Niel Barofsky’s recent book, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street (Free Press: 2012), is a sobering, even infuriating account by an insider who was chosen as the special Inspector General charged with overseeing the TARP program. His office was called SIGTARP, and he got an indication of how important the Treasury Department considered his oversight when he was shown his new office—a tiny hole in a basement of the Treasury building with no windows and a musty odor (in Washington, a big office with a view of iconic buildings is a sign of status). Still, Barofsky, who had trained as a prosecutor with the FBI’s renowned New York Office, brought some of his comrades with him and set out to oversee TARP. What he found shocked him, eventually forcing him to resign in frustration. It should shock every American; for what he learned, indicated by his subtitle, was that the Treasury Department, headed first by Hank Paulson, and then, under Obama, by the narcissistic former head of the New York Fed, Tim Geithner, so favored banks over homeowners that every program was shaped to help big banks, while letting homeowners, waiting for the promised modifications of their loans, basically “twist in the wind.”
Barofsky begins his tale by showing us how the banks encouraged those subprime loans we’ve all heard about. They used the euphemistically termed “yield spread premium” as a way of offering a bonus for brokers who could “convince a borrower who qualified for a prime loan to take a more expensive, higher-interest-rate subprime loan.” That is, they paid brokers more money to steer borrowers into more expensive loans, even though they knew the borrowers had less chance of paying them. That’s because banks earned double on the subprimes: they’d get higher interest rates to begin with, and then be able to resell the mortgages for higher profits in those infamous loan packages that brought down the system. This was predatory lending in spades. But the rating agencies routinely gave these risky loans AAA ratings, and the Federal Reserve just looked the other way. When the loans and the derivatives based on them went bad, panic ensued.
Then came TARP. As most of us remember, Hank Paulson went to Congress and rang the alarm about the imminent collapse of the entire financial system if the people’s representatives didn’t approve the massive bailout. Even so, many in Congress were reluctant, but went along because the Treasury Department sweetened the bank bailout with the assurance that, since it would control the troubled mortgage loans that were toxic, Treasury could give relief to homeowners by modifying the terms of those loans. And this would allegedly stabilize the housing market.
Trouble was, it didn’t work that way. Paulson instituted the CPP (Capital Purchase Program), and what it did was to use TARP funds to “inject capital directly into the banks by buying preferred shares of stock from them,” allegedly to help stimulate lending. It immediately put $125 billion of taxpayer money into nine of the largest banks, but without removing the toxic assets, or purchasing or modifying mortgages at all. The focus of CPP, and of all other government programs, would be the banks; there would be no lending, no credit flowing, no help to homeowners being foreclosed on. Some in Congress, like Georgia Democrat David Scott, cried foul:
“We have been lied to…bamboozled; they came to us to ask for money for one thing, then used it for another. They said we would have oversight, and no oversight is in place. We have given these banks $290 billion for the sole purpose of so-called buying these toxics. They change it, and all of a sudden now they [the banks] are not lending it but using it for acquisitions, using it for salaries. These are lies.” (p. 27)
There were other programs with other acronyms (TALF, HAMP), and they were all, according to Barofsky, dedicated to the same thing: easing the pain for banks, bailing them out, and letting defrauded homeowners fend for themselves. The amounts of money either given or lent or guaranteed by the government (U.S. taxpayers) was staggering. TALF, for instance, the Term Asset-backed Securities Loan Facility, was created by the Federal Reserve to spur consumer credit lending. The NY Fed lent up to $1 trillion to the banks, with “asset-backed securities” as collateral, in effect, betting a trillion dollars of taxpayer money with the only requirement being that “all eligible bonds [the collateral] earn a AAA rating by two credit-rating agencies.” Barofsky, outraged, called William Dudley, head of the NY Fed; the exchange is worth quoting in full:
“That’s fucking crazy, right?” I asked
“You are correct. That is fucking crazy.”
“Bill” I said, “Let me get this straight. We’re going to put $200 billion of taxpayer money on the line to buy asset-backed securities that are similar to those that got us into this whole mess in the first place, and we’re going to rely only on the credit-rating agencies and investor due diligence, nothing else?” I asked.
Dudley replied, “Right.”
I exploded. “Really? Really?” My voice rose. “Isn’t that exactly the same formula that caused this financial crisis? Exactly? What makes you possibly think that now, after all of this, the rating agencies are suddenly going to get it right?”
Dudley paused, understandably annoyed at my tone. “Well, the rating agencies performed pretty well in these asset classes,” he continued, “and we’re confident they won’t risk being embarrassed again.”
It was my turn to pause. “You don’t think that the credit-rating agencies will embarrass themselves again?” I challenged.
“Correct,” Dudley confirmed.
Barofsky comments: “These guys were going to risk hundreds of billions of dollars of taxpayer money on the integrity of the exact same rating agencies that had sold their souls for a few basis points of profit.”
When he gets to the new Treasury Secretary, Tim Geithner, Barofsky has even more trouble controlling his contempt. Geithner apparently did everything he could to stymie and sabotage the oversight function that Barofsky had sworn to implement. The Treasury Secretary’s concern was always to protect and bail out the banks, period. If this hurt homeowners losing all of their wealth, in many cases because of fraudulent loan practices by the very banks Geithner was protecting, so be it. So it was with HAMP, the Home Affordable Modification Program, created in 2009 under Obama. Its four purposes were to 1) protect home values, college funds, retirement accounts, and life savings; 2) preserve home ownership; 3) promote jobs and growth; 4) protect taxpayer interest. But as Barofsky describes Geithner’s comments about it in a key meeting, the Treasury Secretary saw it as a way to help banks rather than homeowners: “This program will help foam the runway for them (i.e. the banks).” In other words, HAMP’s main purpose, for Geithner, was to keep an imminent tide of foreclosures from hitting the banks all at the same time. By stringing homeowners along with the illusion of relief, foreclosures would be spread out over more time, thus giving banks a chance to absorb the losses “while other parts of the bailouts juiced the bank profits.” In short, “HAMP was not separate from the bank bailouts; it was an essential part of them.” And if those who received, or never received home modifications eventually went under, as many would, that was fine; the banks would survive and thrive, as their huge bonuses shortly after the bailouts proved.
Barofsky’s team eventually estimated what the real cost of the government bailout was, or could have been if all the pledges of all the government programs had been actually committed. The number is shocking, even to a public inured to the shenanigans and sleight of hand engaged in by government officials. Though the dollar amount outstanding at the time Barofsky’s team did their audit was “only” $3 trillion, the total amount that the government had to commit, if money markets and banks had failed, was—$23.7 trillion. That’s Trillion, with a T—more money than most nations can even conceive—and its purpose was to bail out the banks. The amount that Treasury spent to help homeowners, on the other hand, was $3 billion—paltry, even compared to the $50 billion originally allocated to HAMP.
Now, of course, the banksters and Wall Street are riding high again, with more profits than ever, while millions of Americans still struggle without jobs and 3.5 million have lost their homes for a total loss of $7 trillion in housing wealth. As to the poor, the poverty rate has also increased from 12.5% to 15.1% since 2007. Nor have mortgage servicers—the ones who encouraged all those subprime loans in the first place, as well as the ones who pretended to be helping homeowners under the HAMP program—been held responsible.
Barofsky’s book is a must-read for anyone who wants to understand how banks thrive and bought-out governments facilitate their financial theft. An added benefit is that it’s written with clarity and verve, making it quite comprehensible for the average reader. Though he is precisely the type of government official the nation needs, Barofsky’s investigations and positions and refusal to play the DC game, pretty much short-circuited his government career. Rather than cash in on his government job, he’s now teaching law in New York, and writing books like this one. For that, we all owe him.