May 02 2013

Book review: Bailout by Neil Barofsky

I recently read Bailout: How Washington Abandoned Main Street While Rescuing Wall Street by Neil Barofsky and it was a gripping read. His book is an insider’s account of how the financial crisis of 2008 was handled in Washington DC and it is not a pretty sight.

Barofsky was a prosecutor in the US attorney’s office in New York who was investigating drug cartels and mortgage foreclosure fraud when, late in 2008, his boss nominated him for the newly created post of Special Inspector General for the Troubled Asset Relief Program (SIGTARP) that was created by Congress to be an independent monitor to oversee the use of the $700 billion that they had rushed through in the wake of the financial crisis. He was in the unusual position of being nominated by the outgoing Republican administration and continuing under the Democratic one.

What makes this book different from other insider books is that Barofsky seems to not have the traditional Washington mindset, which is to always be on the lookout for the next upward career move, and thus be careful to ingratiate oneself to the ‘right’ people and not make waves. It is amusing how early on he was given sage Goldilocks-type advice to do just enough to make himself look good but not too much to upset powerful people. Clearly he did not take that advice. By his performance in Washington and in writing this book, Barofsky has burned his bridges and is unlikely to work there again. He left the post on March 30, 2011 and now teaches at New York University law school.

He describes Washington as a town of gossip and maneuvering that smacks of high school. He describes how people would try and pit him and Elizabeth Warren against each other by spreading false rumors to each about how the other was undermining him/her. They combated that by meeting regularly and became friends as a result. He said that senator Charles Grassley and congressman Darrell Issa, both Republicans on important oversight committees, proved to be very supportive of his watchdog efforts and helped him counter the obstructionism of the Treasury Department. He also explains how you had to write reports in such a way that it got the media’s attention and use that to pressure Treasury officials to do the right thing, because the top people were extremely sensitive to how they appeared in the press.

His book reveals in detail how the high-level people in the Treasury Department are captives of the banking sector, strenuously fighting his efforts to insert rules to protect taxpayer funds from misuse. They relentlessly pushed back, saying that such protections were not necessary since the banks would do the right thing because they would want to protect their sterling reputations. Barofsky was incredulous at this attitude because the top executives in the banks had already repeatedly shown that all they cared about was getting as much free money from the government as they could and had no compunction whatsoever about diverting the money that should have gone to bailing out homeowners to instead enrich themselves.

The Treasury officials also said that the banks might refuse the TARP rescue funds if there were too many conditions attached, a bizarre notion since the banks were desperate for the government to bail them out of the mess they had got into by having all these worthless mortgage-backed securities. He says that the Treasury people seemed to be in awe of the bank executives whom they felt deserved every penny of the massive bonuses they paid themselves out of taxpayer bailout funds.

He describes how the banks and the ratings agencies connived to give the shaky mortgage-backed securities the highest AAA rating. He explains how the government would loan banks up to 95% of the value of the bonds they bought and sold, enabling them to make quick and sure profits while the taxpayers ended up paying up to 95% of the cost of bonds that were worth very little (p. 89).

Barofksy names names, eschewing the anonymous sources so beloved by establishment journalists. The person who comes in for the harshest criticism is Treasury Secretary Timothy Geithner, who is revealed not only as petty and small-minded but also as a complete stooge of the banks. Other top level Treasury people who also seemed to be more interested in helping the banks than in protecting taxpayers were assistant treasury secretaries Neil Kashkari and Herbert Allison. He points out the large number of people in Treasury (Hank Paulson, William Dudley, Lee Sachs, David Miller, Neil Kashkari) who went through the revolving door that connects Treasury to the big banks. As Barofsky says:

I had no idea that the US government had been captured by the banks and that those running the bailout program I’d be charged with overseeing would come from the very same institutions that had both helped cause the crisis and then become the beneficiaries of the generous terms of their bailout. (p. 19)

In fact, top Treasury officials made secret deals with the banks while hiding them from the SIGTARP office. “The hurried decisions, lack of transparency, and unquestioning deference to Wall Street that characterized the approach to the PPIP, HAMP, and CPP programs were hardly isolated incidents; it became clear to us that they were part of an emerging pattern that no secretary would want explored.” (p. 174) The besieged homeowners, who were supposed to be the beneficiaries of TARP, were shunted aside. “Helping the banks, not home owners, did in fact seem to be Treasury’s biggest concern” (p. 156).

Barofsky also said that the much publicized $700 billion figure was just the tip of the iceberg. In actual fact, when you totaled up the amounts that the government had committed itself to in the form of guarantees etc. to all the programs that were created, it was $23.7 trillion (p. 162). This was not what it paid out but what it was on the hook for if things went completely sour. That was unlikely, no doubt, but it gives an idea of the scale of the panic that existed at that time and how much was hidden from us.

In a 2012 afterword to the paperback edition of the book, he says that the problem is even worse now, with the ‘too-big-to-fail banks’ 23% bigger than they were before the crisis (p. 229). Furthermore, they are all interlocked in their dealings, compounding the problem.

That is the crux of the too-big-to-fail problem. The failure of giant financial institutions that are so big and have built up so many obligations to one another could cause a domino effect that could take down other major players and eventually the entire financial system. If the government had not stepped in to save AIG, major banks in the United States and Europe would have potentially suffered tens of billions of dollars of losses at a time when neither they nor the system could withstand such a further shock. The government felt it had no choice, and perhaps that was correct, but as long as there are financial institutions of such size and with so many interconnections, future massive crises-and bailouts-are all but inevitable. (p. 181)

That is the problem. When the financial crisis of 2008 put these powerful banks on the ropes and on the verge of collapse, the government could have used their bailout power to break them up to avoid such future crises. Instead they gave them free money that enabled them to get even richer, bigger, and more interlocked, worsening the problem (p. 217). Why should we be surprised then that homeowners who were wrongfully foreclosed upon got an average of $300 apiece as compensation while ‘independent’ consultants that were hired by the banks with government approval ended up protecting the interests of the banks and got $2 billion for their services? Not only that, even now federal regulators are unwilling to let homeowners have information of wrongdoing by banks in the event that the banks are sued.

Barofsky concludes by saying that massive public anger is the only solution.

I now realize that the American people should lose faith in their government. They should deplore the captured politicians and regulators who took their taxpayer dollars and distributed them to the banks without insisting that they be accountable for how the bailout money was spent. They should be revolted by a financial system that rewards failure and protects the fortunes of those who drove the system to the point of collapse and will undoubtedly do so again. They should be enraged by the broken promises to Main Street and the unending protection of Wall Street. Because only with appropriate and justified rage can we sow the seeds for the types of reforms that will one day break our system free from the corrupting grasp of the megabanks. (p. 234)

What I found most interesting about this book is the totally corrupt culture it reveals. This is of course not a surprise. What is a surprise is to have someone who was working at the highest levels be willing to dish the dirt on how things really go down so soon, instead of writing his memoirs decades later when the culprits have long since left the scene.

Like many others, I strongly suspected that Wall Street had long ago captured the government. But it is one thing to believe that and quite another to see it spelled out in such detail. If you want to know in detail who and what caused the financial crisis, written in an easy-to-understand and readable style by someone at the center of things, this is the book for you.


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  1. 1

    On a related note, I doubt you’ll have heard about it (it’s not exactly widely reported this side of the pond), but a group called UK Uncut Legal Action currently have the UK tax authorities in court over their favouritism towards Goldman Sachs.

    See here: http://ukuncutlegalaction.org.uk/why-goldman-sachs/
    And here: http://www.guardian.co.uk/politics/2013/may/02/tax-chief-bank-goldman-sachs?CMP=twt_gu

    I wonder – is there any mechanism by which some group like Occupy Wall Street could take similar action in the US over Barofsky’s revelations? Don’t regulators and members of Congress swear oaths when taking office? Are those oaths legally binding?

  2. 2
    Mano Singham

    It is interesting how in the second link, the UK authorities also seem to believe that the banks will do the right thing, when their past actions show that they have no intention of doing so.

    The legal issue here would be the old familiar one of ‘standing’, that only people who have suffered a direct injury or otherwise have a clear interest can sue. So homeowners who were defrauded by the banks can sue but not your average citizen. The Justice Department is the one outfit that can take them to court but in the US the top people there (Eric Holder and formerly Lanny Breuer) have close ties to the big banks and have shown a deep reluctance to vigorously pursue them.

    Only deep and sustained public anger can get them to take action.

  3. 3

    Did you all read the Matt Taibbi story on how the US and UK governments gave HSBC a slap on the wrist for rampant money laundering for drug cartels AND TERRORIST GROUPS because the bank is too big to fail and prosecution and punishment would make the financial markets queasy?

    We have a system (we have probably always had such a system) where corruption and crimes are simply unpunishable.

    Also, I heavily recommend NAKED CAPITALISM, which covers these types of stories (sometimes ideologically) everyday.

    If the Administration wanted serious principal reductions, they could have used the hundreds of billions of dollars available to them under TARP to do so. That was under its power and required no Congressional action. Instead of owning up to disasters like HAMP and FHA-Short Refi, they whine about Demarco, Republicans in Congress, reckless homeowners, and once in a while, for show, they’ll say a few bad words about the banks that they continue to coddle. Just look at the conflicting messages: the banks are in such bad shape that they can’t be asked to write off second liens in full in the Administration’s mortgage settlement, yet they are deemed to be healthy by the Fed and are allowed to pay dividends rather than rebuild their balance sheets.
    Read more at http://www.nakedcapitalism.com/2013/05/mirabile-dictu-republicans-and-some-democrats-agree-diss-obama-pick-mel-watt-for-head-of-fhfa.html#42eV38iuaKIrbzjY.99

  4. 4

    @ bmiller

    I think the most outrageous part of that was how they had started making the packages the exact dimensions of deposit window slots so as to speed up the process.

    Overall though, I had thought the Occupy Wall Street protests were the beginning of this anger that he talks about. They just couldn’t come up with a unified message, but I think we’re going to see more of it.

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