO Herb Allison, to oversee TARP. Allison has been at this capacity since June.3
Two main goals of the act are a) increase investor confidence and b) enable
markets to resume operations. Even though the goals of the program have increasingly
become common knowledge in the United States, the way in which the funds have been
used and the information that has been released have not been sufficient to satisfy the
public. There were two ethical issues regarding the release of information that were
raised upon the inception of the act and various sub-issues. These issues have been poorly
addressed and in some instances not addressed at all.4
The ethical issues were: 1) release of information regarding how the Treasury
decides who gets access to the funds and 2) the vagueness in TARP’s written strategy and
bank accountability (transparency), including disclosure of how taxpayer’s money has
been used thus far. Some of the key figures voicing their opinions about the oversight and
control of the TARP funds are President Obama, Barney Frank, House Financial Services
Committee Chairman and Ed Yingling, president of the American Bankers Association.5
The Congressional Oversight Panel released a second report on accountability for
the Troubled Asset Relief Program in January 9, 2009, which said the Department of the
Treasury had not addressed the question, “How is the Treasury deciding which
institutions receive money?” U.S. Citizens are aware that in the long-term, as taxpayers,
they will carry the burden of paying off all of the money lent to institutions if the money
is not paid back. Since citizens will carry this burden, they should be granted access to
3
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
Pulizzi, H. Fannie Mae CEO Allison to Run TARP. Wall Street Journal Online. (2009)
4
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
5
Stone P. Revamping The Bailout. National Journal. (2009)
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the information regarding how the Treasury decides who gets funds. It is very ambiguous
as it stands. The act uses vague terms to define who obtains money and the amount is
exclusively determined by the Treasury. According to Nothwehr, “The act’s criteria for
participation are very unclear”… “The Treasury will need to define what institutions will
be included under the term ‘financial institution’ and will constitute ‘significant
operations.’” 6
According to the report by the oversight panel, the Treasury referred them (the
panel) to their online website, without concrete explanations about the criteria used.
Based on the report, the Treasury defined their activities as an “efficient use of funds.”
This is very problematic because the Treasury was not providing the details they should
release to individuals who provided the funds for TARP’s operations. 7
In a follow-up question, the panel tried to find out how the Treasury decided what
company would get a cash infusion or purchase of stocks, etc. The Treasury abstained
from answering, further retaining the amount of information released to the public.8
In an interview with George Stephanopoulos on ABC's "This Week" on January
11, 2009, President Barack Obama talked about his perspective on TARP funds: “this is
not just money that is being given to banks without any strings attached and nobody
knows what happens, but rather that it is targeted very specifically at getting credit
flowing…” Obama’s new proposed measures targeted the release of information
6
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
7
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
8
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regarding disclosure of criteria for institutions obtaining funds and where the money had
gone.9
In addition to the release of information regarding how the Treasury decided who
was eligible to obtain TARP funds, there was the issue of the vagueness in TARP’s
written strategy. Individuals researching information regarding TARP funds will have a
hard time trying to understand the terms the Treasury used in the first draft of the act and
subsequent documents. The vagueness of the words allows for many interpretations and
misinterpretations. According to the article “Revamping the Bailout,” published by the
National Journal, “bank lobbyists have criticized TARP for failing to define its mission
and sending confusing signals.” Perhaps one of the ideas behind the vagueness in the
Treasury’s words is a concern to prevent the stock and credit markets from overreacting
to the statements.10
In its second report, the oversight panel asked Treasury about its strategy. The
Treasury responded using vague terms such as, “protect taxpayers.” The poorly defined
goals of the TARP by the Treasury did not answer the many questions American citizens
had. In the same report, the panel argued that the data provided by the Treasury to prove
whether the strategy was working was not specific. For example, they provided the panel
with dateless data about credit spreads. The information released was not even relevant to
what the panel had asked for. In addition, the report included a table with many questions
unaddressed by Treasury.11
9
Sweet, L. Obama interview with George Stephanopoulos on ABC’s “This Week.” Transcript. Chicago
Sun-Times Online. (2009)
10
Stone P. Revamping The Bailout. National Journal. (2009)
11
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
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Adding to the strategy question, the Congressional Oversight Panel asked
Treasury if the public was receiving a fair deal, to which the Treasury responded that
taxpayers will earn money on appreciation in market value of institutions. The specific
details were not even mentioned and are further vague. In trying to dig for more
information, the panel asked the Treasury to compare the terms obtained by it to the
terms private companies obtained and the Treasury did not care to answer. Not only was
information unreleased, but any unfairness taking place is subject to corruption by policy
makers overseeing TARP. 12
In the December 2009 Oversight Report by the Congressional Oversight Panel, the
authors summarized criticism by Charles Calomiris, Henry Kaufman Professor of
Financial Institutions at the Columbia Business School, about TARP's effectiveness: "He
maintains that Treasury has never clearly and comprehensively articulated goals and
principles to guide its TARP activities. Rather, it has employed 'ad hoc interventions,
justified as they go along, which are inconsistent with one another and follow no clear set
of discernible principles.'”13
In addition to the release of information regarding the Treasury’s strategy and the criteria
to decide who obtains funds, there exists another ethical issue. This was the release of
information regarding bank accountability, or transparency. 14
In the interview with Stephanopoulos, Obama said, “I, like many, am
disappointed with how the whole TARP process has unfolded. There hasn't been enough
12
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
Warren, E. December Oversight Report. (2009)
14
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
13
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oversight. We found out this week in a report that we are not tracking where this money
is going.”15
Obama was quick to recognize that the oversight of the funds was not properly in
place. Many issues regarding what is being done and what is released are unresolved.
According to Nothwehr, “It seems certain that institutions who participate in TARP will
have to publicly disclose information pertaining to their participation.” However, this
information is not being publicly disclosed and the only details of transactions taking
place are summarized in Office of Management and Budget’s The Troubled Asset Relief
Program: Report on Transactions Through December 31, 2008. The information released
in this report is just a compilation of the amount given to some of the institutions
receiving TARP funds. The requirements and conditions are not mentioned and the report
lacks further details about the transactions, apart from the amount given to the
institutions.16
In an address at the Brookings Institution on December 8, President Obama talked about
the savings American taxpayers will attain as a result of revamped management of the
TARP program after recognizing that the program was flawed and improperly managed.
"In fact, because of our stewardship of this program, and the transparency and
accountability we put in place, TARP is expected to cost the taxpayer at least $200 billion
less than what was anticipated just this summer," President Obama stated.17
In addition to President Obama’s criticism of TARP funds oversight, Barney
Frank, House Financial Services Committee Chairman, introduced a bill which amends
15
Sweet, L. Obama interview with George Stephanopoulos on ABC’s “This Week.” Transcript. Chicago
Sun-Times Online. (2009)
16
Nothwehr, E. Emergency Economic Stabilization Act of 2008. (2009)
Sunshine, R. The Troubled Asset Relief Program: Report on Transactions. (2009)
17
Obama, B. Remarks by the President on Job Creation and Economic Growth. (2009)
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current TARP policies, suggesting greater oversight over companies’ disclosure of
information. The act, entitled: TARP Reform and Accountability Act of 2009, asks for
“periodic and public reporting on use of assistance.” The idea is to require companies
using TARP funds to disclose quarterly their use of the funds. In addition, the bill
requires companies to report any increase or decrease in the amount borrowed from the
government. This initiative has been paving the ground for stronger oversight of where
the funds are going. Companies should be forced to disclose all information regarding
what is being done with the funds taxpayers are providing.18
In his Opening Statement on December 10, 2009, during the Congressional Oversight
Panel Hearing with Treasury Secretary Timothy Geithner, Damon Silvers, a member of
the Public Company Accounting Oversight Board Standing Advisory Group and the
Financial Accounting Standards Board Advisory Council, stressed the still unaddressed
transparency issues after various reports suggesting Treasury's attention to this. “This
Panel has found in report after report that TARP transactions have been undertaken on
less than fair terms to the public, that there have been issues of transparency in key TARP
actions including the stress tests...,” said Silvers.19
The release of information regarding what is being done with taxpayers’ money is
a main concern we should have. Many media articles since TARP started in 2008, have
accused companies like AIG and Bank of America of paying unfair bonuses to
employees. Information regarding this has not been released. In addition, there exists the
uncertainty as to whether banks are helping the economy by receiving these funds.
18
Frank, B. TARP Reform Accountability Act of 2009. (2009)
19 Silvers, D. Opening Statement of Damon Silvers, Congressional Oversight Panel Hearing with Treasury
Secretary Timothy Geithner. (2009)
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In its second report, the Congressional Oversight Panel asked the Treasury what
the financial institutions were doing with the funds. The Treasury responded by saying
that banks increased the level of loan loss provision and that it would take time for banks
to resume lending activities. This is yet another vague answer. As providers of these
funds, we do not know what is being done with the money. There exists a lack of
transparency compelling us to think that perhaps we are being taking advantage of. As
the main authoritative agency, the Treasury should provide enough information to let the
public know if this infusion of money to institutions was a mistake or if it is working and
how. This could be as simple as having institutions report the breakdown of where the
money goes.20
According to an article in cnn.money.com, Citigroup is the only institution that
came clean in releasing information about their strategy for the funds provided by the
Treasury. Citigroup said it was going to use $36.5 billions of the $45 billion provided to
it to resume lending activities previous to Citigroup's repayment of $20 billion in funds in
late 2009. None of the hundreds of other institutions that have received TARP funds have
released any information yet.21
The use of funds to pay for undeserved bonuses to employees has been another
main issue. In 2008, companies such as AIG and Bank of America decided to pay large
bonuses to employees after having received TARP funds. According to a States News
report, “One of the main themes you hear over and over again is the public’s concern
about the amount of compensation that executives at ‘Wall Street’ firms earned over the
20
21
Warren, E. Accountability for The Troubled Asset Relief Program. (2009)
Ellis, D. Citi comes clean on TARP uses. CNNMoney.com. (2009)
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years, as their companies were making decisions that ultimately contributed to the crisis
we are currently experiencing.” This information has not being released by banks.22
In the same report, the speaker said the SEC was concerned with the disclosure of
information regarding executive compensation. However, we have not seen any
substantial action to support what they said. Even though they have raised the issue, a
solution has not been provided. The lax rules that the SEC, which is supposed to be the
regulator regarding the release of information by publicly run companies, are not
effective. This would further complicate the ability of the SEC to obtain information for
the public regarding payments and compensations. According to the report,
“…companies failed to provide informative analysis on one or many levels, thereby
depriving investors of critical information on fundamental compensation practices and
decisions.” This conclusion is not referring to only TARP recipients, and it makes clear
how far the government is from collecting information to let the public know where the
money is going.23
In the proposed TARP Reform and Accountability Act of 2009, House Financial
Services Committee Chairman Barney Frank addressed issues regarding the
compensation packages for the executives whose companies received TARP funds.
Unfortunately, the act does not include any provision regarding the disclosure of this
information to the public.24
There are some measures that have been taken by individuals in the United States
to encourage or force, the release of information regarding executive pay. According to
22
States News Service. Executive Compensation Disclosure:
Observations On Year Two and a Look Forward to Changing Landscape for 2009. (2009)
23
States News Service. Executive Compensation Disclosure:
Observations On Year Two and a Look Forward to Changing Landscape for 2009. (2009)
24
Frank, B. TARP Reform Accountability Act of 2009. (2009)
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ABC.go.com, Attorney General of New York, Andrew Cuomo subpoenaed AIG and
Bank of America to release information on executives’ salaries. This measure serves as a
good example to encourage transparency by other companies who have received TARP
funds.25
Six months after TARP’s inception, policy makers were still struggling to address
the many concerns raised. So far, some measures have been taken and others are
currently being implemented. The Obama administration is more focused on oversight
than the Bush administration was.
In an effort to correct the lack of transparency, oversight and proper disclosure of
information, the United States Government Accountability Office posted an online
document entitled: Status of Efforts to Address Transparency and Accountability Issues.
The report provides suggestions to the Treasury on how to properly address unresolved
issues. The report suggests the Treasury to, “Communicate a clearly articulated vision for
TARP and how all individual programs are intended to work in concert to achieve that
vision.”26
In addition, the accountability office recognized the Treasury’s efforts in
addressing oversight issues such as compliance and oversight of companies but also
raised a concern about “less progress in improving the transparency of the program…” 27
The government is restructuring the processes by which TARP operates. Even
though the plan has a long way to go regarding ethical issues regarding information
disclosure on TARP, we have to recognize their ability to address the issues raised.
25
Katersky, A. & Sauer, M. Judge Rules Bank of America Must Reveal Bonus Information. ABC News
Online. (2009)
26
Dodaro, G. Status of Efforts to Address Transparency and Accountability Issues.(2009)
27
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An indicator of the Treasury’s response to the criticisms by U.S. citizens and
politicians is the Financial Stability Plan. This plan can be found online in the Treasury’s
website. It addresses two main information policy issues.
These are: 1) increased
transparency and 2) disclosure. This is the main step the Treasury has taken to ensure
information is properly released to tax payers and U.S. citizens in general. Overall, the
new administration is moving to correct problems. 28
Another document that is periodically updated by the Treasury Department and which
must current version was released on January 15, is the Office of Financial Stability
Troubled Asset Relief Program Transactions Report. The report which lists the
investments made in public companies, as well as which companies have repaid the loans
back to the Treasury.29
Although TARP has been widely criticized, it has restored confidence to the
markets to some degree. This seemed to be the main purpose and so far it is succeeding.
Since addressing the public’s concerns regarding what is happening and the disclosure of
activities was not the first priority, the Treasury is progressing only slowly to address this
issue. Given the amount of money used for the “financial bailout,” the release of
information by the previous administration was very poor. The carelessness shown here
increased the risk of corruption. Fortunately, the Obama administration is moving in the
right direction and more information is being released. Given the rapid implementation of
the program and the emergency state of the economy during TARP’s creation, the
government did a sufficient job disclosing information then. Now that the emergency has
passed, the disclosure of information should cover what happened before and what is
28
29
Financial Stability Online. Fact Sheet Financial Stability Plan. (2009)
Allison Jr., H. Troubled Asset Relief Program Office of Financial
Stability for the year ended September 30, 2009. (2010)
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happening now regarding the funds. As long as citizens are directly or indirectly
connected to the funds given to institutions, they should know where every single dollar
is going. The arguments such as, “the economy is our priority,” does not diminish the
responsibility and duty of the government to fully inform all the parties involved in the
transactions of TARP funds.
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Works Cited List
Allison Jr., H. (January 15, 2010). Troubled Asset Relief Program Office of Financial
Stability for the year ended September 30, 2009. Retrieved January 30, 2010 from
http://www.treas.gov/press/releases/OSF AFR 09.pdf
Dodaro, G. (2009, February 5). Status of Efforts to Address Transparency and
Accountability Issues. Retrieved April 10, 2009, from
http://www.gao.gov/new.items/d09296.pdf
Ellis, D. (2009, February 3). Citi comes clean on TARP uses. Cnnmoney.com. Retrieved
April 14, 2009, from
http://money.cnn.com/2009/02/03/news/companies/citigroup_tarp/index.htm
Financial Stability Online. (2009, March 31). Fact Sheet Financial Stability Plan.
Financial Stability.gov. Retrieved April 13, 2009, from
http://www.financialstability.gov/docs/fact-sheet.pdf
Frank, B. (2009, September 1). Tarp Reform and Accountability Act of 2009. Retrieved
March 31, 2009. From the Library of Congress web site:
http://thomas.loc.gov/cgibin/bdquery/D?d111:3:./temp/~bdf1hH::|/bss/111search.
html|.
Katersky, A. & Sauer, M. (2009, March 18). Judge Rules Bank of America Must Reveal
Bonus Information. ABC News Online. Retrieved April 14, 2009, from
http://abcnews.go.com/Blotter/story?id=7115278&page=1
Nothwehr, E. (2008, December). Emergency Economic Stabilization Act of 2008.
Retrieved March 25, 2009, from University of Iowa, Center for International
Finance and Development Web site:
http://www.uiowa.edu/ifdebook/issues/bailouts/Bailout_Plan_Outline.pdf
Obama, B. (2009, December 8). Remarks by the President on Job Creation and
Economic Growth. Retrieved January 30, 2010, from
http://www.whitehouse.gov/the-press-office/remarks-president-job-creation-andeconomic-growth
Pulizzi, H. (2009, April 18). Fannie Mae CEO Allison to Run TARP. Wall Street Journal
Online. Retrieved April 18, 2009, from
http://online.wsj.com/article/SB124000437105430225.html
Silvers, D. (2009, December 10). Opening Statement of Damon Silvers
Congressional Oversight Panel Hearing with Treasury Secretary Timothy
Geithner. Retrieved January 30, 2010 from
http://cop.senate.gov/documents/statement-121009-silvers.pdf
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States News Service. (2008, October 21). Executive Compensation Disclosure:
Observations On Year Two and a Look Forward to Changing Landscape for
2009. States News Service. Retrieved March 25, 2009, from LexisNexis
Academic Universe database.
Stone, P. (2009, January 16). Revamping The Bailout. National Journal. Retrieved
March 25, 2009, from Academic Search Premier database.
Sunshine, R. (2009, January 16). The Troubled Asset Relief Program:
Report on Transactions Through December 31, 2008. Retrieved March 25, 2009,
from the Congressional Budget Office web site:
http://www.cbo.gov/ftpdocs/99xx/doc9961/01-16-TARP.pdf
Sweet, L. (2009, January 11). Obama interview with George Stephanopoulos on ABC’s
“This Week.” Transcript. Chicago Sun-Times online. Retrieved April 10, 2009,
from
http://blogs.suntimes.com/sweet/2009/01/obama_interview_with_george_st.html
Warren, E. et al. (2009, January 9). Accountability for the Troubled Asset Relief
Program. Retrieved April 6, 2009, from http://cop.senate.gov/documents/cop010909-report.pdf
Warren, E. et al. (2009, December 9). December Oversight Report, December 9, 2009
Taking Stock: What Has the Troubled Asset Relief Program Achieved? Retrieved
January 30, 2010, from http://cop.senate.gov/documents/cop-120909-report.pdf
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