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Investigation looks into political pressure on bailout distribution

A special inspector at the Treasury Department is auditing the Troubled Asset Relief Program after reports that members of Congress exerted pressure and that banks actively lobbied for the money.

February 13, 2009|Ralph Vartabedian

Amid growing public consternation with the federal banking bailout, the Treasury Department's special inspector general has opened an examination of political influence in handing out some of the $350 billion in federal bank bailout funds, The Times has learned.

The audit, which has just begun, is broad in scope but will focus on lobbying activities by financial institutions and what the special inspector general, Neil Barofsky, has called "outside influences."

The Treasury Department has released $294 billion as of last month, with most of it going to the banking industry in exchange for preferred stock and other bank securities.

When the department launched the banking rescue plan last fall, it set up a process for awarding the massive sums of money outside of public view and with criteria that were not disclosed, even to Congress.

The secrecy fueled suspicion that political influences would be difficult to restrain with so much money at stake and with the banking industry in such disarray. Within months, reports began to surface that banks were actively lobbying for the funds and that members of Congress were exerting their influence on Treasury officials to give money to specific banks.

Sen. Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, asked Barofsky earlier this week for an investigation into possible political meddling in the Troubled Asset Relief Program, or TARP. Grassley has been among the most vocal critics of how the program is working.

Barofsky apparently had already decided on such an investigation. He disclosed his plan deep in a 189-page document sent to Congress on Feb. 6, saying he had begun a "general audit reviewing outside influences on the [TARP] application process."

The investigation hints at what could be a long, drawn-out legal drama. Barofsky, a former federal prosecutor, has his own multimillion-dollar budget and is aligning his office with other federal law enforcement agencies, pledging "robust criminal and civil enforcement against those, whether inside or outside of government, who waste, steal or abuse TARP funds."

Concern about potential influence-peddling was heightened after the disclosure that a bank in Massachusetts received $12 million in TARP funds after Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, had inserted language in the TARP legislation that aimed specifically at helping the bank. The story was first reported in January by the Wall Street Journal.

Frank did not deny trying to help the bank, which he said was put into jeopardy when the U.S. took control of Fannie Mae and Freddie Mac. The value of preferred shares in the mortgage giants held by the bank plunged. In addition to the Massachusetts case, other reports surfaced of banks across the country receiving TARP funds after members of Congress interceded.

Separately, the regular inspector general at the Treasury Department, Eric Thorson, has opened an examination into why the department awarded $400 million to Beverly Hills-based City National Bank.

The Thorson probe is trying to assess why City National, which did not lobby for the funds, received money while other banks did not.

The TARP program, which will hand out approximately $350 billion more this year, is under mounting pressure. Treasury Secretary Timothy F. Geithner stumbled this week in unveiling few details of how the second half of the TARP money would be spent, which sent the stock market into a tailspin.

A special congressional oversight panel, headed by Harvard University law professor Elizabeth Warren, has been set up to monitor the situation. She has issued blistering criticism of the TARP process, telling a Senate hearing last week that the Treasury Department already was facing a $78-billion shortfall in the value of its TARP securities relative to what it had paid out.

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ralph.vartabedian@latimes.com

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