90.9 WBUR - Boston's NPR news station
Top Stories:
PLEDGE NOW
Here and Now with Robin Young
Public radio's live
midday news program
With sponsorship from
Mathworks - Accelerating the pace of engineering and science
Accelerating the pace
of engineering and science
Friday, September 13, 2013

Former TARP Watchdog: ‘We’re Headed Toward Another Financial Crisis’

Neil Barofsky, special inspector general for TARP, testifies before the Senate Finance Committee hearing to examine the Troubled Asset Relief Program (TARP) on Capitol Hill in Washington, Wednesday, July 21, 2010. (Manuel Balce Ceneta/AP)

Neil Barofsky, special inspector general for TARP, testifies before the Senate Finance Committee hearing to examine the Troubled Asset Relief Program (TARP) on Capitol Hill in Washington, Wednesday, July 21, 2010. (Manuel Balce Ceneta/AP)

Sunday marks the fifth anniversary of the day Lehman Brothers collapsed, sending financial markets into a tailspin and setting off the global financial crisis.

Many commentators are pointing out that not a single Wall Street CEO is in jail. And some experts are warning that another financial crisis is looming.

Neil Barofsky is the former inspector general of the Troubled Asset Relief Program (TARP).

He told Here & Now there is a “deep frustration that those perhaps most responsible for the crisis not only weren’t punished, they were rewarded for their conduct.”

Here we are five years later, and the biggest banks are 30 percent larger than they were in 2008.
– Neil Barofsky

However, Barofsky thinks prosecuting the leaders of these banks wouldn’t have been wise.

“In 2009 it would have probably been a bad idea to indict one of these companies and face undoing all the hard work that was done to save them in the first place,” Barofsky said. “It’s not just, it’s not fair, but it’s the reality.”

Barofsky finds it distressing that the rules and regulations that resulted from the financial meltdown do not address the fundamental problems that brought it about in the first place.

“It leaves intact these giant financial institutions that are still too big to fail,” Barofsky said. “Here we are five years later, and the biggest banks are 30 percent larger than they were in 2008. Even when all the rules are done, it doesn’t get to the core of the problem.”

Barofsky also says Congress was too generous to the companies it bailed out, because it didn’t understand the mechanisms of the financial industry. He says a bailout was necessary, but not on such generous terms, using AIG as an example.

“They could have saved AIG, they probably needed to save AIG, but they didn’t have to do it in such a way that was such a giveaway and that really increased the moral hazard,” Barofsky said. “No lessons were learned from the counterparties, other than, if you do business with a giant, too-big-to-fail institution, you don’t need to worry about it because Uncle Sam is going to sit there and backstop all of your bad bets.”

Counterparties are the big banks to which AIG owed money, Barofsky explained.

Barofsky predicts that the next financial meltdown is around the corner.

“We’re headed toward another financial crisis, I believe, because we didn’t fix the fundamental problems and the perverse incentives and the too-big-to-fail problem that was present in the last one.”

Guest

Transcript

JEREMY HOBSON, HOST:

Well, Sunday marks five years to the day since the collapse of the investment bank Lehman Brothers. Lehman had been the fourth-largest investment bank in the country. At its height, it employed 28,000 people and was worth $60 billion. Its downfall sent financial markets into a tailspin and set off the global financial crisis.

Even some in the government at the time, like former treasury secretary Henry Paulson, were unwilling to publicly acknowledge what was going on.

HENRY PAULSON: Well, as you know, we're working through a difficult period in our financial markets right now as we work off some of the past excesses. But the American people can remain confident in the soundness and the resilience of our financial system.

HOBSON: Well as we now know, that was a bit optimistic. Lehman's bankruptcy triggered a reshaping of Wall Street, the collapse of the insurance giant AIG, even the meltdown of the nation of Iceland. So five years later, what has changed on Wall Street, and what is left to be done?

Joining us is Neil Barofsky. He served as special inspector general of the Troubled Asset Relief Program, or TARP, the $700 billion government bailout of the financial industry. He is also the author of "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." Neil Barofsky, welcome to HERE AND NOW.

NEIL BAROFSKY: Thank you.

HOBSON: Well, let's start with the fact that no one from any of these Wall Street firms has yet been put behind bars, which a lot of Americans think is a problem.

BAROFSKY: Yeah. I think it's one of the frustrating things about the financial crisis, is there is a perception, and I think, you know, many times it's a very, very fair perception, that there's been a lack of accountability, that those who were the captains of these ships of Wall Street that helped run our entire economy aground and taking with it much of the global economy have basically gotten away with it. And the question is what is it, exactly?

You know, it's not just that they haven't been put behind bars or hasn't been any indictments or criminal prosecutions, there really hasn't been any degree of accountability. There hasn't been any major actions by the SEC naming these individuals, at least civil actions accusing them of fraud.

They really got to keep all the benefits of the excesses that Hank Paulson was talking about five years ago; all the money, the hundreds of millions of dollars that they were able to extract from their companies on the way up. They got to keep just about every single penny of it. So there is a deep frustration that those perhaps most responsible for the crisis not only weren't punished but in some ways were rewarded for their bad conduct.

HOBSON: Well why is that? Why was there no punishment?

BAROFSKY: That's the $64 billion - I was going to say $64,000, but whenever you're talking about the crisis, you've got talk in billions or trillion - dollar question. And, you know, I don't think there's a simple answer. You know, in the direct aftermath of the financial crisis, in early 2009, you know, you had to look at this in context. We had just spent as a government trillions and trillions of dollars to save these handful of institutions because it was determined that if any single one of them were to fail, they would bring down the entire global economic system with it.

And there was this remarkable statement put out February '09 that I don't think gets enough attention in which, you know, joint statement of the regulators, including the new Secretary of Treasury Tim Geithner essentially saying that the government was going to ensure that the largest financial institutions were not going to fail no matter what.

It was de facto nationalization. We were going to put the government's full faith and credit behind these private enterprises, and having done that, the idea that the Department of Justice would then on the other hand launch a comprehensive criminal investigation and potential criminal charges against one of these entities is - was unthinkable.

HOBSON: Well, let's listen to what Eric Holder said. You're talking about the Department of Justice. Here's the attorney general talking about that in March, using the phrase too big to jail.

ATTORNEY GENERAL ERIC HOLDER: I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.

HOBSON: Neil Barofsky, is it too late to bring any charges?

BAROFSKY: It's certainly getting there. You know, there's a five year statute of limitations, generally speaking, on criminal charges. The activity that led up to the crisis occurred 2008, but really 2006, 2007. So that ship has already sailed. And also, frankly, the appetite for those types of criminal cases has also waned.

When you're doing these types of investigations, and as a prosecutor and as the head of a law enforcement agency at SIGTARP, you know, as the years go by it becomes much, much more difficult. Memories fade, and it becomes exponentially harder.

But what Eric Holder was saying there is actually a true statement. It's somewhat shocking and staggering that it's still true in 2013, but in 2009, again, it would have probably been a bad idea to indict one of these companies and face undoing all the hard work that was done to save them in the first place. It's not just, it's not far, but it's the reality.

HOBSON: We're speaking with Neil Barofsky, he served as special inspector general for TARP. We'll be back with more from him after a break, HERE AND NOW.

(SOUNDBITE OF MUSIC)

HOBSON: This is HERE AND NOW. We're speaking with Neil Barofsky, former inspector general of the Troubled Asset Relief Program, or TARP. Neil Barofsky, in terms of regulations and what has been done, the Dodd-Frank Act of 2010 was supposed to rein in the financial institutions, but there are concerns, they've been talked about a lot, that it has not been fully implemented. What still needs to happen with Dodd-Frank?

BAROFSKY: Well, a whole bunch needs to happen. I think something like 60 percent of the rules that were dictated by Congress to be written up and made formal by the regulators still haven't been done. The most high-profile one, of course, is the named Volcker Rule, which is sort of a Glass-Steagall light. It's sort of - was an idea to go back to some of the requirements after the Great Depression when we had a formal separation of the riskiest parts of a bank or commercial banks.

This thing has been toiling around for three and a half years and, you know, still hasn't seen the light of day. So, you know, so part of the problem is that the rules haven't been written. The other part of the problem is that even after the rules are written, you know, at its core Dodd-Frank didn't go to the core problem in my view of the financial crisis and the core problem raised, as we were discussing earlier, of Eric Holder's reluctance to hold these institutions accountable and that it leaves intact these giant financial institutions that are still too big to fail.

And, you know, here we are five years later, and the biggest banks are 30 percent larger than they were in 2008 going into this crisis. So even when all the rules are done, it's still not going to get the core of the problem.

HOBSON: And of course the argument that the financial industry would make when they hear you say that is, well, if we reduce the size of the banks in New York, London will make them bigger, or China will make their banks bigger, and we will lose our competitiveness on the global stage.

BAROFSKY: Look, as far as a taxpayer and as a participant in the financial system, I don't terribly care if one of the largest financial institutions is a little less profitable because what they're really saying when they say that is OK, these large international banks over in Europe, they're fully subsidized by their governments. They have too-big-to-fail guarantees, and that gives them an opportunity to extract subsidies from the taxpayers.

And what the American banks are saying when they say is we want that, too. We want what was recently calculated as an $85-billion-a-year subsidy. That's money that's essentially going from our taxpayer pockets into their balance sheet of profit each year. And we don't want to give that up.

Well, I believe in capitalism, and in capitalism, without a subsidized industry, I think they'll be more competitive. If you go back and look to before this era of megabanks, of universal banks, you know, in the late 1990s. The number one investment bank in the world wasn't a giant European universal bank, it was little old Goldman Sachs, probably one-tenth the size as it is today. And it ate everybody's lunch because it was leaner, meaner, didn't have the conflicts of interests that are sort of riddled through these private institutions, didn't have the problem of being too big to manage. So I really discount that.

You know, it's really funny. If you go back, and you look at the Great Depression, and you look at Glass-Steagall and the laws that, you know, helped protect our economy for decades and decades, the arguments that are advanced today were the exact same arguments that they made back them.

And they weren't true then, it's been proven, and they're simply not true today.

HOBSON: Now this is all very complicated stuff, and even some of the people on Wall Street didn't understand some of these financial instruments they were using. As you oversaw the bailout, did the people in Washington, the members of Congress, the members of the administration, did they understand this industry and all that was going on with it at the time?

BAROFSKY: You know, one of the most startling things when I first got down there in December of 2008, and I was trying to unravel the money that had already gone out the door and the, you know, the dozen or so programs that were still in the works that they were planning to lay out, you know, with hundreds of billions of dollars of taxpayers, at times trillion-dollar programs that they were considering.

And with some of them, when I started asking questions, I realize that the treasury officials I was talking to couldn't answer my questions. They didn't - it's not only did they not understand the market, they didn't understand their own programs. And eventually I had to keep asking and asking, and I found some, you know, economists at the Fed who seemed to understand it.

And what was happening was that the industry was sort of dictating the terms of these bailouts, and the government was, out of, you know, shock and fear I think were going along without necessarily thinking about them. So of course as we tried to unravel them and do our job, we found that they were filled with trap doors and vulnerabilities for fraud and conflicts of interest.

But there really was a fundamental lack of understanding of the complexity of some of these instruments, and I think when you look back and see some of the failures, it has something to do with the fact that they were really - and sometimes it seemed like they were flying blind.

HOBSON: Well since the crisis, there's been a lot of criticism of what happened coming out of Washington. Senator Elizabeth Warren held some high-profile hearings when she was chair of the congressional oversight of TARP. This was before she became a senator. Here is some tape from a 2009 hearing. She's dressing down Treasury Secretary Tim Geithner over the way the government bailed out the insurance giant AIC.

SENATOR ELIZABETH WARREN: Chrysler and GM, insolvent company; AIG, insolvent company. Chrysler and GM have bondholders, unsecured creditors, secured creditors and employees, and they all took big haircuts. AIG had people holding credit-default swaps, and they took no haircut at all

TIM GEITNER: AIG had...

WARREN: They ended up with money from the federal government, 100 cents on the dollar, and I'm trying to understand why those two are different from each other.

HOBSON: Neil Barofsky, did the government have a choice in bailing out not just AIG but the banks?

BAROFSKY: There had to be something. There had to be some form of bailout. I think that there's - you know, there was such fear. There was such paralysis in the markets, and the bottom is a number of these institutions were insolvent. They were headed towards bankruptcy, and after Lehman went down, no one was willing to take the chance and roll the dice to see what would happen if another one went down.

But that's not to say that what they did was the right way of doing it. And I think so often what gets lost in this debate is that there is sense that either you support the way they did it, or you're, you know, you don't know what you're talking about. And the bottom line is they didn't have to do it on such generous terms.

And what Senator Warren was referring there in the overly generous terms on the AIG bailout, not necessarily to AIG but to AIG's counter-parties, the big banks to which AIG owed money in this, you know, this magnificent backdoor bailout of those institutions, is Exhibit A. They could have saved AIG. They probably needed to save AIG. But they didn't have to do it in such a way that was such a giveaway and that really increased the moral hazard.

That is, no lessons were learned from these - from the counter-parties other than if you do business with a giant, too-big-to-fail institution, you don't need to worry about it because Uncle Sam is going to sit there and backstop all of your bad bets.

HOBSON: Well, in the minute or so we have left, we should point out that TARP money was paid back in full. The AIG bailout was paid back in full. Do you expect that in the next financial crisis, when it happens, that things will be different next time?

BAROFSKY: Well, first I would just say not all the TARP money was paid back in full. You know, they're still expecting some significant losses, in the tens of billions of dollars, but it's far less than what we expected.

And look, we're headed towards another financial crisis, I believe, because we didn't fix the fundamental problems and the perverse incentives and the too-big-to-fail problem that was present in the last one. But we're going to have a real big political problem as we go down that path again because of the incredible unpopular of the bailouts.

And in large part, I think, you know, treasury bears responsibility for running them in a non-transparent, at times deceptive, and un-evenhanded way that had a huge reward to Wall Street but left Main Street struggling, homeowners and the middle class absolutely left behind. And I think it's going to be a real problem next time.

HOBSON: Neil Barofsky served as special inspector general of the Troubled Asset Relief Program, or TARP, the $700 billion government bailout of the financial industry. He's author of "Bailout: An Inside Account of How Washington Abandoned Main Street While Helping Wall Street." Neil Barofsky, thank you so much.

BAROFSKY: Thanks for having me.

HOBSON: And we'll be back in a few minutes, HERE AND NOW. Latest news is next. Transcript provided by NPR, Copyright NPR.


Please follow our community rules when engaging in comment discussion on this site.
  • JHWillson

    Would Mr. Barofsky care to comment on the total disdain House Democrats showed SIGTARP Christy Romero yesterday during the “Oversight of the SIGTARP Report on Treasury’s Role in the Delphi Pension Bailout” hearing? https://www.delphisalariedretirees.org/delphi/
    Though not “bank” related the destruction of 22,000 earned pensions (union and salaried) happened during Mr. Barofsky’s watch.

  • way2ski

    The world’s economy is running on a ginormous ponzi scheme. When the US economy lost 3 trillion dollars, where did the money go? It didn’t go anywhere because it never existed. The government, acted out of fear of a monetary failure that would reveal to the world how artificial the whole thing really is!

  • JHWillson

    Would suggest you replay Mr. Barofsky’s last statement. When the U.S. Treasury and the current administration get involved all transparency and fairness go out the window.

  • Lawrence

    Where’s the outrage?

    • fun bobby

      do you expect the media, who is owned by the banks,
      to portray outrage?

  • fun bobby

    cash out your stocks now while they are worth something. buy bullets and TP

    • dust truck

      canned goods and maybe even gold bullion too, though I suspect food, bullets (and even TP) will probably be the currency of the post apocalyptic world.

      • fun bobby

        bullets and tp have unlimited shelf life

  • Bill Thomas

    yes cash out your stocks and buy bullets and tp. oh yeah you cant find any bullets……..

  • fun bobby

    no wonder ammo is in such short supply

  • bzz

    congress is too busy taking womens rights away, screwing the citizens in every way, and people’s right to marry etc to be bothered by making these financial guys accountable ..THEY are the terrorists, THEY are the non patriots.. It’s an inside job.. NOT Chlesea Manning , or Snowden…They stood for the people and put themselves on the line FOR THE PEOPLE… THE republican congress are lame ducks that go after easy targets who are the common folk because they can not afford to fight.. Neil is right , it is perverse and fundamentally wrong. So how can we the people change that..At least the
    Occupy movement brought things to the forefront..Now what to do.

Robin and Jeremy

Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

July 21 Comment

Boxing Attracts More Than Would-Be Fighters

At the Ring Boxing Club, boxers range in age, are both men and women, and include an award-winning author.

July 21 Comment

Why Hot Cars Are So Deadly

An average of 38 kids die in a hot car every year in the U.S. We look at the science of why cars get so hot so fast, and why children are more vulnerable.

July 18 20 Comments

A Conversation With Immigrant Activist Jose Antonio Vargas

We sit down with the immigrant-rights activist, who has written extensively about the fact that he has been living illegally in the U.S. for years.

July 18 4 Comments

Will Israel Widen The War And Will Hamas Run Out of Rockets?

What will drive Israel's decision? What are the strategic calculations Hamas is making and how will it emerge from this conflict?