IT might seem remarkable that there’s more to say about our late Bailout Age. But there is more — a lot more.
Nearly four years after Washington began its huge rescues of banks with taxpayer dollars, an important player in this, one of the great financial dramas of all time, is offering a damning account of how the Bush and Obama administrations handled the whole episode.
He is Neil Barofsky. Remember him — the man whose job it was to police the $700 billion Troubled Asset Relief Program? And his new account, a book titled “Bailout” (Free Press), to be published on Tuesday, is a must-read.
His story is illuminating, if deeply depressing. We tag along with Mr. Barofsky, a former federal prosecutor, as he walks into a political buzz saw as the special inspector general for TARP.
Government officials, he says, eagerly served Wall Street interests at the public’s expense, and regulators were captured by the very industry they were supposed to be regulating. He says he was warned about being too aggressive in his work, lest he jeopardize his future career.
And so Mr. Barofsky, who formerly prosecuted Colombian drug lords as an assistant United States attorney in New York City, is schooled in the ways of Washington. One telling vignette comes early on in his book, when he is advised by inspectors general in other agencies about how to do his job.
As Mr. Barofsky writes, he had assumed that his assignment to oversee TARP meant that he should be fiercely independent from the Treasury Department, and vigilant against waste, fraud and abuse. But after canvassing other inspector generals for guidance, he writes, he learned of different priorities: maintaining and possibly increasing budgets, appearing to be active — and not making enemies.
“The common refrain went like this,” Mr. Barofsky writes. “There are three different types of I.G.’s. You can be a lap dog, a watchdog or a junkyard dog.” A lap dog is seen as too timid, he was told. But being a junkyard dog was also ill-advised.
“What you want to be is a watchdog,” he continues. “The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.” He also learned, he says, that success as an inspector general meant that investigations come second. Don’t second-guess the Treasury. Instead, “focus on process.”
Thus the collision course was set between Mr. Barofsky and a crew of complacent, bank-friendly Treasury officials. He soon discovered that the department’s natural stance of marching in lock step with the banks meant that he had to question its policies and programs repeatedly to ensure that taxpayers weren’t at risk for fraud and abuse.
“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true,” Mr. Barofsky said in an interview last week. “It really happened. These suspicions are valid.”
To be sure, Mr. Barofsky and his team were up against a powerful status quo. And that meant that they ran into plenty of brick walls.
“Bailout” covers a lot of ground, running through attempts of the inspector general’s office to ensure that additional rescue programs suggested by the Treasury had safeguards in place to avoid conflicts of interest, collusion and fraud. One battle involved the Public-Private Investment Program, designed to get troubled mortgages off banks’ balance sheets by encouraging private investors to buy them using mostly taxpayer dollars. When the inspector general’s office recommended ways to protect against fraud and to fix other flaws in the program, Mr. Barofsky writes, the Treasury rejected the suggestions, maintaining that they would gut the programs and reduce participation.
Another skirmish involved the department’s ill-conceived loan modification plan, known as the Home Affordable Modification Program. When the Treasury began discussing the program’s outlines, Mr. Barofsky said he became concerned that it would open the door to fraudulent foreclosure rescue schemes, in which large upfront fees could be extracted from desperate borrowers eager to participate in what was supposed to be a free government program. When his office recommended fraud-prevention measures, several were ignored, he writes.
A few months after the modification plan was announced, his office began a preliminary audit of its rollout. “We soon verified what we had suspected,” Mr. Barofsky writes. “Treasury had failed to ensure that the servicers had the necessary infrastructure to support a massive mortgage modification program.” It barely got off the ground, and few homeowners have received the help they hoped for.
THIS was just one of many examples from Mr. Barofsky’s 16-month tenure, during which, he says, Washington abandoned Main Street while rescuing Wall Street. “There has to be wide-scale acknowledgment that regulatory capture exists, dominates our system and needs to be eradicated,”
Mr. Barofsky said in the interview. “It was my job to bring as much transparency to taxpayers so they knew what was going on. Writing the book, I tried to bring the same level of transparency so people understand how captured their government has become to the financial interests.”
I asked Mr. Barofsky, now a senior fellow at the N.Y.U. School of Law, what could be done to get regulators to man up, as it were.
“We need to re-educate our regulators that it’s O.K. to be adversarial, that it’s not going to hurt your career advancement to be more skeptical and more challenging,” he said. “It’s implicit in so much of the regulatory structure that if you don’t make too many waves there will be a job for you elsewhere. So we have to limit those job opportunities and develop a more professional path for regulators as a career. That way, they won’t always have that siren call of Wall Street.”
Mr. Barofsky’s assessment of his former regulatory brethren is crucial for taxpayers to understand, because Congress’s financial reform act — the Dodd-Frank legislation — left so much of the heavy lifting to the weak-kneed.
“So much of what’s wrong with Dodd-Frank is it trusts the regulators to be completely immune to the corrupting influences of the banks,” he said in the interview. “That’s so unrealistic. Congress has to take a meat cleaver to these banks and not trust regulators to do the job with a scalpel.”
Finally, Mr. Barofsky joins the ranks of those who believe that another crisis is likely because of the failed response to this one. “Incentives are baked into the system to take advantage of it for short-term profit,” he said. “The incentives are to cheat, and cheating is profitable because there are no consequences.”
Despite all of this, Mr. Barofsky ends on something of a positive note. Meaningful changes to our broken system may finally come about, he writes, if enough people get angry. His conclusion is this: “Only with this appropriate and justified rage can we sow the seeds for the types of reform that will one day break our system free from the corrupting grasp of the megabanks.”
That’s not much of a silver lining. But I guess it’s better than none.