An inside story of the Wall Street bailout

Neil Barofsky was special inspector general for the Trouble Asset Relief Program from December 2008 to March 2011.  His new book, BAILOUT: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, told me a lot about not only of the failures of the Obama administration, but of the dysfunctional culture of Washington, D.C.

In Barofsky’s early days in Washington, he was kindly advised not to be too abrasive or controversial.  Herb Allison, the former Merrill Lynch executive who was the so-called “TARP czar,” told him that if he played the game, he was assured of moving on to a good job either in Washington or Wall Street; otherwise, he would be unemployable.   That is also what Senator Richard Shelby (R-Alabama) told him—that if he did his job right, he would make a real difference and serve the American people in a meaningful way, and he also would never be able to get a job again.

His account makes U.S. government seem like the court of King Louis XVI in 18th century France.  Everybody was obsessed with protocol, rank, status, privileges and keeping in the good graces of the powers that be.  Having a big office was very important.  High officials were flattered as if they were demi-gods.  Barofsky wrote that he made up his mind early on that he was going to do his job well and then get out.

He was a federal prosecutor in New York who prosecuted Colombian drug lords and white collar criminals.  A Democrat, he was appointed in the waning days of the Bush administration after Congress insisted on the IG position as a condition for approving TARP.  Treasury Secretary Hank Paulson gave him the cold shoulder, but Treasury Secretary Timothy Geithner was downright hostile.  He learned early that the secret of influencing the executive branch is to have friends in Congress, and the secret of influencing Congress is to cultivate the press, which he did.

His report is another confirmation of the failure of the Obama administration to bring Wall Street under control.  According to Barofsky:

  • Secretary of the Treasury Timothy Geithner basically trusted the banks to manage their own bailout.  They were lent $4.7 trillion, not just the $700 billion authorized by Congress, with no significant audit or supervision, under conditions in which they could hardly fail to profit.  In one case, a couple of bankers literally designed a program which they then proceeded to administer, to their great profit.
  • The purpose of the bailout was to get credit flowing into the economy again for consumer loans, home mortgages and financing for small business, but this didn’t happen, and nothing was put in place to assure that it would happen. Barofsky conceded that a bailout probably was necessary in late 2008 to prevent a financial collapse, and that the banks repaid most (not all) of the money advanced.  But he said there was no need to bail out the banks at 100 cents on the dollar, and no justification for refusing to audit how the money was spent.
  • The Home Affordable Modification Plan (HAMP) was never intended to provide help homeowners avoid mortgage foreclosures, but rather, in Geithner’s words, to “foam the runway” for the banks—that is, to stretch out the foreclosure process so that banks and mortgage servicers would not be overwhelmed by having more foreclosures than they could handle.  Barofsky said Geithner resisted audits and measures to protect homeowners from fraudulent mortgage servicing programs.
  • There is nothing in place to prevent another financial crash, as bad or worse than the one that went before.  The only thing different is that government has authority which will make possible future bailouts without going to Congress.

While Barofsky’s book did confirm my low opinion of Secretary Geithner, it did raise my opinion of Congress.  Barofsky was able to accomplish what little he did—a few audits, a few successful prosecutions for fraud—through the support of courageous Democrats and Republicans in Congress.  I have a higher opinion of Senator Shelby than I did before, although qualified by the fact that he is a highly partisan Republican who anti-labor, anti-civil rights, and opposed to creation of a Consumer Financial Protection Board.

Barofsky currently is a senior fellow at New York University School of Law.

The following brief segments from PBS’s Newshour provide an impression of Barofsky’s personality, background and thinking.

This is from an interview with Neil Barofsky on PBS’s Frontline

You are highly critical of the management of TARP. What went wrong?

It’s important to remember that there were a number of different objectives for TARP. It did meet one of its primary objectives, which was to help prevent the entire collapse of our financial system. … The other goals, which have more of a focus on helping Main Street institutions and individuals and businesses definitely small enough to fail — those goals all came short.

So, for example, TARP was supposed to be used by the banks to restore lending, help pump that oxygen into the lifeblood of the economy, and it just didn’t happen. One of the reasons why it didn’t happen is the money went to the banks with no strings attached, no conditions, no incentives, just essentially piles of money given to them without any instructions whatsoever and sort of this hope that somehow or other they use the money to achieve the policy goals of the administration.  Of course, that never happened and you just look at the malaise the economy has been in in the years ever since.

Similarly, TARP was supposed to help homeowners, and that was part of the very bargain that was struck in order to get TARP passed. … We had a housing program that was an utter failure by any definition if you look at what its original goal was — up to 4 million homeowners helped, and today it’s around 800,000, 20 percent of that goal. Or if you look at how much money has been spent, just a small tiny fraction, maybe 6 percent of the original $50 billion, on par with what credit card companies got.

Click on FRONTLINE | PBS for the entire interview.  Here is an excerpt from the book.

The further we dug into the way TARP was being administered, the more obvious it became that Treasury applied a consistent double standard.  In the late fall of 2009, as I began receiving the results of two of our most important audits, the contradiction couldn’t have been more glaring.  When providing the largest financial institutions with bailout money, Treasury made almost no effort to hold them accountable, and the bounteous terms delivered by the government seemed to border on being corrupt.  For those institutions, no effort was spared, with government officials often defending their generosity by kneeling at the altar of the “sanctity of contracts.”  Meanwhile an entirely different set of rules applied for homeowners and businesses that were most assuredly small enough to fail.

Nowhere was the favoritism toward Wall Street move evident than with the government’s approach to AIG, where inviolable contract terms were cited to justify the absurd executive bonus payments as well as far richer payments provided to the megabank counterparties to AIG’s CDS deals, honoring even their most reckless bets.  For homeowners and small business owners, though, contracts went from being sacrosanct to inconvenient irrelevancies.  So when mortgage service lenders blatantly disregarded HAMP contracts by trampling over homeowners’ rights, Treasury turned to an endless series of excuses to justify its refusal to hold them accountable.  Similarly, for more than two thousand auto dealerships, Treasury’s auto bailout team sought to void the contractual rights granted them under state franchise laws to shut them down.

Click on Neil Barofsky’s ‘Bailout’ as an Anthropological Study of Washington’s Awfulness for a book review on Huffington Post.

Click on Bungled Bank Bailout Leaves Behind Righteous Taxpayer Anger for Barofsky’s thoughts about the current situation.

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2 Responses to “An inside story of the Wall Street bailout”

  1. J. Palmer Says:

    You might enjoy the following post:

    Feel free to leave a comment if you agree or disagree.


    • philebersole Says:

      I agree with your post about the auto bailouts. Everybody concerned had to sacrifice, which is how it should be. This was very different from the way the Wall Street bailouts were handled, in which the bankers were protected from loss.

      Barofsky in his book contrasted the way the Treasury Department treated AIG bonuses as sacred because they were a contractual obligation, and the way Treasury casually brushed aside GM’s contracts with its dealers as well as state laws regarding franchises.


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