Academic

Last week, Neil Barofsky, the Special Inspector General of the TARP, released his latest report on the implementation of the TARP program.  Most news agencies responded to sound-bite sentences in the report that TARP "had not worked" and that there still was too much risk in the system and that we may be creating a second housing bubble.  The report also contained criticisms of the New York Fed's handling of AIG (they should have been stronger negotiators, among other things), and of executive compensation in general. 

The document also contained an accounting of numerous audits that SIG Tarp was conducting (many of which had been referred by various Congressmen), and the (many) criminal and civil investigations of fraudulent conduct that had occurred in connection with TARP monies and programs.

In other words, it was a really big report (224 pages), which immediately triggered the question: What is the boundary of the SIG's authority?  Ordinarily, we might expect an Inspector General to conduct audits and investigations around the implementation of agency programs, and to investigate specific allegations of wrongdoing within a particular agency.  Does the critique of policy exceed such boundaries? 

With regard to the TARP programs, it's easy enough to envision what we would expect an SIG to do: We want to know how much money is being spent, where it's going (and whether the beneficiaries are the ones intended by Congress), and whether proper procedures are being used to document where and how the money is being used.  We also want to identify those individuals who are abusing TARP programs and/or violating the law so that we can punish and deter future abuses and violations. 

But it is not at all clear to me that a Special Inspector General should be weighing in on government policy decisions,much less predicting the housing market or ecnomy's future.  For one thing, the skill-set is wrong.  Neil Barofsky was not picked for his expertise and knowledge of financial matters.  To the contrary, he was chosen to be the SIG because he was a former prosecutor (full disclosure: we overlapped during our terms at the United States Attorneys Office, but did not know each other well). Prosecutors should be very good at overseeing audits, reviewing internal processes, and investigating fraud.  Prosecutors have no reason to be very good at working out the nuances of financial regulation. 

Moreover, one has to be worried that we are creating another Eliot Spitzer/Andrew Cuomo-esque culture of prosecutorial celebrity here.  Neil is already doing the rounds of business news shows, and New York Magazine has published a couple of short puff pieces admiring the fact that he was such a "bad-ass" (their word, not mine) with criminal defendants (the intended analogy to bankers and Treasury folks is obvious).  The upshot, of course, is that the more SIG beats up the government and bankers -- and does so with easy to digest soundbites -- the more good press he'll get. Complex analysis and nuanced response, meanwhile, get lost in the shuffle.  Moreover, so does the incentive for banks and government agencies to cooperate with each other.

Although I doubt Congress is unhappy about it (Tim Geithner and the banks seem to be everyone's favorite punching bags these days), the legislation that created the SIG does not seem to support the SIG's foray into policy.  Rather, it simply says that the SIG should: "conduct, supervise and coordinate audits and investigations of the actions undertaken by the Secretary under this Act" and submit quarterly reports to Congress.