LOS ANGELES AND WASHINGTON — In the first major disclosure of corruption in the $750-billion financial bailout program, federal investigators said Monday they have opened 20 criminal probes into possible securities fraud, tax violations, insider trading and other crimes.
The cases represent only the first wave of investigations, and the total fraud could ultimately reach into the tens of billions of dollars, according to Neil Barofsky, the special inspector general overseeing the bailout program.
The disclosures reinforce fears that the hastily designed and rapidly changing bailout program run by the Treasury Department and Federal Reserve is going to carry a heavy price of fraud against taxpayers -- even as questions grow about its ability to stabilize the nation's financial system.
Barofsky said the complex nature of the bailout program makes it "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering."
The report said little about who is under investigation and how the fraudulent schemes work, but investigators are already on alert for a long list of potential scams. Such schemes could include obtaining bailout money under false pretenses, bilking the government with phony mortgage modifications, and cheating on taxes with fraudulent filings.
"You don't need an entirely corrupt institution to pull one of these schemes off," Barofsky said. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off a collusion or a kickback scheme."
The risk of fraud is only increasing as the bailout becomes "more complex and larger in scope," he said.
Indeed, much of the 247-page report released in Washington today by Barofsky's office focuses on a segment of the bailout that is only now being put into motion -- an effort to buy toxic securities from banks and other investment groups in which the federal government would provide up to 92.5% of the money. That effort could be the most vulnerable to fraud, Barofsky said, because investors would have so little at risk.
Among the toughest recommendations in the report is for the Treasury to abandon its planned structure for buying the toxic securities, which include intricate bundles of bad mortgages and loans, before it gets rolling.
