stimulus.jpg(A Populist Capitalist Blog)

As the federal government prepares to flood the American economy with its multi-trillion dollar stimulus package, there are two things I know for sure:

1. Our grandchildren will resent us as they continue to pay interest on the debt we are saddling them with.

2. There will be billions and billions of dollars lost in widespread fraud.

How do I know?

First, the government can’t even stop the relatively minor fraud (in the millions of dollars, see bullet points 1 and 2) going on now. Second, the stupendous scope, the unprecedented rollout speed, the staggering complexity, and unheard-of lack of safeguards (bullet points 3 and 4).

— USA Today, March 25, 2009: “Fraud in contract program that assists small businesses. Nineteen companies were improperly awarded nearly $30 million in federal contracts…” (article below)

— The New York Times, April 14, 2009: “Prosecutions Lag as N.Y. Foreclosure Frauds Surge. Bank robbers average less than $2,000 and face a 75 percent chance of being caught…a mortgage fraud ring walks away with hundreds of thousands of dollars per house, prosecutors say, and runs little risk of arrest.” (article below)

— Business Week, April 2, 2009: “The IRS fears increased fraud. The inspector general of the Treasury Dept. estimates that, even before the stimulus, the EITC (Earned Income Tax Credit) was resulting in $10 billion to $13 billion a year in improper claims, many of which the agency contends are encouraged by unscrupulous preparers.” (article below)

— The New York Times, April 21, 2009: “Bank Aid Programs Are Seen as Open to Fraud. …inherently vulnerable to fraud and should not be started without stronger safeguards, a top government investigator warned… a $3 trillion effort of ‘unprecedented scope, scale and complexity’ and comes with too little oversight and too little information.” (article below)

There are many kinds of fraud. Are we committing one on future generations with our trillion dollar deficits?

Closing Quote:
“It is a fraud to borrow what we are unable to pay.” — Publilius Syrus


GAO: Fraud in contract program that assists small businesses
By Matt Kelley
March 25, 2009

WASHINGTON — Nineteen companies were improperly awarded nearly $30 million in federal contracts that were supposed to go to small businesses in low-income neighborhoods, congressional investigators say in a new report.

The Government Accountability Office, the non-partisan investigative arm of Congress, found the 19 companies while reviewing a sample of participants in HUBZone, or Historically Underutilized Business Zone, a federal program for economically distressed areas run by the Small Business Administration (SBA). The GAO report, scheduled to be released at today’s House Small Business Committee hearing, says “there are likely hundreds and possibly thousands of firms” in the program that don’t meet its requirements.

The committee’s chairwoman, Rep. Nydia Velázquez, D-N.Y., said she plans to urge the SBA to shut down the program until it can fix the problems.

“We’re talking here about millions of dollars,” Velázquez said. “It’s outrageous that money is going to companies that don’t qualify to be in the program.”

SBA spokesman Jonathan Swain declined to comment Tuesday. He said acting Administrator Darryl Hairston will answer the committee’s questions today.

The HUBZone program began in 1997 as a way to encourage economic development in blighted areas by directing some government contracts to businesses based in low-income neighborhoods that draw at least 35% of their workers from those areas. The federal government awarded $8 billion in HUBZone contracts in fiscal 2007, and there are about 9,300 businesses in the program.

A GAO report released in July found that the SBA provided little oversight to ensure companies in the program met those requirements. That report found 10 Washington, D.C.-area businesses were improperly part of the program because their offices were outside of poor neighborhoods or they did not employ enough workers from those neighborhoods, or both. One company, for example, listed its office as a small room above a dentist’s office in a low-income area, while investigators found its main office was in the suburb of McLean, Va.

The SBA determined seven of those 10 companies were ineligible, and the Justice Department may file civil lawsuits against five of them, the GAO says.

SBA officials told the GAO they are “reengineering” the program to make it more efficient and to do a better job of preventing and detecting fraud and abuse. The report says the SBA has taken some steps, including requiring applicants to provide more documentation.

Still, the SBA doesn’t have effective fraud-fighting measures, the GAO report says. For example, the SBA has no rules for referring possible wrongdoing to agency investigators.

The new report also found some Washington-area companies that GAO previously identified as ineligible got new contracts, including one that got a $23 million contract. That company and two others remained eligible because the SBA had computer problems that prevented it from completing performance evaluations, the report says.

The SBA plans to ban those three from future federal contracts, the report says.



Suzanne DeChillo/The New York Times

Linda and Wesley Bryce lost the title to their home on Staten Island, and now face eviction.

Prosecutions Lag as N.Y. Foreclosure Frauds Surge
The New York Times
April 14, 2009

Many New York City prosecutors reacted slowly and brought few indictments as foreclosure swindles and mortgage fraud swept the city during the past decade, allowing problematic operators to flourish even as the nation’s housing market rose and crashed, according to housing lawyers, prosecutors and federal reports.

As early as 2000, the federal Department of Housing and Urban Development declared the city a foreclosure fraud “hot zone.” In 2005, the National Consumer Law Center wrote an influential report, “Dreams Foreclosed: The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure ‘Rescue’ Scams,” warning that the F.B.I. and local prosecutors remained dangerously understaffed in this fight.

Yet a review of civil lawsuits suggests that many fraud cases go unprosecuted.

Officials with several of New York’s district attorneys acknowledge the problem, saying they lack the staff to investigate and prosecute more than a fraction of the potential deed-theft and mortgage-fraud cases. Such cases are typically complex and time consuming; as a consequence, prosecutors say, they often know the names of sophisticated fraudulent operators but have trouble getting indictments.

“Am I frustrated and can I feel the frustration of those who send us the cases? Absolutely,” said Gregory C. Pavlides, the chief of the economic crimes unit in the Queens district attorney’s office. His unit’s 14 lawyers also handle money laundering, counterfeiting, identity theft and environmental cases.

For years many district attorneys viewed mortgage fraud as taking a second seat to traditional show-stoppers: homicides, counterfeiting, burglaries and even gambling. At least one New York district attorney still takes that view.

“Our natural inclination is that these are civil cases,” said William Smith, spokesman for the Staten Island district attorney, Daniel M. Donovan.

Yet mortgage and deed fraud, assistant district attorneys say, are among the most economically destructive crimes prosecuted by their offices. Bank robbers average less than $2,000 and face a 75 percent chance of being caught; a mortgage fraud ring walks away with hundreds of thousands of dollars per house, prosecutors say, and runs little risk of arrest.

“Robbing a bank with a gun is not as smart as going into mortgage fraud,” Mr. Pavlides said. “Because of the sheer volume, you have a decent chance of getting away with it.”

Nationwide, mortgage fraud and deed theft cost homeowners $4 billion to $6 billion annually, according to the F.B.I. In New York City, housing fraud has wiped out tens of millions of dollars for thousands of predominantly black and Latino homeowners in large parts of Brooklyn, Queens and Staten Island.

Mortgage fraud comes in several varieties. Most common today are deed thieves, who approach distressed owners and offer to straighten out finances by temporarily taking over deeds. Then they refinance and abscond with the owners’ equity. Others, more frequently during the boom years, rely on circles of appraisers who deliver inflated appraisals on demand, and on lawyers paid by the seller but purporting to represent the buyer, and on mortgage brokers, to persuade buyers to take on overpriced and often dilapidated homes.

As the foreclosure crisis has deepened, officials have promised a tougher line. Last week, Treasury Secretary Timothy F. Geithner announced plans for federal and state agencies to fight mortgage and foreclosure fraud. And last month, District Attorney Charles J. Hynes of Brooklyn and Senator Charles E. Schumer announced the creation of a real estate fraud unit in Brooklyn, to address what Mr. Hynes described as “the recent flood of mortgage fraud cases plaguing New Yorkers.”

But the lawyers who have pleaded with district attorneys, chased witnesses and pointed out the same suspected law breakers for years say that prosecutors failed to stop fraud when it was most rampant.

“We gift-wrapped these cases,” said Jessica Attie, co-director of the foreclosure prevention project at South Brooklyn Legal Services. “These are crimes committed in plain sight.”

When Doris Dickinson walked into Joe Sanders’s office at Brooklyn Legal Services Corporation A, he noted the sort of detail he thought an assistant district attorney would love.

The men who sold one of Ms. Dickinson’s houses filled out a deed in 2002 claiming that she was dead.

“Exhibit A: This is Ms. Dickinson and she’s alive,” Mr. Sanders said. “I figured that was a good place for a prosecutor to start.”

Ms. Dickinson, 53, is blind, and her father, a transit worker, had scrimped and purchased several homes in hopes of giving her a lifelong income stream. According to a lawsuit in State Supreme Court, two men used the forged deed to obtain a mortgage. Then they sold the house to an accomplice — or straw buyer — and refinanced it, taking $570,000 in equity, court papers say.

Ms. Dickinson spent years fighting to regain legal title, eventually taking her case to Richard Farrell, one of the few prosecutors in the Brooklyn district attorney’s office who handles mortgage fraud.

“He gave me his card and said what was done to me was wrong,” said Ms. Dickinson, whose curls cascade around large black sunglasses.

Mr. Farrell has called witnesses and searched records, and he has located a suspect. But a year later, no grand jury has been called or indictments brought.

“It’s in my hopper,” Mr. Farrell said.

Mr. Farrell, chief of the new mortgage fraud unit, said the Brooklyn district attorney’s office has brought 50 cases since 2000 and has obtained 45 pleas and convictions, or five per year in a county of 2.4 million people.

In Queens, the district attorney, Richard A. Brown, said in a recent interview that his office obtains 35 to 45 mortgage fraud indictments annually, although often of individual suspects rather than larger operators.

The district attorneys speak of their frustration in tracking the more sophisticated operators.

“I’m simply emphasizing how difficult these cases are,” Mr. Farrell said. “Each case tends to take in excess of a year.”

Federal and state prosecutors have made more progress. Benton J. Campbell, the United States attorney for the Eastern District of New York, formed a mortgage fraud squad a year ago and recently obtained a conviction of the owner of Olympia Mortgage for defrauding Fannie Mae, the federal mortgage giant, on hundreds of mortgages. The Southern District office, too, has gained several convictions of high-volume swindlers.

Mr. Donovan, on Staten Island, is the only New York City district attorney who says his county has no mortgage fraud problem, although his county ranks near the top in foreclosures per capita statewide. “We don’t see many complaints,” said Mr. White, his spokesman.

But lawyers with Staten Island Legal Services and State Senator Diane J. Savino, who represents parts of Brooklyn and Staten Island, say they get many reports of fraud and have walked some cases over to Mr. Donovan’s office. “We’ve gotten very little response,” Ms. Savino said.

Linda and Wesley Bryce can attest to Staten Island’s fraud problems. They own a small, $169,000 home on the borough’s working-class north shore. Mr. Bryce, 71, worked in a pigments factory; Ms. Bryce, 55, worked as a chemical technician. Then she injured her spine, and their granddaughter, who is in their care, needed surgery, and in 2006 they fell behind on their mortgage payments.

The bank filed notice and a day later two “rescue” specialists from a mortgage broker in Queens knocked on the Bryces’ door. Temporarily share the mortgage with us, the men said, and we’ll give you $10,000 of the refinance proceeds and put your home on solid footing.

The Bryces, who are quick to say they lack financial sophistication, agreed. According to a lawsuit in State Supreme Court, the so-called rescuers transferred the deed to a straw buyer. A year later, they told the Bryces that they would have to pay $324,000 to get their house back, or start paying rent of $3,000 per month. When the Bryces protested, the rescue firm filed a petition to evict them.

“It was all done in a couple of hours,” Ms. Bryce recalled, resting her chin on her cane, in an interview in their lawyer’s office.

The Bryces called Mr. Donovan, and a detective tried to help them. Mr. Donovan’s top deputy said his office investigated but dropped the case after discovering that federal prosecutors had obtained an indictment of one of the mortgage brokers in an unrelated case.

An associate of the broker, however, continues to claim ownership of the Bryces’ home; a state judge has intervened but the Bryces still face eviction.

“There is this mentality that the victims are complicit if they sign papers they don’t understand,” said Margaret Becker of Staten Island Legal Services. “But who would ever knowingly sell their home for $10,000? Of course it’s fraud.”

And then there is Dr. Janet Mitchell, 58, the daughter of a butler and a maid who became chief of perinatology at Harlem Hospital Center and a national advocate for black pregnant women with H.I.V.

In 1992, she purchased a handsome and affordable brownstone in Fort Greene, Brooklyn. Then early-onset dementia struck. Dr. Mitchell stopped paying her bills in 2005, leading lenders to foreclose. Soon afterward, she walked into a mortgage company, according to a lawsuit filed by her niece.

A mortgage specialist persuaded her to sign a handwritten transfer with no lawyer present and paid off her $210,000 in loans. Then he refinanced her house, taking $1.7 million in cash. The doctor now lives, penniless, with her sister in Colorado.

South Brooklyn Legal Services gave the files to the Brooklyn district attorney’s office. The prosecutors have not yet brought a case.

“We are constantly trying to get them to pursue this case,” Ms. Attie said. “These are the most defenseless of all.”


A Boom for Tax Prep
New tax breaks will drive fresh customers to H&R Block, Liberty Tax, and others. But the IRS fears increased fraud in the unregulated industry
By Ben Elgin, Keith Epstein and Brian Grow
Business Week
April 2, 2009

As federal stimulus dollars begin to flow, one unlikely beneficiary is the $30 billion tax-preparation industry. Prep specialists from top dog H&R Block (HRB) on down are celebrating as the Apr. 15 deadline approaches. The fresh treat: billions of dollars in new and expanded tax credits for individuals and small companies.

The good news for tax preparers could turn into bad news for the IRS, however, as well as an early illustration of what might be many unintended consequences stemming from the stimulus.

Tax-prep pioneer John Hewitt calls the huge federal spending package “the H&R Block and Liberty Tax Stimulus Plan.” Twenty-seven years ago, Hewitt founded Jackson Hewitt Tax Service (JTX), the second-largest chain in the business. He now runs No. 3 Liberty Tax Service.

Hewitt has instructed his staff to explore leasing additional stores being vacated by Starbucks and other victims of the recession. “I love it whenever [lawmakers] pass tax changes,” he says. “This one helps us because there are more tax changes that affect more people than any bill I’ve ever seen.”

The mood is less cheerful at the IRS. Officials there are girding for a wave of questionable credit claims and outright fraud. A major problem, explains Nina E. Olson, the IRS taxpayer advocate (or ombudsman), is that most tax preparers are unregulated. The vast majority aren’t licensed accountants or lawyers. Only three states—California, Maryland, and Oregon—certify tax preparers. In an industry of more than 1 million service providers, the IRS imposes fewer than 300 penalties a year, most quite modest.

“There are too many areas of this country where you have to go through more work to be licensed as a beautician than to do someone’s taxes,” says Representative Xavier Becerra of California. A senior Democrat on the House Ways & Means Committee, he plans to introduce legislation this year to require that all preparers register with the IRS.

Olson fears that preparers will exploit the stimulus initiative’s multibillion-dollar expansion of the Earned Income Tax Credit, which last year transferred $47 billion to low-income families. The inspector general of the Treasury Dept. estimates that, even before the stimulus, the EITC was resulting in $10 billion to $13 billion a year in improper claims, many of which the agency contends are encouraged by unscrupulous preparers. While prep companies aren’t supposed to charge fees based on how much money they obtain from the IRS, in practice many set higher prices for customers seeking refunds.

The stimulus package also includes new or enlarged tax benefits for small businesses, first-time home buyers, certain parents and retirees, and people who improve the energy efficiency of their dwellings—all of which are susceptible to abuse in the hands of dishonest or incompetent tax preparers, says Olson. “Some of the provisions in the economic stimulus legislation will dwarf the EITC in terms of rate of fraud,” she predicts.

An estimated 60% of all tax returns are handled by paid preparers, up from 48% in 1990. The preparers have plenty to dig their teeth into: The stimulus legislation enacted in February provides for $154 billion in additional refundable tax credits to families and small businesses over the next three years. Using proprietary software, prep companies charge $200 to $450 for a basic return, with the fees often set toward the high end of the range if the taxpayer receives a credit-related refund. This creates a strong incentive to encourage customers to seek credits based on their income, number of children, willingness to insulate their homes, or a purchase of real estate.

Even when done properly, the tax-prep business can yield impressive profits. “We were charging people $300 to $400 for 10 minutes of work,” says Greg Gillihan, who ran a franchise in Kansas City in 2007 for the fourth-largest chain, Dayton-based Instant Tax Service, which has 1,200 offices.

Industry executives say that only a tiny handful of prep offices engage in fraud. “People trying to play by the rules are disadvantaged competitively and dismayed by some of what goes on,” says Robert A. Weinberger, H&R Block’s top lobbyist in Washington. John G. Ams, executive vice-president of the National Society of Accountants, agrees: “My members are tired of having to fix errors they find on someone else’s work product.” The group has pushed for self-regulation overseen by the IRS.

As for the industry’s rates, executives and their advocates point out that no one is forced to hire a preparer. “If you don’t like the price charged, go to somebody who does it cheaper,” says Mark Steber, Jackson Hewitt’s vice-president for tax resources. “It’s the free-market economy model.”

Unfortunately, the free market’s invisible hand sometimes has its thumb on the scale, to the detriment of the U.S. Treasury. In January, volunteers for Impact Alabama, a nonprofit activist group, secretly recorded meetings with employees at 13 outlets in that state, including one Jackson Hewitt franchise. Transcripts provided to BusinessWeek show that the volunteers posed as taxpayers seeking EITC refunds for which they were not eligible. Most of the tax preparers appeared willing to file false returns.

On Jan. 12, an Impact Alabama volunteer visited a Jackson Hewitt outlet in Montgomery, the state’s capital. Situated in a strip mall between a liquor store and swimming pool supply business, the Jackson Hewitt office has a sign in the window stating: “Confused about changing tax laws? We’re not.”

According to the transcript, a Jackson Hewitt employee told the undercover volunteer that she qualified for the EITC based on her occasional custody of two children. In fact, the supposed taxpayer should not have received a refund under the EITC because, as the volunteer made clear, neither child lived with her for the six months out of the year that the law requires.

The Jackson Hewitt employee prepared documents seeking what appears to have been an invalid $5,639 refund and charged a fee of $402, according to Impact Alabama. The nonprofit never filed for the refund.
When a BusinessWeek reporter visited the Jackson Hewitt office in early March, employees declined to comment. The owner of the franchise, Charlie West, said in a subsequent interview that the fee charged was “higher than usual” because of the complexity of the return in question. He said initially that he would look into the EITC fraud allegation but then failed to respond to follow-up calls. (On Mar. 31, Liberty Tax’s John Hewitt confirmed he is exploring a possible acquisition of his former company, Jackson Hewitt.)

Impact Alabama’s research is part of a campaign by its founder, Stephen Foster Black, director of the University of Alabama’s Center for Ethics & Social Responsibility, to persuade the state’s legislature to require licensing of all tax preparers. H&R Block has supported that effort. But 300 other individual tax-prep outlets and franchisees in Alabama and elsewhere have started a group called the National Independent Tax Preparers Assn., based in Montgomery, to oppose the bill that Black supports. Similar standoffs have kept preparers from facing meaningful policing in a number of states.

J.C. Snowden, who heads the tax preparers’ association, says the Impact Alabama investigation was sneaky and unfair. He favors a fine on preparers of up to $100 per tax-return violation. The legislation supported by Black would impose fines of $500 to $2,500 per violation. “We’re firmly behind regulating this industry,” Snowden says. For now, though, his lobbying is slowing down any changes.

In Washington, the IRS can’t track complaints against tax preparers because the agency has no central database to store the information, according to a Feb. 24 report by the Treasury Dept.’s inspector general. A Dec. 31, 2008, IG report found that the IRS generally doesn’t follow up on hundreds of thousands of questionable EITC returns, as identified by its own computerized filters.

Even when the IRS does step in, the results are often uncertain. In 2007 the agency became suspicious of an eight-store Instant Tax franchise in Missouri. The agency received information from a former employee that Instant Tax was selling bogus personal information about made-up family members so that clients could apply for EITC refunds, according to an April 2007 affidavit for a search warrant filed by an IRS agent in federal court in Springfield, Mo. Another former employee complained to the IRS that the franchise owner, Kevin Edmonds, and his manager, Josh Lenz, were “taking advantage of mentally disabled and poor people” by adding false information “that resulted in fraudulent returns and fraudulent increases in earned income tax credit[s],” the affidavit said.

The IRS also found that the Instant Tax franchise was generating refunds on 99.3% of the returns it handled, according to the affidavit. “The entire business…is permeated [by] fraud,” the agent stated. The IRS searched the eight Instant Tax locations in October 2007, but it since has taken no further public action. An agency spokesman declined to comment.

Instant Tax issued a press release in August 2008 acknowledging that it had “allowed the franchisee [in Missouri] to expand too quickly” and had terminated its contract with the owner, Edmonds. But Instant Tax didn’t mention in the press release that it had sold two Florida locations to Lenz shortly after the October 2007 IRS raid. Edmonds, meanwhile, became an Instant Tax “area developer” in Oklahoma, a job he holds today. Edmonds and his attorney declined to comment. Lenz didn’t return calls seeking comment.

Fesum Ogbazion, Instant Tax’s CEO, says that Edmonds sells franchises in his current role and doesn’t prepare any returns. The company is concerned about the IRS investigation, says Ogbazion, but still sold franchises to Lenz because the probe hasn’t led to any charges.


Bank Aid Programs Are Seen as Open to Fraud
The New York Times
April 21, 2009

WASHINGTON — The Treasury Department’s most ambitious plans to rescue troubled banks — partnerships between the government and private investors, backed by the Federal Reserve — are inherently vulnerable to fraud and should not be started without stronger safeguards, a top government investigator warned in a report to be released Tuesday.

The report also warned that the Treasury’s $700 billion Troubled Asset Relief Program has evolved into a $3 trillion effort of “unprecedented scope, scale and complexity” and comes with too little oversight and too little information about what companies are doing with the taxpayer money they are getting.

“The American people have a right to know how their tax dollars are being used,” wrote Neil M. Barofsky, the special inspector general assigned to monitor the bailout program, in his second report to Congress.

Mr. Barofsky was particularly critical of the Treasury Department’s refusal to demand detailed information from banks and other financial institutions about what they are doing with the money they receive.

Noting the widespread public outrage unleashed over the Treasury’s huge payments to the American International Group, the failing insurance conglomerate, Mr. Barofsky warned that Treasury officials were jeopardizing the credibility of their efforts by not requiring companies to disclose far more about their use of taxpayer money.

“Failure to impose this requirement with respect to the injection of yet another $30 billion into A.I.G. would not only be a failure of oversight, but could call into question the credibility of the government’s efforts,” he said. He was referring to bailout money that had been pledged, but not yet delivered, to the insurance giant.

The inspector general was particularly pointed in his criticism of the Obama administration’s plan to buy up questionable assets from banks. That plan calls for the Treasury to spend $100 billion to buy up troubled mortgages and mortgage-backed securities.

The plan also calls for multiplying the total volume of those asset purchases to almost $1 trillion by allowing private investors to borrow money at low interest rates from the Federal Reserve.

Mr. Barofsky said the plan posed “significant fraud risks,” especially when it came to buying up securities backed by exotic mortgages made during the peak of the housing bubble, when the excesses of poorly documented loans and no-money-down loans reached their zeniths.

The report said that the Federal Reserve intended its lending program, known as the Term Asset-Backed Securities Loan Facility, or TALF, to finance new lending rather than to buy up existing assets. It warned that the Fed was not currently planning to examine the securities that it would finance, and would be relying instead on the evaluation by credit rating agencies that originally failed to spot the dangers of subprime mortgages.

“Credit ratings, cited as one of the primary credit protections in TALF as currently configured, have been proven to be of questionable value,” the report said. “The wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis.”

Mr. Barofsky also warned that the Treasury’s plan might allow investors to double up on government subsidies for buying up troubled assets. The Public-Private Investment Program would have the Treasury invest alongside private investors. But the partnerships would also be able to borrow money from the Fed through “nonrecourse” loans. If the investments flopped, the investors could walk away from the loans and leave taxpayers with most of the losses.

The Treasury and the Federal Reserve have not yet begun the asset purchase programs.

The two agencies started up a limited version of the TALF program last month, which is mainly focused on financing consumer and small-business loans.

In February, Treasury Secretary Timothy F. Geithner announced the broader Public-Private Investment Program, which is aimed at buying up both mortgages and mortgage-backed securities. Part of the plan calls for marrying the public-private program with the Fed’s lending program, but the program still appears to be at least a month or two away from starting.

Senator Charles E. Schumer, Democrat of New York and a member of the Senate Banking Committee, said some of the inspector general’s criticisms about buying up “legacy assets” — usually troubled mortgage-backed securities — made sense.

“There are a few problems with using the TALF program to buy up legacy assets,” he said. “First, it’s rewarding the worst behavior — buying no-doc loans.” Second, he said, the public-private program “is a very rich subsidy program to begin with. You have to ask whether it needs the extra enrichment of TALF, particularly when it involves the most egregious of mortgages.”

Treasury officials had no comment on Mr. Barofsky’s report. But Mr. Geithner is scheduled to discuss it on Tuesday at a hearing of a Congressional panel that oversees the financial bailout program.

Both the Treasury and the Fed have increased the amount of information they are making public about their various rescue plans. Treasury officials have pushed the banks to provide information about their lending volumes, and they are demanding more information about what banks are doing with their money.

But Treasury officials have argued that it is almost impossible to get meaningful information about how banks are using money under the troubled-asset program, in part because the money came with few conditions. Treasury officials have also noted that if the funds are allocated for one purpose, like mortgage lending, they free up other money that can be used for a very different purpose, like making acquisitions.