Book Review: Bailout, By Neil Barofsky

Like millions of Americans worried over their shrinking retirement funds, I relied on www.sigtarp.gov to find the truth about where our tax dollars were going and to whom.

Author Neil Barofsky headed SIGTARP as Special Inspector General over TARP which Congress authorized and funded to keep track and oversee the original TARP (Troubled Assets Relief Program). This $700 billion to prop up the Wall Street banks' meltdown had been pushed through a fearful US Congress in late 2008 by former Treasury Secretary Henry Paulson, Fed Chair Ben Bernanke and then NY Fed President Timothy Geithner.

As a young lawyer and prosecutor, Neil Barofsky, a Democrat, was chosen by the Bush administration for his crusading reputation, to assuage Congress members who hated TARP. They felt the widespread bi-partisan taxpayers' revolt about the unfairness of the bailouts. Bumper stickers with the phrase "where's MY bailout?" proliferated as TARP funds were diverted from their stated purpose of buying up toxic mortgage-backed securities to directly infuse the funds into the big banks -- with almost no conditions. Congress had stipulated that TARP was to relieve homeowners and prevent waves of foreclosures. Barofsky was confirmed by the Senate and by the incoming Obama administration in early 2009.

In Bailout (Free Press, 2012), Barofsky recounts the road blocks, ambushes and trench warfare he encountered in trying to do his job. With fascinating detail, he describes his experiences: from threats from Wall Street friendly executives, including the "gold or lead" (hush money or a bullet) threats often used by the Mafia, to multiple strategies to bypass or ignore him and SIGTARP officials. He describes his arrival at the U.S. Department of Treasury's splendiferous building in Washington, with the enormous ornate offices of its top team, and there being led down to the basement to a den-like, malodorous office with a small barred window below street level where he and SIGTARP spent most of the next 3 years.

Interspersed with such illuminating details, Barofsky offers a blow-by-blow account of exactly what went on as the original $700 billion ballooned into $23.7 trillion of commitments by various Federal agencies -- almost none of which reached homeowners. The tsunami of evictions, foreclosures, fraud, the "robo-signing" of mortgage documents, blighted neighborhoods and homelessness roll on to this day. Taxpayers were on the hook for bailing out banks and Wall Street players and their lobbyists who "owned Washington," as described by Senator Dick Durban (D-Illinois).

This book is essential reading -- even for policy wonks like me -- as it goes deeper than any of the hundred or so books covering the 2007-2012 period, when financial debacles plunged the real economy into recession. Barofsky fearlessly lays most of the blame on Treasury Secretary Timothy Geithner, as well as the timidity of the Obama White House, abetted by the tide of money and lobbying that perverted legislators and regulators to favor Wall Street over Main Street. He also details the regulatory capture of the SEC and all those agencies supposed to oversee finance and write the still-unfinished rules put in place by the Dodd-Frank law.

In my view, only Sheila Bair, the Republican head of the FDIC, held her ground and did much to champion homeowners and their only hope: reducing the principal owed on their under-water mortgages. This is still fiercely opposed by the big banks -- amazingly on "fairness" grounds, as they bask in the favors of the Treasury and the Fed. Yet this is the easiest way to restore the real economy -- even though financial reforms are still urgently needed.

I agree with Barofsky's parting analysis: another financial blow-up is inevitable until the fundamental reform and downsizing of global finance is achieved.

Meanwhile, the high frequency trading caused another debacle in August with the errant computer at Knight Capital Group. The front-running, excessive leverage, insider trades continue in this mother of all bubbles: the global casino described most recently in Barofsky's Bailout, as well as in Broken Markets and Dark Pools. Better fasten our seatbelts -- the ride is getting even bumpier.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Comments

[thesafesurfer]

So many still stick their heads in the sand and call TARP as success. I watched the interview and Barofsky makes the same mistake that all TARP supporters do, it should've have worked but didn't. They just can't accept the verdict of history, massive government interjections into the market NEVER EVER work.

The Big Banks needed to fail. Everyone says that would have been disaster. Is the perpetual stagnation of Japan's economic for over two decades a success? What the stagnation decade of the 1970's a success and not painful.

When are we going to have REAL capitalism where there are no bailouts and failed business models disappear!!!!

[untrusting investor]

Good overview. Too bad that we cannot bet people like Neil Barofsky and William K Black actually in significant regulatory positions. They could make a difference. But corrupted politicians and crony capitalists would never allow any form of real regulatory oversight. It would cost them way too much money.

[tallguyz]

A nice, well-written article, thank you for doing this.

You state: "...only Sheila Bair ... did much to champion homeowners and their only hope: reducing the principal owed on their under-water mortgages".

I disagree: they need to let the market clear before housing will rebound, the only way to do that is to "unclog the arteries" by letting banks foreclose. The banks could rent the homes back to homeowners (who could afford to pay market rent) and eventually share in any profits.