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61–734—PDF 2008

S. HRG. 110–1085

ANTICIPATED NOMINATION OF NEIL M. BAROFSKY

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

ON THE

ANTICIPATED NOMINATION OF

NEIL M. BAROFSKY, TO BE SPECIAL INSPECTOR GENERAL, TROUBLED

ASSET RELIEF PROGRAM, DEPARTMENT OF THE TREASURY

NOVEMBER 17, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 4

Schumer, Hon. Charles E., a U.S. Senator from New York ................................. 5

ADMINISTRATION WITNESS

Barofsky, Neil M., nominated to be Special Inspector General, Troubled Asset

Relief Program, Department of the Treasury, Washington, DC ...................... 7

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Barofsky, Neil M.:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 25

Biographical information ................................................................................. 27

Responses to questions from committee members ......................................... 33

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 42

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 4

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 43

Schumer, Hon. Charles E.:

Opening statement ........................................................................................... 5

(III)

(1)

ANTICIPATED NOMINATION OF NEIL M.

BAROFSKY, TO BE SPECIAL INSPECTOR

GENERAL, TROUBLED ASSET RELIEF

PROGRAM, DEPARTMENT OF THE TREASURY

MONDAY, NOVEMBER 17, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 2:06 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Conrad, Wyden, Schumer, Stabenow, Salazar, Grassley, Snowe, Kyl, Crapo, and Roberts.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; Joseph

Adams, Economic Development Advisor; Ayesha Khanna, Detailee;

and Mary Baker, Detailee. Republican Staff: Emilia DiSanto, Special Counsel and Chief Investigator; Jason Foster, Investigative

Counsel; Nick Wyatt, Tax Research Assistant; and Jim Lyons, Tax

Counsel.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

In the book of Chronicles, King David says, ‘‘I know, God, that

you test the heart and are pleased with integrity.’’ During King David’s time, a prophet like Nathan could help to keep the government in line. These days we do not have a Nathan. These days we

have an Inspector General.

So, thank you, Mr. Barofsky, for your willingness to serve your

country in this job of testing the government’s work. Thank you for

your willingness to help ensure its integrity. It is going to be a demanding job, to say the least.

I see from your resume that you have been a prosecutor. You are

going to be able to test that experience as Special IG for the Troubled Asset Relief Program, otherwise known as TARP. The financial rescue program is huge, $700 billion. The number and variety

of financial institutions receiving money from Treasury is extensive. Tracking the path of the bail-out dollars through these institutions is going to be a difficult task.

You are also going to confront the harsh reality that almost half

of the $700 billion is already out the door. The chart behind me

tells the story. For a while, you are going to be playing catch-up.

2

You will be looking back at Treasury’s use of about $290 billion in

about 43 days.

I have a great interest in the Special IG for the TARP. I raised

the idea in the first place the first weekend that we were examining the Treasury financial bail-out proposal.

As many will remember, the Treasury’s original proposal for the

TARP was 3 pages long. I read it word for word, and I was stunned

at its audacity and its failure to comprehend what was needed to

get our financial institutions back in shape. It is arrogant, in fact.

It gave the Treasury unlimited power over $700 billion and provide

no oversight by anyone.

The House and the Senate spent 2 weeks hammering out a better bill. That better bill included strong oversight, and it included

the Office of the Special IG for the financial rescue program. The

size and complexity of this effort is unprecedented in recent memory. It is essential to have a team that focuses exclusively on the

asset management efforts of the Treasury Department, and it is essential for a team to report to Congress on the status of this new

program. We will be looking aggressively at your report due back

before us the first part of next year.

My proposal for a Special IG was based on the Iraqi Reconstruction Special Inspector General. It was another massive oversight

challenge then, and it is going to be a massive oversight challenge

now.

During the negotiations on the rescue package, 33 Senators

signed a letter to the congressional leadership endorsing the idea

of a Special IG to oversee the Troubled Asset program. During the

negotiations, the Treasury Department resisted; they did not want

it. But then the administration and the Congress agreed that a

Special IG should be part of the financial rescue package and

should be a part of the final legislation. Congress passed it, and the

President signed it into law.

The law gives a Special IG a $50-million budget. He will have

the duties and responsibilities of Inspectors General under the Inspector General Act of 1978. He will have the power to supervise,

and the power to coordinate audits and investigations of target activities.

He will have power to appoint staff to carry out the activities of

the office, and he may encounter conflicts of interest, which I ask

you to report on. You may also, under the legislation, enter the

contracts for audits and contracts for studies, which I hope you will

follow up with.

Once you are on the job, we expect you to report to the Finance

Committee every 120 days on activities of the TARP. The law also

directs you to report to Congress if information requested by you

is refused.

We could spend hours asking questions about the TARP program

and how it is being managed. We know that the Treasury Department has named Neil Kashkari, Assistant Secretary of International Economics, to head the financial rescue program. Treasury

has decided to spend $125 billion on nine major banks, including

Citigroup and J.P. Morgan Chase, and another $125 billion to be

allocated for hundreds of small and mid-sized banks.

3

Secretary Paulson has also announced a policy regarding preferred shares and warrants for common stock. Standards for restrictions on executive compensation are being developed, and

those include a claw-back provision and a ban on golden parachutes during the period that Treasury holds equity issued through

this program.

Several senior posts have been filled. The law firm of Simpson,

Thacher, and Bartlett has been selected as the legal advisor. Treasury has announced that the bank of New York Mellon will serve

as its custodian for the implementation of the Troubled Asset Relief

Program, and PricewaterhouseCoopers and Ernst and Young have

been hired to help with accounting and internal controls services.

These decisions made by the Treasury Department are critically

important, I think, to the financial rescue program, yet the Treasury has made them all without any oversight by a Special IG.

As for the use of funds, the bottom line, frankly, is that the Secretary of the Treasury told Congress and the American people that

the Bush administration needed $700 billion to purchase troubled

assets. Yet this past Wednesday, the Treasury announced that, in

fact, there were no plans to purchase troubled assets. To say that

this was a surprise is an understatement.

We are going to find out why the first plan was rejected and why

a new plan was developed. What is the theory behind the new plan

for providing equity to these financial establishments? What exactly are the agreements with the financial institutions who have

received TARP funds? What conflict of interest standards were followed?

Mr. Barofsky, you undoubtedly have opinions, but you also undoubtedly have been advised to decline to answer very many of

these questions. After all, you were just nominated. Nominees usually are quite reticent. But I can assure you that we will not rest

until we get answers to these questions. This might not be the

proper time and place for a full airing of your answers. There will

be time down the road, certainly the first of next year when we

have further oversight hearings.

But I pledge to you that I will push also in the meantime to get

you confirmed. We have to get you on the job as quickly as possible. Half the money is already gone, and it is way past the time

when you should have been on the job overseeing the program. I

hope you will be on the job by the end of the week.

So thank you for your willingness to serve. I urge you to work

hard to test the government’s work. I urge you to stick to what will

be a demanding job, and I urge you to do so with all the energy

and focus and integrity that you can command to help ensure the

program’s integrity.

I might say that there are some of us on the committee here who

voted for the rescue package, and although we received lots of telephone calls and letters from the people we upset back home, it is

my view that this is the right thing to do. It is my view that we

improved upon the original plan immensely. It is also my view that

we do not know whether this is going to work or not, but we are

going to do all we can with oversight hearings on down the road

to help you make sure that it works so that the country’s financial

4

integrity is back on even footing. Thank you very much for your

willingness to serve.

I will now turn to Senator Grassley.

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman. I am glad that we

are having this hearing and can get this nomination confirmed. So,

thank you.

This committee has a long history of vigorous and continuous

oversight of the Treasury Department. That oversight experience

led the chairman and me to press the lead congressional negotiators for the TARP legislation to provide an Inspector General for

this program; with $350 billion of taxpayers’ hard-earned money at

stake now, we need this watchdog inside the program. There is potentially as much as another $350 billion that could be spent on

the rescue plan. I do not think any of us would be surprised if the

dollar amounts went higher than what is already initially out

there.

Frankly, a vacuum has been created by a delay in filling this Inspector General’s position. We need to fill this vacuum now. As

scores of billions of Federal dollars have rolled into these troubled

financial institutions, the chairman and I have raised issues of

whether the legislative intent of the program has been followed.

We have raised questions about executive compensation, questions about institutions’ use of the funds, and questions about a

homeowner relief program. Just this last Friday, I asked the Inspector General at Treasury to look into the circumstances of any

possible conflict of interest involving Treasury’s administrative

move that gives a big tax break to banks that acquire poorly performing banks.

All of this adds up to appropriate oversight. It is a tradition in

this committee, and now that we have elected a new President and

will soon have more Democratic members of Congress, I expect that

oversight will not abate once we have a new administration in 2

months. I do not believe that it will, but I want to continually raise

this issue so that we know we have just as vigorous oversight by

Congress of a Democratic President as we have had of a Republican President. We need the eyes and ears of an Inspector General

inside the TARP program now and through the life of this extraordinary Federal assistance.

The concept of an Inspector General—we say ‘‘IG’’ around here—

is extremely relevant where so much Federal money is being used

in such an unprecedented manner. The Inspector General’s Act of

1978 charged these IG offices with, among other responsibilities,

the prevention and detection of fraud and keeping Congress fully

and currently informed about serious problems within each agency.

The work undertaken by each of the 64 statutory IGs is vastly important to Congress. IGs help to minimize and eliminate fraud,

waste, and abuse. This conserves and promotes the efficient, effective, and economical use of taxpayers’ money.

I will underscore what I said a few moments ago. With up to

$700 billion of taxpayers’ money at stake, we cannot cut corners in

ensuring against waste, fraud, and abuse. IGs also police Federal

5

employees so that they do not abuse their positions of responsibility. This entails investigating allegations of misconduct, and

sometimes even referring criminal violations to the Attorney General.

In carrying out this important work, it is absolutely vital that all

IGs and their staffs be beyond reproach with regard to the rules

that they enforce. Anyone who accepts responsibility for enforcing

the law also takes on greater responsibility for being accountable

under the same law. As top cops in their respective agencies, we

should be able to hold IGs and their staffs as models of ethical behavior and judgment, and in most cases we can.

The initial TARP IG has big shoes to fill. Neil Barofsky, our witness, has indicated his willingness to fill those shoes. He is certainly a talented attorney. We found, in the Southern District of

New York, great work being done. That is right in the heart of our

Nation’s financial center. For over 8 years, he has been involved in

prosecuting sophisticated criminal cases where key players in the

financial sector have skirted the law. Before that time, he practiced

law in a couple of high-pressure Wall Street law firms.

So you may say that Mr. Barofsky is moving from the frying pan

into the fire, but we are glad that you are making that move and

willing to take on this important responsibility.

Thank you.

The CHAIRMAN. Thank you, Senator.

I see the good Senator from New York is here. Since the nominee

is from New York, I expect that the good Senator from New York

would like to say a few complimentary words about the nominee

from New York.

OPENING STATEMENT OF HON. CHARLES E. SCHUMER,

A U.S. SENATOR FROM NEW YORK

Senator SCHUMER. Yes. I appreciate it. And they will be complimentary. I want to welcome my constituent, and most importantly, a fellow Yankees fan, I am told. I hope you root for the Giants, too. They are pretty good. No, he does not. [Laughter.]

Neil Barofsky, who is——

The CHAIRMAN. That shows his integrity.

Senator SCHUMER. Exactly. Straight answers from Barofsky. I

hope it is not the Dallas Cowboys, though.

Anyway, given the amount of taxpayer dollars at stake, we certainly need to be vigilant in making sure the funds are used as

promised, so the post of IG is an important one. I know you, Mr.

Chairman, played a vital role in making sure that this position—

you and the Senator from North Dakota—was in the bill, and I

think it is important.

Mr. Barofsky, I would let my colleagues know, is a former work

colleague of my Chief Judiciary Counsel, for whom I have enormous respect, and he has enormous respect for Mr. Barofsky, having worked side by side with him in the U.S. Attorney’s Office in

New York City.

During that time, Mr. Barofsky was part of a group of attorneys

devoted to investigating and prosecuting mortgage fraud-related

crimes, so he has background in this area. Before that, he was lead

prosecutor on the successful prosecution of former Refco officers for

6

their participation in a $2.4-billion accounting fraud, and last year

he won the Attorney General’s John Marshall Award for outstanding legal achievement for asset forfeiture.

Some may say that Mr. Barofsky is a brave man for being willing

to take this position. I already know not to be concerned about any

lack of bravery, because Mr. Barofsky demonstrated great personal

bravery when he investigated the Revolutionary Armed Forces of

Colombia, FARC, the narco-terrorist group that controls more than

half the world’s annual cocaine production.

He successfully indicted the FARC’s top 50 leaders at great risk

to his own personal safety, so, if he can take on FARC, he can surely make sure that taxpayer money is being spent wisely and legally. So, I think he is the right man for the job, and I look forward

to supporting his nomination.

Just three quick points while I have the floor. First, please scrutinize the decision-making process that the Department used to develop the term sheet that applies to the capital purchase program.

I have said on a number of occasions that I think, in Treasury’s

zeal to include the major banks, it made the terms too weak to

make the program effective.

Without including some sort of lending requirement and strong

restrictions on dividends, banks are too tempted to hoard the capital rather than lend it to consumers and businesses that need

credit. So there are important questions that should be asked about

their decisions, what analysis was done about how the capital

would be used.

Second, I think it is important, sir, that you look into how the

banks are spending the money they receive from TARP. Of course,

in an ordinary circumstance we would not want the government

telling the banks what to do, but these are taxpayer dollars, and

it is important we ensure that they are being used in a way consistent with our goals, which is more lending.

The money should not be hoarded or used for outsized compensation packages under the IG’s authority to oversee the management

of the government’s interest. It is critical that Congress have a

clear understanding of how the money is being spent.

Finally, the office should examine the process by which Treasury

is allowing entities that were not originally eligible to receive

TARP funding to become eligible. The Federal Reserve has received

many requests from financial firms to become bank holding companies, in part so they can get access to the TARP. I do not want to

delay the process of distributing assistance that companies need,

but I think it is important that we, and the markets, have a clear

understanding of how this program will be implemented across the

broader financial sector.

Mr. Barofsky, thank you for stepping forward and serving your

country. We need you. I think you have excellent qualifications to

do a good job.

Thanks, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

This Finance Committee is extremely interested in the whole

program, clearly. The committee does not, however, have jurisdiction over your nomination—that is the Banking Committee—but

we will be holding hearings because of this committee’s deep inVerDate 11-MAY-2000 14:06 Oct 29, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 61734.000 TIMD PsN: TIMD
7

volvement in the program. I just want you to rest assured that you

do not have to worry about a vote in this committee. The vote you

need to be concerned with is in the Banking Committee.

Having said that, however, because we are so concerned about

the program, I will ask the three standard questions that we ask

of all nominees who are before this committee, and I will ask those

questions right now.

The first is: Is there anything that you are aware of in your

background that might present a conflict of interest with the duties

of the office to which you have been nominated?

Mr. BAROFSKY. No, I am not.

The CHAIRMAN. Do you know of any reason, personal or otherwise, that would in any way prevent you from fully and honorably

discharging the responsibilities of the office to which you have been

nominated?

Mr. BAROFSKY. No, I do not.

The CHAIRMAN. Do you agree, without reservation, to respond to

any reasonable summons to appear and testify before any duly constituted committee of Congress, if you are confirmed?

Mr. BAROFSKY. I do, of course.

The CHAIRMAN. And that would include the Finance Committee.

Mr. BAROFSKY. Yes.

The CHAIRMAN. Great. All right.

Now is an opportunity for you to introduce any family you might

have with you. We would be very honored to meet them.

Mr. BAROFSKY. My wife Karen is here today.

The CHAIRMAN. Nice to meet you, Karen.

Mr. BAROFSKY. Who has become a Yankees fan. [Laughter.]

The CHAIRMAN. And thank you, Karen, because this is a great

sacrifice all the way around. This is clearly a shared family sacrifice, and we thank you very much for your vicarious participation

in public service, very much.

Mr. Barofsky, we have allocated about 5 minutes for your statement. Your full statement will obviously be in the record.

Why don’t you proceed?

STATEMENT OF NEIL M. BAROFSKY, NOMINATED TO BE SPECIAL INSPECTOR GENERAL, TROUBLED ASSET RELIEF PROGRAM, DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Mr. BAROFSKY. Thank you. Senator Schumer, I would like to

thank you for that kind introduction. I appreciate it. I know my

mother down in Miami really appreciates it, so I thank you.

Chairman Baucus, Senator Grassley, members of the committee,

I am honored to appear before you as the President’s nominee to

be the Special Inspector General for the Troubled Asset Relief Program. I am grateful to this committee for taking the time to consider my nomination, and it is indeed humbling to be considered

for such an important and vital position in this moment in our Nation’s history.

If confirmed, I look forward to working closely with the members

of this committee and your respective staffs, as well as the other

committees that will be overseeing the program and the carrying

out of my responsibilities as Special Inspector General.

8

If I may, I will take a moment to share with you my professional

background and why I think it prepares and qualifies me for this

position. For the past 8 years, I have served as an Assistant U.S.

Attorney in the Southern District of New York. My experience as

an AUSA has reaffirmed to me the importance and rewards of public service, and, if confirmed, I look forward to the opportunity to

provide greater service to this country in this most serious time.

This past summer, our U.S. Attorney asked me to supervise a

newly created mortgage fraud group to respond to the havoc that

mortgage fraud has caused to countless homeowners and lenders in

our district. Drawing on an amazingly talented group of prosecutors at different levels of experience and expertise in such areas as

securities fraud, organized crime, major bank fraud, asset forfeiture, and civil fraud, we have attacked at the root those who

have contributed significantly to the current housing and financial

crisis through wholesale fraud of homeowners, lenders, and investors.

We have focused on crimes committed by those who have tricked

lenders into making loans they never intended to repay, those who

have engaged in predatory lending practices by tricking homeowners into applying for mortgages that they never could afford,

and the criminals who have engaged in schemes in which they literally steal the homes from citizens who found themselves in default on their mortgages.

I have also supervised our office’s joint investigation into the vast

credit default swaps market—the Office of the New York State Attorney General. I believe that my experience as the head of the

Mortgage Fraud Group and my role in both supervising and participating in these investigations has given me a vital education in

understanding some of the root causes of the current financial crisis, as well as the securities and derivative instruments whose decline in value has been such an important part of it.

It has also given me the tools to identify the markers of fraud

throughout the financial industry, the necessary expertise in investigating such frauds, and the experience of establishing a plan of

attack on those committing these frauds.

While an AUSA, I was also one of the lead prosecutors in the investigation and prosecution of those criminally responsible for the

$2.4-billion fraud that was committed at Refco, Inc., a commodities

giant that imploded in October of 2005 just months after the company went public. This investigation and trial have given me the

experience to understand and detect complex billion-dollar frauds

and an understanding of financial audits and where they can fail.

Over the last few weeks, as have many Americans, I have been

closely following the current financial crisis and the government’s

response, and in particular the creation and execution of the TARP.

If confirmed, I look forward to contributing to the oversight that

Congress established to protect the taxpayers’ $700-billion investment, fulfilling the duties of the Special Inspector General as outlined in the relevant governing statutes.

My overriding goal as Special Inspector General for the TARP

will be to make sure that its rules and regulations are followed and

to prevent waste, fraud, and abuse. We will need to establish an

efficient and effective audit program and, of course, we will need

9

to establish an investigation arm, which I can assure this committee will tirelessly investigate and refer for prosecution any individual or entity that dares to try to criminally profit from this program.

I intend to work closely with each of you, your colleagues on the

other committees that are overseeing the program, your staffs,

GAO, and all others who are charged with overseeing this historic

program. I want to emphasize to you that I fully understand and

appreciate that, if confirmed, I am accountable to you, the Congress, and the American people. I fully intend to keep you fully and

promptly apprised of significant findings and concerns.

Mr. Chairman, Senator Grassley, members of the committee, I

want to thank you for the opportunity to appear before you, and

I would be pleased to respond to any questions that you may have.

The CHAIRMAN. Thank you, Mr. Barofsky.

[The prepared statement of Mr. Barofsky appears in the appendix.]

The CHAIRMAN. First, do you think $50 million is enough?

Mr. BAROFSKY. Mr. Chairman, it is very hard to determine the

answer to that question at this time. The TARP is obviously—all

the funds have not been committed. It is not entirely clear which

direction the TARP may take with the new administration. It is

very hard at this stage for me to tell you if $50 million will be

enough. We do not even know how long the program is going to

last.

The CHAIRMAN. Well, I expect when you report back to us—I

think your first report is due around Inauguration Day—maybe

you would be in a position to advise us and to answer that question.

Second, could you talk just a little bit about what staff you think

you need? I mean, we are talking about fairly sophisticated financial instruments, sophisticated products, arrangements. What sort

of staff do you need? Do you think you would need to be able to

accrue the talent that you are going to need?

Mr. BAROFSKY. Mr. Chairman, I am confident that we will be

able to recruit the right talent. I think that an opportunity to work

on a program as important as this will bring out many, many

qualified applicants. I think to begin with, we obviously have to put

together our core staff, if confirmed, of a management group, obviously a Deputy Inspector General, as well as an audit director, investigations director, and counsel. I think we would start with that

core group and build out from there.

I know recently Inspector General Thorson has estimated that as

many as 100 people may be required to staff this office. I plan, if

confirmed, to meet with Inspector General Thorson and find out

where he determined those numbers and get a sense of what his

estimates are, and we will go from there. But I think it is important to start with a core group and build it out from there.

The CHAIRMAN. And obviously you are going to need full access

not only to Treasury and Treasury’s decisions, but also to the entities that Treasury has hired, that is, the law firm and the accounting firm. Is that correct, that you will have the same access to their

books as you will Treasury? Is that your understanding?

Mr. BAROFSKY. I assume so, Mr. Chairman.

10

The CHAIRMAN. You said something about, you would make sure

the rules are being followed. Personally, I would like you to look

to see where the rules and standards are sufficient. It is not

enough just to follow the rules that Treasury sets, to follow the

rules and standards that Treasury sets, the administration sets. It

is to make sure that the rules and standards are the proper ones

and sufficient.

Could you comment on that, please? Do you see that as part of

your duty?

Mr. BAROFSKY. Yes, Mr. Chairman. Obviously the TARP is an

evolving process. I think there are two points raised by your question. One, we would need to look back at the current rules and regulations that have been promulgated, look as to what went into the

decision-making process and determine if they are sufficient under

the attempt of the statute, and to provide the right degree of oversight.

Then, of course, as new regulations, new contracts are entered,

I believe it would be appropriate for the Special Inspector General

to be consulted and begin to make sure that, not only are the proper rules and regulations being followed, but that they are sufficient.

Obviously, if we found out or came to the determination that they

were insufficient, we would raise that with the Secretary and bring

it to your attention.

The CHAIRMAN. At this point, it is early, but you have given some

thought to this. What should Congress be most concerned with in

this whole program? I mean, is it standards? Is it conflicts of interest? Is it the complexity? Is it whether the money is being sufficiently targeted? What are some of the issues you think we should

be concerned with here? I cannot ask you to specifically answer for

yourself because you are new to the job, you are not even confirmed. But what should we be thinking about as we try to ensure

that this program is working well?

Mr. BAROFSKY. Mr. Chairman, I think the answer to your question is yes. I think all the things you noted are going to be important considerations. As you have noted, I am coming at this from

the outside. My basis of knowledge is what I read in the newspaper

and what I have seen on the Treasury website.

But I think all the things that you identified are going to be important concerns and will be important concerns for the Special Inspector General. It is difficult right now from my perspective to

rank those concerns, but I think all of them, as well as preventing

fraud and abuse and those who may take advantage of this program, are all very important considerations.

The CHAIRMAN. What sort of conflicts of interest or potential selfdealing are you going to be looking at?

Mr. BAROFSKY. Well, I think there are different areas to look at

conflicts of interest as you go down the ladder of the TARP. Obviously at the top level it would be within Treasury, people who are

in the selection of the contractors and the employees. The next

level up from those contractors, obviously there is enormous opportunity for conflicts of interest with respect to, for example, the law

firms, the asset managers once they are hired, Bank of New York,

each of the contractors. And obviously we will have to take a strong

11

and hard look at what the mitigation plans are, what is in place,

and make sure that they are sufficient.

The CHAIRMAN. Well, my time has expired. But before I turn to

Senator Grassley, I might say that one of my major concerns,

frankly, is one I hear from financial institutions in my home

State—namely, they did not cause this problem, that is, the

subprime mortgage and the credit crunch and so forth—but some

of the TARP funds are being used in a way that is harmful to

them.

Namely, it is that some of the TARP funds—and I am not the

first to mention this point—are used without sufficient restrictions

on the funds. That is, without restrictions saying, all right, you

have to lend to credit-worthy customers first and not pay dividends, not pay executive compensation, not use the funds to buy

other institutions.

I am very concerned about that. I guess the question is the

fungibility of money. It is to make sure this money is not just going

to the firms, because they will use it in a way that is in their own

financial best interests rather than the public purpose here. We

want to make sure that the public purpose is well served. I ask

you, when you come and report back to us, indicate the degree to

which you think there have been sufficient conditions to ensure

that the money is targeted for the purpose it is intended, that is,

to relieve the credit crunch and get the company back on track.

Thank you.

Senator Grassley?

Senator GRASSLEY. Yes. My first question is going to deal with,

if you will have access to certain records that I think it is important for you to have access to. I want to start out by saying, first

of all, my staff recently received a briefing from the Government

Accountability Office. In that briefing, the GAO noted that it has

access under the Emergency Economic Stabilization Act to TARPrelated records of Treasury itself, as well as to records of TARP

agents and representatives, and any vehicles that Treasury establishes under that Emergency Economic Stabilization Act.

But the Government Accountability Office does not have clear access to information from recipients of TARP funds, such as banks,

either through the Emergency Economic Stabilization Act or

through the GAO’s other access authority under two or three other

statutes—I will not go into naming them. So can you please tell us

what type of access you believe that you will have as the TARP IG,

and is that sufficient for you to do your job?

Mr. BAROFSKY. Senator Grassley, I would fully intend—I do not

know the full scope of the authorities under the statute. They do

appear broad to me. They obviously incorporate the Inspector General Act of 1978 and its broad authorities, including subpoena authority.

But one of the first things that I would do, if confirmed, would

be to look at exactly what our tools are, with consultation of counsel, and to the extent that I felt that we did not have the necessary

tools, I can assure you that we would come back to this committee

to ask for whatever additional tools that we would need to fulfill

the duties that are imposed on us by the statute.

12

Senator GRASSLEY. I would encourage you to not only look at

what the statute says, but to assume as much as you can reasonably assume from the law and let somebody tell you why you cannot have access to the records, and challenge every place you can

because, if you do not have access to where the money went and

is being used, I do not know exactly how you can do the job that

is before you.

Mr. BAROFSKY. That is an excellent strategy, Senator.

Senator GRASSLEY. All right.

We are going to be looking to you, along with the Government

Accountability Office, to be our eyes and ears. With that in mind,

would you please tell us what type of reporting do you see being

provided to Congress so that we know what is going on with the

enforcement or carrying out of this legislation?

Mr. BAROFSKY. Well, obviously the statute requires the Special

Inspector General to report within 60 days of confirmation, and

sets forth a series of things that must be required in that report,

and then at a minimum, every quarter thereafter. I think, as Special Inspector General, if confirmed, one of the other first things I

would do would be to reach out to GAO, because I think that they

have an audit function, as well as the Special Inspector General’s

Office has an audit function, and I think coordination with those

audits is of vital importance.

Obviously GAO has its own and separate reporting schedule, but

I think that we, as the Special Inspector General’s office, will have

to work closely and be very coordinated not only with GAO, but

any other oversight body so we have a comprehensive oversight approach to the TARP.

Senator GRASSLEY. Two questions. How quickly would you expect

to have the full complement of your staff in place? That is about

doing your job. Then, second, what do you see as the key risks or

challenges facing TARP, and how would you work with Treasury

to address those?

Mr. BAROFSKY. I think that, as far as the timing on a full staff,

it would be very difficult for me to give an estimate of that. I think

that the first step will be to hire key management staff. But I also

do not anticipate waiting until we are fully staffed up before actually performing the oversight duties. I will be there from Day 1, if

confirmed, and that is when the Special Inspector General’s oversight will begin, on that Day 1.

As far as the key risks and challenges, I think that, any time you

have a program of this size, $700 billion, and an accelerated program of getting that money out onto the street, there are going to

be risks associated with that, with people who are well-meaning

and intending the best. It is a lot of money in a short period of

time. Part of the oversight, I think, would be to help make sure

that, not only is there no fraud, waste, or abuse, but also mistakes

that may be made. We would work hard to help the Treasury personnel avoid those mistakes and to keep the ship on the right path.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Mr. Barofsky, your job is not for the faint-hearted, suffice it to say. As I was reviewing for this hearing, I saw that

13

the current Treasury Inspector General said, ‘‘The oversight of the

program is a mess.’’ And he goes on to say, ‘‘I don’t think anyone

understands right now how we’re going to do proper oversight of

this thing.’’ That, if anything, seems to me to be an understatement.

Given the fact that Treasury still declines to say exactly how it

spent the taxpayer money, nor has it said who the beneficiaries are

or what conditions have been placed on them, I would characterize

the operation of this program now in terms of oversight as like

Dodge City before the marshals showed up. I think it is critically

important that you get on top of this.

Senator ROBERTS. Would the gentlemen please not refer to my

hometown in that definition? I would really appreciate it. [Laughter.]

Senator WYDEN. As a fellow Kansan, I appreciate that statement.

Senator ROBERTS. You are only 150 miles east of us.

Senator WYDEN. We will talk Kansas later.

What I want to ask you, though, is on these key points—Treasury not saying how it spent the money, nor whom the beneficiaries

are, nor what conditions have been placed on them—is that acceptable to you? It is certainly not acceptable to the American people.

Does the public not have a right to that information?

Mr. BAROFSKY. Senator, obviously, if confirmed, part of the job

and part of the statute is transparency. I would certainly work

with Treasury to make sure that all the obligations that are provided under this statute as far as transparency are met.

Senator WYDEN. But the fundamentals of transparency are

knowing how the money is spent, who got it, and what conditions

are. Does that not define, in its very essence, transparency?

Mr. BAROFSKY. Yes, Senator. I believe in our first 60-day report,

by statute, if confirmed, we would be required to report on many

of those specific items that you are discussing, and we certainly

would include those items in our report.

Senator WYDEN. How important is it to you to watchdog the

bonus abuse issue? Because I know when I have been home and

people have asked about this, that is the first thing that they bring

up. Of course, in TV reports you have people inside the industry

saying that a very substantial portion of the overall funds available

under TARP would go to bonuses. So to you, as you kind of

prioritize the issues for watchdogging, how important is it to you

to watchdog against bonus abuse?

Mr. BAROFSKY. Well, not only as the nominee for Special Inspector General, but obviously as a taxpayer and an American citizen,

it is of great concern if taxpayer money is inappropriately being

used by those who receive it for an improper purpose that is outside the scope of their agreement with the government or outside

the requirements of the statute and the regulations. Obviously we

would look into that. That would be a top priority.

Senator WYDEN. Now, do you see a role for yourself in ensuring

the part of the legislation, the intent issue of the legislation, that

homeowners see some relief through this program? As you know,

there was considerable discussion in the debate about trying to

help homeowners. We have homeowners getting clobbered all over

the United States. Do you see a role for yourself in ensuring that

14

Treasury adheres to congressional intent, that homeowners get relief through the program?

Mr. BAROFSKY. I think it would be difficult for me to answer that

question right now, Senator, not knowing the details of the policy

decisions that went into the creation of this statute, and of what

other acts Treasury or other parts of the government are taking.

It is difficult for me to answer that question from the outside coming in.

Senator WYDEN. Do you have a difference of opinion with respect

to congressional intent? The reason it is so important is that it

seems that TARP keeps moving into these other fields, and so

homeowners seem to be getting the short shrift in the exercise.

Every day, it seems that the exercise moves further and further

away from what was finally spelled out in the congressional intent

of the program. I want to see if you think it is a big part of your

work to ensure that Treasury adheres to the intent, particularly

now when the program seems to be moving away from homeowners.

Mr. BAROFSKY. Again, Senator, I would have to take a really

close look at the language of the statute, getting into the issues of

intent. I just don’t feel qualified right now to really give you an answer. I apologize for that. Perhaps, if confirmed, I can come back.

Senator WYDEN. My time is up. I hope you will look at that.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

I will now turn to the Senator from Dodge.

Senator ROBERTS. We try to get the hell into Dodge, not out of

Dodge. [Laughter.]

But at any rate, Neil, thank you for offering to do this and to

bring your expertise to this very, very difficult problem. You have

quite a record in regards to expertise in combatting securities

fraud, organized crime, major bank fraud, asset forfeiture, civil

fraud, and credit default swaps. We did not even know what that

was about 2 months ago, but you have already had experience with

it, so I really appreciate that.

Then you say ‘‘the experience of establishing a plan of attack on

those who are committing fraud.’’ Of course, I did not know that

you had been a major player in exposing whatever you have exposed with the FARC in Colombia. But if you can do that, why, you

can maybe take on this job.

I think that it has been said by Senator Wyden already, and I

think it is obvious that, while we have committed nearly $300 billion in taxpayer dollars to the TARP program, mainly through the

direct capital injections, there is little oversight of the program.

Senator Wyden did quote Eric Thorson, who is overseeing the bailout. He said, ‘‘The lack of oversight is a mess.’’ He said, ‘‘I don’t

think anybody understands right now how we’re going to do this

thing.’’ How then can we have any proper oversight?

Then we have changed in a very dramatic shift. We are under

a different TARP. I remember asking in the Marine Corps, is it

brown side out or green side out? We got a green tarp instead of

a brown tarp. So, you will probably have four more acronyms to

work with: TARP 3, TARP 4, whatever. You have a changing target. But you have the background and you certainly have the comVerDate 11-MAY-2000 14:06 Oct 29, 2010 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 61734.000 TIMD PsN: TIMD
15

mitment. You answered the questions that obviously could not be

answered very well.

Here is mine: Senator Grassley has indicated that under the

TARP legislation multiple entities are charged with the oversight

of the program. I have seven of them. First you have the GAO, and

you have already mentioned the GAO and how you are going to

work with them. I think that is some very good insight on your

part. Then you have a specially-appointed congressional panel

which has not been appointed yet, or at least not that I am aware

of. Third, you have the IG position for which you are nominated,

and 50 million bucks and appropriate staff. You have the newly

created Financial Stability Oversight Board. You have this committee, led by the able chairman and ranking member. You have

the Banking Committee. You have the House and Senate leadership who tend to jump over committees, unfortunately. Then you

have the new administration. And you have to report within 60

days of your nomination in regards to this program.

Can you meet the deadline and are you independent enough and

have the ability to work with people, all of these different oversight

entities, to somehow bring this together? I do not know how you

are going to do this. You really have swallowed a major job, and

I wish you well, but I do not know how you are going to do it.

Mr. BAROFSKY. I fully intend to meet the 60-day reporting requirement for what is required under the statute, if I am confirmed. I do believe that I have the independence to deal with those

conflicting concerns. I think that the way the office was created

lends to that independence and that, while it certainly will be demanding, a job of this importance and $700 billion requires comprehensive oversight. I look forward to coordinating the various

oversight——

Senator ROBERTS. Well, it is that coordination that I am really

concerned about. I apologize for interrupting you, sir.

Senator Rockefeller and I served on the Intelligence Committee.

There were 16 different agencies under the Intelligence Committee.

We were very worried about intelligence oversight and ‘‘stovepipes,’’ is what we called it, where you had one agency and their

stovepipe of information. How are you going to take down that

stovepipe information with regards to TARP?

I mean, you are the guy in charge, and yet you have all these

other stovepipes. You are going to have to interconnect that. How

are you going to coordinate this?

Mr. BAROFSKY. Well, I would certainly look to other examples for

guidance, but I think having a strong leadership position and, at

the end of the day, oversight is vitally important, but it is also vitally important that it is coordinated. If there are contradictory and

duplicitous demands on those trying to run this program, the oversight could end up defeating its own purpose, which is, of course,

to make sure that the program succeeds and succeeds fairly.

Senator ROBERTS. I have only one thing to add on. My time has

expired. I apologize to the chair. I do not think we need more regulation, I think we need better regulation and transparency. There

is a difference. I do not want the pendulum to swing back to the

regulatory overkill that always affects our small community banks

and lending institutions in my State of Kansas.

16

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus.

I think for all of us who have supported this economic rescue

package, it was a tough vote and I think one of the most historic

votes of our time. I was pleased that, as we worked on that package, that we were able to move forward with Senator Baucus and

his efforts to have an Inspector General appointed to oversee this

program so that we do not have the kind of taxpayer abuse and

fraud that could otherwise occur when you have this kind of money

that is on the table. So, I was very pleased with that.

My question to you has to do with candor, and candor in front

of this committee. In that same seat that you are in, I think, Secretary Paulson came before this committee 2 months before President Bush called for an economic rescue package. I still remember

him, in the response to questions asked by members of this committee, saying that the economics of the Nation were fundamentally strong, we did not have any significant problems on the horizon, et cetera.

Then all of a sudden we have President Bush and Secretary

Paulson and Chairman Bernanke saying the sky is falling, the conditions are such that we are looking at the possibility of an economic situation like the one that we saw during the Great Depression. Yesterday, I think the President said in the meeting of the

G–20 that he thought that the economic rescue package was necessary in order for us to avoid the kinds of problems that we saw

during the Great Depression.

My whole problem with where we are today, frankly, is that

many of us saw these problems coming. We were very aware, for

example. We were having a subprime housing melt-down a year

ago and we were trying to get something done, and yet it seemed

the administration was turning its eye and looking the other way.

So, as I look at you sitting there in your chair today, what I remember is Secretary Paulson himself saying the fundamentals of

the economy are strong. Frankly, I think what has been missing is

candor, that is, a candid explanation and understanding of our economic condition and the program that will help us move forward

to the kind of circumstance that we all want, which is a healthy

economy for our country.

So my question to you is, in this position as Inspector General,

will you come before this committee and be candid with us in terms

of the implementation of this program? As part of that, I would like

you also to answer why it is that you have been chosen for this program, from your point of view. Why is it that a Republican President, President Bush, would choose someone who has been an

Obama supporter in this campaign to become the Inspector General

of this $700 billion program? So, if you would comment on that, I

would appreciate it. And I congratulate you, by the way, and thank

you for taking on what is a very, very important and difficult task.

Mr. BAROFSKY. Thank you, Senator. I do not know, of course,

what went into the President’s decision-making process. I can only

assume that he selected the person that he believed was the best

person for the job. I was never asked or questioned during my apVerDate 11-MAY-2000 14:06 Oct 29, 2010 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 61734.000 TIMD PsN: TIMD
17

plication process whether I was a Democrat, Republican, or Independent, or whom I supported, so I have to assume that the President selected the person who had the best experience and background and demonstrated integrity for the job, and I am humbled

and flattered by that nomination.

Senator SALAZAR. Does it matter to you that we are going to have

a transition here in not too many days down the road, and you will

be overseeing a very significant component of an economic recovery

program that President-Elect Obama will put into place? Does that

have any bearing at all in terms of how you look at this job?

Mr. BAROFSKY. Well, obviously we will work very closely, if I am

confirmed, with the transition team to ensure that it is as seamless

as possible, frankly, if confirmed, that we transition into what Inspector General Thorson is doing.

Senator SALAZAR. All right. Did you apply for this job or were

you called one day and asked, are you interested in this job? What

went into that process?

Mr. BAROFSKY. The latter, Senator. I was asked by my U.S. Attorney, Michael Garcia, if I would be interested in the job. After

talking to Karen about it, we decided that it was—I love my current job, but we decided it was too important of a task not to pursue.

Senator SALAZAR. Well, thank you very much.

I do have a statement that I will submit for the record, but I just

want to say to you that I very much look forward to having the

kind of relationship with you where this committee and the rest of

the Congress can have the kind of candor which I think this Congress expects and deserves, and I think which the American people

expect and deserve on such a major undertaking.

Thank you very much.

Mr. BAROFSKY. Thank you, Senator.

The CHAIRMAN. Thank you, Senator.

[The prepared statement of Senator Salazar appears in the appendix.]

The CHAIRMAN. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

The economy is in enormous trouble. Japan has just gone into a

recession, technically. Everything is going downhill in our country.

The CHAIRMAN. Not everything.

Senator ROCKEFELLER. Not everything, but a lot. Along comes

this economic recovery package, which we voted for. What was the

purpose of it? The purpose of it was to protect the American people,

to make it possible for people to get their homes back, to work with

their mortgages. That is what the banks were meant to do. They

have not done that.

I think the American people at this point have some reason, with

already several hundred billion dollars having been spent, to have

even further doubts about their government. This disturbs me as

much as it disturbs you, whom I honor and will vote for.

But I want to know—you answered a question earlier, I think

from Senator Grassley or from somebody about, can you make sure

that you get the information that you need. I think, if I heard you

correctly, you said ‘‘I assume so.’’ I do not want to hear an answer

like that. I am going to get it. We need a strong IG. Chairman BauVerDate 11-MAY-2000 14:06 Oct 29, 2010 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 61734.000 TIMD PsN: TIMD
18

cus was right about that. IGs, whether it is in intelligence, whether

it is finance—and particularly in finance, or particularly in all of

them—IGs are the key to accountability.

We do not have any other oversight capacity. There are too many

committees of Congress. Only IGs can really do good oversight, and

they have to level with the American people, to protect the American people, and to do what was in the law that we passed which

we are not now doing. So, on two levels, the money is not going

to the banks to be helpful on mortgage situations, and it is not in

any way establishing patterns, mandates in terms of executive

compensation.

Now, Treasury has the authority to make it binding now, to

make it binding for those banks that accept government money to

restructure the home loans for those homeowners facing foreclosure. They are not doing that. There was a big switch. Paulson

did a big switch. It was treated rather mildly, I thought, in the

press, but I do not think across the country. I think the people are

angry. So, so much of this comes down to you.

I am not talking about Republican or Democratic administrations. I think people in high finance and people who deal with finance have certain ways of doing things. It is like GM or others,

or any group trying to change their way of behavior. They can do

it at the top, but if you can’t do it five or six levels down it does

not mean anything because it does not last.

So the IG is the person who is always there, who always has his

mind out for protecting the American people and the law that we

passed, which is not being followed, which is dangerous for this

country. I want to know that you are going to be that kind of Inspector General. Not ‘‘I assume so,’’ but ‘‘I am going to get that information, I am going to know what the banks are spending that

money for, I am going to know it all, and I am going to know about

the executive compensation.’’ You are in the law, and they will be

reporting to you. They have to do it. They do not feel like they have

to do it now because it is sort of a take-it-as-you-want law. It

makes me as a West Virginian and an American citizen very upset,

very angry. I think a lot of other people feel the same way, and I

want to know why you are going to be different.

Mr. BAROFSKY. Well, Senator, when I said ‘‘I assume so,’’ I assumed that authority is already in the statute. If there is any authority that is necessary to carry out the job of the Special Inspector General that is not already in the statute, I can assure you that

we will lean forward, as Senator Grassley suggested, and we will

come back and ask Congress for the authority to get the right information that we would need to do our job.

Senator ROCKEFELLER. All right. Answer my broader question.

Why should I believe that you are going to be the IG I want to,

I am inclined to—that you are going to be the IG who is going to

be so all over this program that nobody in this or the next administration can slip stuff by? Because banks have ways of doing things,

and people in high finance have ways of doing things, and you

know that perfectly well.

Mr. BAROFSKY. Senator, I will not give you empty words. Instead,

I will just point to my record and what I have done as a prosecutor

in the Southern District of New York. Whether it was attacking the

19

FARC in the jungles of Colombia or Refco on Wall Street, all I have

done is go after those who have violated the law. I will take that

exact same tenacity and dedication to this job as I have done to

every prosecution I have worked on.

Senator ROCKEFELLER. Thank you. I am glad you will be doing

it, and we will all be watching.

The CHAIRMAN. Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman. First of all, I want

to thank the chairman because it was obviously his initiative at the

time of considering this legislation to incorporate a Special Inspector General, and I think it was absolutely essential and paramount

in terms of providing confidence overall in the administration of

this program. I only regret that it has taken the administration 45

days to consider your nomination, Mr. Barofsky. I want to thank

you for your willingness to undertake it at this consequential time

in our Nation’s history.

The program has obviously changed, since we enacted it, from

the purchase of troubled assets to direct equity investments. I

would like to know from you, what is your understanding now in

terms of those responsibilities? How do you have to adjust your

data collection or your responsibilities that are enumerated in the

law? What has to change in that regard?

Mr. BAROFSKY. I think that, again, based on my understanding

of the statute, while the scope of what we are looking at has

changed, responsibilities are the same. The responsibilities, of

course, are to audit and investigate, in particular, to fulfill the reporting requirements.

I do not think the reporting requirements have changed. I think

that these are, statutorily, still defined as troubled assets, even if

they are in some ways different from the collateralized debt obligations that were originally contemplated or may have been originally contemplated. But I think the approach is the same. We need

to investigate and audit, and that means take a close, long, hard

look at these transactions, at the decision-making, at the hiring,

and I do not think that the core focus of a Special Inspector General has changed.

Senator SNOWE. Well, it is interesting in noting the differences

in responsibility between the Inspector General, the Comptroller’s

Office, and the GAO. That concerns me. I am wondering if you

have had a chance to examine those responsibilities and the nature

of the missions. For example, you cannot, as I understand it, get

access to information directly from companies, but the information

is to be elicited from other agencies. Is that correct?

Mr. BAROFSKY. I am not sure, Senator.

Senator SNOWE. I think that that is important because, if your

responsibilities are narrow in scope, that has to change. I think

central to this program, as Senator Rockefeller has indicated, is

that we have to provide confidence in the underpinnings at a time

in which an overwhelming majority of Americans obviously do not

support this program. It has changed by lightning speed even since

we have enacted it. Day by day, there have been alterations to the

original nature of the program. We have seen banks that have not

made the lending commitments that were really the underpinning

of this legislation.

20

So, when I look at the scope and I have staff enumerate them,

there is a difference in responsibility and the nature of it. Yours

is much more specific and narrow in contrast to the Comptroller

General and the GAO with respect to their responsibilities, which

are much broader.

Mr. BAROFSKY. Senator, I would obviously have to take a close

look, again, and have to consult with counsel as to exactly how narrow they are. But of course, if I am confirmed, and if we believe

that the authorities and the powers are too narrow, we would certainly report that back to this committee and the Congress.

Senator SNOWE. Well, as I understand, the Treasury Department

is not required to respond to Special IG audits or make changes to

the way the TARP program functions based on your recommendations. Is that your understanding?

Mr. BAROFSKY. I am not certain, Senator.

Senator SNOWE. I think that, if Treasury has the ability to disregard those recommendations, clearly that is a serious problem

and certainly undermines the effectiveness of the program. I think,

frankly, as soon as you assume your responsibilities, I think these

issues have to be quickly examined. I cannot impress upon you

enough how paramount your responsibilities are going to be to the

core of credibility.

It is absolutely vital at this very serious time. I was just concerned about the fact that the Treasury does not have to respond

to an audit, and you do not have the access that is so essential,

I think, to any and all information that is going to be critical for

your assessment of how this program is being administered.

Now, for example, how would you determine the valuation of

stock or preferred stock that the Federal Government is going to

take, given this change in program?

Mr. BAROFSKY. Senator, that is something we would have to look

into. I really am not prepared to give a precise method of valuation

of that today.

Senator SNOWE. But you would agree that you would have to

change your data collection based on what it was going to be, originally intended, to what it is now?

Mr. BAROFSKY. It clearly is contemplated within the statute that

we do that. I do not know if it is a change, since the job has not

yet been created.

Senator SNOWE. Right.

Mr. BAROFSKY. But it is certainly a different approach.

Senator SNOWE. Now, the CRS also indicated one other question,

that there seems to be no requirement that the Inspector General

publish, or even keep, records regarding any investigations made.

Can we have your assurances that any and all information will be

preserved and made available to the public based on any investigations that are done?

Mr. BAROFSKY. That sounds like a reasonable request. Obviously

I would have to consult with counsel as to the nuances of your request, but it certainly seems like a reasonable one, and obviously

something we would take very seriously.

Senator SNOWE. I appreciate that. Thank you again.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

21

Before I turn to Senator Kyl, let me say that the Senator’s question raised an interesting point. It is fully my understanding that

the Special IG has full authority, full access to whatever information the Special IG would like to have. The GAO is an arm of Congress. It is not located and put in the Justice Department—not directly, but indirectly—to get information needed.

I understand the concerns shared by my colleague, but it is my

understanding that the statute is written in a way and fully intends to allow the Special IG to have full access to all information

that he needs to have. If there needs to be any clarification there,

we are going to provide it. But I want you to assume that you do

have it. You go ahead, until someone raises a ruckus and says no.

If they say no, then I want you to continue to assume that you

have it. I want you to have the tenacity of a mongoose, or as some

say, the tenacity of ‘‘mean as a junkyard dog.’’ I want you to be the

IG whom we all are going to be proud of, who steps in and makes

sure that this program is run the way it is supposed to be, and,

if it is not being run the way it is supposed to be, that you give

us the recommendations that are necessary to make sure that it is

run as it is supposed to be.

So, somewhat along the lines of what Senator Rockefeller said,

you just assume you can do anything you want to do. Assume it

is all there. Again, even if someone says no, do not take no for an

answer. The answer you want is the information in the public’s

best interests. That is my understanding of the way the statute is

written. You have that. I appreciate the concerns of my colleague,

but I want to make sure that—yes?

Senator SNOWE. Yes. Mr. Chairman, in that case we ought to

make sure it is clearly delineated.

The CHAIRMAN. Yes.

Senator SNOWE. Because the responsibilities are clearly different

between the Comptroller and the GAO.

The CHAIRMAN. They are very different, but we are not going to

be able to make any changes until next year. So, I am saying in

the meantime, I want Mr. Barofsky—I assume he is going to be

confirmed by the end of this week—to assume he has full power to

do whatever he wants, and, if any changes are necessary, we will

make the changes.

Senator Kyl?

Senator KYL. Thank you, Mr. Chairman.

The Stabilization Act which created the TARP placed several requirements on participating firms which restrict executive compensation, so you may be spending a portion of your time reviewing

executive pay at these firms. One criterion in particular says, ‘‘It

shall include limits on compensation that exclude incentives for

senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution.’’ Obviously people in business take risks. How do you

think you will differentiate between, in effect, an unnecessary risk

and a calculated risk within the normal bounds of business behavior?

Mr. BAROFSKY. Senator, I think that is a difficult question for me

to answer today. Obviously the first step would be to look and see

what the policies, and what the contractual terms are, and what

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the specifics are that these companies are going to be required to

fulfill with respect to their risk committees and make recommendations as to whether or not those are appropriate and sufficient. But

as I sit here, I cannot really answer your question as to where the

dividing line should be, or would be between an acceptable risk and

an unacceptable risk.

Senator KYL. If you find that it is too difficult to make a subjective decision in certain situations, would you recommend to the

Congress any kind of guidelines that might be useful for you to follow that we would need to legislate?

Mr. BAROFSKY. It is certainly something that, if confirmed, I

would consider.

Senator KYL. All right. You are probably also going to be pressured to pursue investigations against firms. Some of them may

even be politically motivated. Obviously there is a lot of money that

the taxpayers have at risk here. How do you balance the need to

provide Congress with accurate information about how TARP is operating against undue interference in the business operations of

the companies that are receiving the funding?

Mr. BAROFSKY. I think the Office of the Special Inspector General

has some mandated reporting requirements and, beginning, middle, and end, as an office we have to fulfill those reporting requirements. As far as undue political influence on the office, I can assure this committee that it will not impact our operations. We

serve the American people, if confirmed, and this Congress. It just

will not have a place in an office, if I am confirmed.

Senator KYL. Obviously, though, you see that there could be

some difficult situations where there is pressure to investigate a

firm, and yet you might conclude that the activities of the firm do

not merit an investigation. You acknowledge the potential pressure

on your office in that event?

Mr. BAROFSKY. Senator, part of my job for the last 8 years is

making the determination of when to pursue an investigation after

an allegation has been made. There is a tried-and-true formula of

balancing the credibility of the allegation versus the resources required, versus the likelihood of success of the investigation. Irrespective of the politics of any given allegation or referral, that formula has to be followed by the Office of the Special Inspector General, and will be followed, if I am confirmed.

Senator KYL. All right.

Finally, you are aware of the definitional limitations on potential

recipients of funds under the TARP program. Originally it was the

Asset Purchase Program. Now most of this is going, actually, to

lend to different financial institutions. There are definitions of who

qualifies for those kinds of funds.

From your understanding—and clearly you would not have

agreed to accept this position, if confirmed, if you had not reviewed

it fairly carefully—do the limits of the definition of those who qualify for the funds include entities like those being discussed today—

the automobile companies, for example?

Mr. BAROFSKY. Senator, I would not hazard an opinion today.

Senator KYL. I am sorry?

Mr. BAROFSKY. I would not hazard an opinion today. I have not

looked into that and gotten sufficient input. It seems like it is a

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complicated question, and from my outsider’s perspective I am just

not prepared to answer that question.

Senator KYL. Well, you have looked at the statute, though?

Mr. BAROFSKY. I have.

Senator KYL. And see that it defines financial institutions as the

recipients of the funding?

Mr. BAROFSKY. Yes.

Senator KYL. I just wonder if it is complicated beyond that as to

some entity that is not a financial institution, like a car manufacturing company, as to whether it would be qualified or not.

Mr. BAROFSKY. Senator, I would be answering you merely based

on my reading of press materials. I know there have been suggestions in the press that the financing arm of auto companies may

or may not qualify. I just really would not feel comfortable with

giving an opinion without doing sufficiently more research into the

statute, the definitional terms, looking at the nuances of these particular companies.

Senator KYL. Mr. Chairman, I would just note that it is encouraging to see someone who is actually desirous of reading the statute, perhaps looking at the case law or anything else that might

bear on a proper understanding. I appreciate your answers. Thank

you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

I just have one final point. I am impressed with your experience

and results that you obtained as a prosecutor. However, this position is a bit different than a prosecutor. A prosecutor is charged

with bringing people to justice who have not followed the law and

letting a judge or jury then decide whether or not the person

named has followed the law or not.

In this case, there are not a lot of laws, not a lot of standards.

There is a lot of discretion left to Treasury in how these dollars are

to be spent or not spent. So it is going to be your job here, when

you are tracking down how the money is spent, to tell us, the country, what the law should be, what the standards should be, whether the standards set by Treasury are sufficient or not. It is going

to take a lot of work, clearly, and it is going to take a lot of discretion, a lot of wisdom in reading the statute, the underlying statute,

and understanding not only the letter, but the spirit of the statute.

Clearly, the bigger spirit is: what is the public interest here?

So I encourage you to do that. Tell us not only how the dollars

are being spent, but whether they are being spent wisely and properly and what the standards should be if they are insufficient

standards, remembering that we set this up so that you could be

truly independent, so you would not be subject to the pressures of

an administration, or Congress, for that matter, although we are

giving you a little guidance here of what we want, what we expect

from you.

But this is not just a garden-variety Inspector General within a

Department. I think some Inspector Generals do a pretty good job,

some do not. It is my thought just to make doubly certain that we

have an Inspector General that is truly independent and that we

have given the resources to do that, that we have set up a Special

IG similar to the Special IG we set up in the Iraq reconstruction

fiasco. That IG uncovered millions—tens of millions, maybe hunVerDate 11-MAY-2000 14:06 Oct 29, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 61734.000 TIMD PsN: TIMD
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dreds of millions—of dollars of waste that would not be known to

the American public were it not known for that Special IG.

So I am hoping there is not a lot of waste here, but my thought

was we would put you ahead of the process, not behind it. That is,

let us not try to find the waste. Let us set up, have you go in right

now off the top with very vigorous scrutiny to ensure as much as

possible that dollars are not wasted.

You are independent. You are special. You are not another GAO

report, you are not an oversight board, you are not these other

oversight institutions that are mentioned and created in the statute. You are targeted with laser-like focus and all your resources

on this program. You are independent. You are fully independent.

You have a great opportunity to do just a super job so that not

only the American public feel better about this whole program—I

think Senator Rockefeller is right, there are a lot of misgivings

about this. I think a lot of American people think, hey, this thing

is not working the way it is supposed to; maybe we were right after

all to be skeptical about it.

So it is up to you to make sure these dollars are spent properly

and fundamentally clearly so that you have the self-respect and

knowledge that, by gosh, you did the greatest and best job possible.

We want you to know that you have the full cooperation of this

committee in helping to accomplish that objective. We want to work

with you because, clearly, the American public are our employers.

We are just employees, just the hired hands. It is up to us to serve

our employers, and you are in just a great position to help make

that happen. I want to just commend you again for it and wish you

good luck.

Other questions? [No response]. All right. Thank you, Mr.

Barofsky. All I am saying is: go for it.

Mr. BAROFSKY. Thank you, Mr. Chairman. Thank you, Senators.

[Whereupon, at 3:22 p.m., the hearing was concluded.]

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