Posts Tagged ‘Bailout’

An inside story of the Wall Street bailout

August 16, 2012

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.

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The new American oligarchy

May 30, 2010

About two months after President Obama was inaugurated, he met with the CEOs of the 13 largest financial institutions to ask for their cooperation in averting financial collapse. The U.S. government was engaged in a major financial rescue effort to save the U.S. banking industry from collapse. In return, he asked that the bank CEOs hold off on big pay raises and bonuses that enrage the public. “We’re all in this together,” he reportedly said. “Help me to help you.”

He was pleading with them as if they were a sovereign power in their own right. “This administration is the only thing standing between you and the pitchforks,” he reportedly said.  The bank CEOs balked at Obama’s requests and since then have mobilized against even modest financial reforms.

This story is told in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, by Simon Johnson and James Kwak. Simon Johnson is a former chief economist for the International Monetary Fund. His brother-in-law, James Kwak, has had a successful career as a software entrepreneur and business consultant. In many ways, they argue, the United States fits the profile of faltering Third World oligarchies the IMF has had to bail out. And Obama, so far, has not challenged this.

Their definition of an oligarchy is a nation in which economic power generates political power, and vice versa. They show how, for the past 30 years, a financial oligarchy has emerged and, under Democrats and Republicans alike, has steadily freed itself of governmental control while continuing to demand and get government bailouts. The recent bailout is only the latest and biggest of a long series, and is unlikely to be the last unless big changes are made.

The savings of Americans, instead of being invested in American industry and contributing to the nation’s economic growth, have been diverted to a kind of high-stakes poker game that benefits nobody but the winners, and in which the big losers are bailed out.  This will not end, they say, until the big banks are broken up, as President Theodore Roosevelt broke up the Standard Oil trust.

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