TOPICS > Economy

Making Sen$e of Bailouts: Why the U.S. Government Bought ‘Troubled Assets’

August 2, 2012 at 12:00 AM EDT
The Troubled Asset Relief Program was created in 2008 to prevent financial collapse by allowing the U.S. government to buy up troubled assets. But it ended up being used to bailout big banks. Paul Solman talks to Neil Barofsky, author of the new book "Bailout," about his role as the former TARP Special Inspector General.

JEFFREY BROWN: And finally tonight, continuing questions about the government bailouts at the height of the financial crisis.

Tomorrow’s jobs report will provide the latest snapshot of how the economy is faring. A former government watchdog says some of the key decisions made in 2008 are still resonating now.

NewsHour economics correspondent Paul Solman has the story. It’s part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: Neil Barofsky was a 38-year-old U.S. attorney in New York, prosecuting Colombian drug lords and domestic housing scam artists, when President Bush chose him, in the fall of 2008, as special inspector general to oversee TARP, the Troubled Asset Relief Program. A lifelong Democrat, Barofsky was retained by the Obama administration.

The job as top cop at TARP meant guarding the $700 billion bailout fund from fraud. But in his two-year tenure, Barofsky clashed repeatedly with Treasury officials in charge of the program, who he says undercut or ignored his efforts to hold big banks accountable for what they did with taxpayer dollars.

He’s now written a tell-all account of his disillusioning years in D.C., “Bailout,” his attempt to disillusion readers as well.

We sat down with Barofsky at New York University School of Law, where he now teaches as a senior fellow.

Neil Barofsky, welcome.

NEIL BAROFSKY, former Troubled Asset Relief Program special inspector general: Thank you.

PAUL SOLMAN: What are you trying to accomplish with this book?

NEIL BAROFSKY: There’s so much anger out there, you know, on the left, on the right, Occupy, Tea Party, that recognize intuitively that there’s something wrong with our financial system.

And I wanted to write this book so people could understand that they’re right, and give them the actual evidence, the actual anecdotes of what happened in Washington, and how much their government has been serving the interests of Wall Street over the interests of the taxpayers who funded their bailout.

PAUL SOLMAN: We have the Troubled Asset Relief Program, hundreds of billions of dollars which is going to supposedly fix the problem and save the economy. And what went wrong with that, in your view?

NEIL BAROFSKY: Well, originally, what TARP was supposed to do, based on what Congress put into the bill, what Treasury promised, was to do more, of course, than just save the banks, because when the bubble burst, it just wasn’t bad only for the banks.

It was really bad for Main Street, and there was a huge problem with foreclosures across the country. So where TARP went wrong was, they did the first thing, which was help prevent a complete financial collapse by saving and then later protecting the largest giant banks, but they didn’t do anything else.

PAUL SOLMAN: But isn’t it a good thing that the banks were saved? We are not facing financial Armageddon. And it’s because, arguably, the financial system was saved, was bolstered by — by programs like the Troubled Asset Relief Program.

NEIL BAROFSKY: The fact that it’s a good thing that the banks didn’t go down and take the entire economy down with it doesn’t absolve responsibility that Treasury was given and the administration was given to do more than just shovel hundreds of billions of dollars into the banks, money that ended up you know in the executives’ pockets, even though they drove these institutions into the ground.

And if you think that it was good thing, ask all those people who are unemployed. Ask the millions of people who’ve unnecessarily been foreclosed and a potential 10 million that still might be.

PAUL SOLMAN: Well, but you were there carping about how TARP was being run. And, in the view of Treasury, you were somebody who wasn’t helping restore the confidence that the system needs to proceed and recover.

NEIL BAROFSKY: I didn’t take an oath of office in order to cheerlead bad policies and to turn and look away when — when they did things that harmed, actually harmed people and protected the banks, instead of what they were supposed to do.

PAUL SOLMAN: But you say bad policies. The policies worked. The government, for example, got paid back. You kept worrying about fraud in these programs, and the government has gotten its money back, hasn’t it?

NEIL BAROFSKY: No. I mean, TARP is still — Treasury itself is projecting I think about $70 billion in TARP losses.

PAUL SOLMAN: In fact, Treasury is projecting that TARP will ultimately cost $60 billion, mainly for programs to help struggling homeowners,it says.

As for the $245 billion of TARP funds spent on banks, Treasury Secretary Tim Geithner insists they have already turned a profit.

TREASURY SECRETARY TIMOTHY GEITHNER: Right now, it is $20 billion we have earned for the taxpayer, very carefully designed.


CHARLIE ROSE, “The Charlie Rose Show”: … $20 billion, that is the interest, right, on the money that…

TIMOTHY GEITHNER: On the bank — on the bank investments. They’re — most of it is back in the Treasury.


PAUL SOLMAN: On “Charlie Rose” last week, Geithner disputed Barofsky’s main claim as well, that Treasury put Wall Street before Main Street.

TIMOTHY GEITHNER: Of course, what — our job was to protect Main Street, the economy, the average American from the failures and a failing financial system. That’s what we did. And that is a just and necessary thing. And to have let it burn would have been much more damaging to Main Street, the average American, than what we did.

I don’t know. Look at what Europe is going through now and ask yourself, can you find an example of something as effective and powerful as the strategy we designed over that period of time? I don’t believe you are going to find an example of that.

NEIL BAROFSKY: I’m not, for one second, suggesting that it’s not a good thing that our financial system didn’t collapse, but the flaws that were existing back in 2006, 2007, 2008 have gotten even more severe.

The banks are now 20 percent to 25 percent bigger because of government policy that saw problems with too-big-to-fail banks and decided to make them even bigger.

PAUL SOLMAN: So how can it be that there hasn’t actually been effective legislation to break up the banks?

NEIL BAROFSKY: This is exactly the problem. This is where the financial interests have captured the governmental institutions.

The biggest disillusionment was seeing how our elected officials and our appointed officials would put the interests of the giant financial institutions, the banks, banks that they had previously worked for, or banks they hoped to return to go work for once again, over the interests of struggling homeowners and over the interests of the broader economy.

It’s a problem that our leaders — and these were Democrats and these were Republicans — all catered to the interests of financial institutions over that of the American people. That transcends politics.

PAUL SOLMAN: And is it because they had worked for the banks in the past, and hoped to work for them again, that they were, in your term, captured by the banks?

NEIL BAROFSKY: I think that’s a large part of it.

And I don’t even mean this in a malevolent way, like they’re evil people because they work for a bank. Look, to do this type of program, you’re going to need to have some people, of course, from the financial industry. It would be crazy not to.

But you also have to recognize that, when you spend decades, years on Wall Street, and come to the government, you don’t suddenly check everything that you have learned, your approach and your ideology, at the door. You bring it with you.

And that’s one of the reasons why I believe there was such this view, this deference to the banks and this belief what’s good for the banks is good for the country, and that we didn’t need the types of protections that I was advocating, because of that core ideology.

PAUL SOLMAN: So what’s going to happen? Where are we now?

NEIL BAROFSKY: If we don’t change our ways, if we don’t do something about the size of these banks, we’re going to end up in another financial crisis.

And because we don’t have as much powder in the keg because of how much money we have spent, and because the banks are bigger now, it’s going to be a bigger, more devastating financial crisis.

PAUL SOLMAN: You actually think that’s going to happen?

NEIL BAROFSKY: I don’t think it; I know it’s going to happen, if we don’t stop this. Risk is going to pile up in ways that we don’t even imagine, and it will blow up again.

PAUL SOLMAN: Neil Barofsky, thank you very much.

NEIL BAROFSKY: Thanks for having me.