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Neil Barofsky Lauds Barney, Blasts Dodd-Frank

Our final outtake from our Aug. 2 interview with SIGTARP Neil Barofsky: Special Inspector General for the Troubled Asset Relief Program. (Note that the full title runs 59 letters, which the acronym pares down to a mere seven.) Our previous installments have featured a near death experience with Colombian drug lords, Making Sense
his thoroughly disillusioning experiences in Washington and his analysis of what when wrong with TARP — from the very outset.

Congressman Barney Frank, D-Mass., provided us a written response to why he thinks Barofsky has misunderstood the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Barney Frank: Mr. Barofsky asserts that the financial reform bill “purported to end Too Big To Fail banks… but it didn’t.” People should know that he simply asserts this without in any way backing up that claim with analysis of the legislation.

In fact, the financial reform law very explicitly ends Too Big to Fail in several ways. First, it abolishes the section of the law which allows the Federal Reserve to lend money to any institution in America when it thinks it is necessary, as it did with regard to AIG.

Secondly, the financial reform law explicitly states that if any financial institution — no matter its size — cannot pay its debts, it must be dissolved before any intervention by the federal government is permitted. The shareholders must be wiped out; the board of directors dissolved; the executives dismissed — the entity disappears. The Treasury Secretary is given authority to expend funds in the course of dissolving that institution in a way that minimizes damage to the economy, but is mandated to recover any money spent in that effort by an assessment on financial institutions with assets of more than $50 billion. Mr. Barofsky apparently assumes that a Treasury Secretary or the Board of Governors of the Federal Reserve would blatantly violate federal law.

Paul Solman interviewed Congressman Frank in the summer of 2011 about allegations made by Gretchen Morgenson and Josh Rosner’s in their book “Reckless Endangerment” that Washington played a major role in the housing crisis.

Third, Mr. Barofsky asserts that very large financial institutions get a benefit from being designated as subject to special scrutiny and regulation, including higher capital requirements under the new law. If it were the case that being so designated confers a financial advantage on these institutions, they would be seeking that designation. In fact, completely contrary to Mr. Barofsky’s unfortunately shallow analysis, no institution has sought to be included in this category and a number of them have been lobbying hard against being in it. Fortunately, their lobbying is proving unsuccessful.

Fourth, Mr. Barofsky cites Paul Volcker as an advocate for his position. To the contrary, once I and others joined former Federal Reserve Chairman Volcker in making the Volcker Rule part of the bill, Mr. Volcker was a supporter of the legislation. I am confident that a very strong version of the rule will be adopted by the regulators.

Finally, reducing the size of the banks would have done nothing to diminish the major causes of the financial crisis. Institutions were able to securitize and resell 100 percent of the mortgages they owned, encouraging very imprudent lending. Trading derivatives of these securities was unregulated. Our legislation deals firmly with both these issues.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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