The Troubled Asset Relief Program (TARP) Inspector General Neil Barofsky recently announced that he has already opened 20 criminal investigations resulting from allegations of TARP fraud and abuse. Clearly, with billions of dollars of federal funds in play, the TARP will be a prime target for fraudsters, and Mr. Barofsky’s mandate is to carefully monitor the situation and take appropriate and deterrent action to protect taxpayer funds.
However, there are two sides to every story. Financial institutions applying for TARP aid are in fairly dire financial straits, and most need to use the TARP assistance to get back on solid ground. The amount of regulation and red tape accompanying TARP funding has already deterred some institutions from seeking assistance.
Now, with aggressive criminal investigations of allegations of fraud, those institutions have another significant deterrent when considering a TARP application. As in all criminal investigations, the company under investigation bears the legal costs of maneuvering through the investigation and any eventual prosecution, even if the allegations eventually prove unfounded. For a company already in a serious financial predicament forcing it to seek government aid, the cost of defending even a basic criminal investigation by the TARP Inspector General could be the straw that broke the camel’s back. Ideally, Mr. Barofsky will be cognizant of the risk to the somewhat fragile TARP recipients. He should be judicious in deciding which allegations warrant formal investigation, and should ensure that the necessary investigations are thorough without being overbroad or unnecessarily costly for the subjects or targets.