Book Review: Bailout, by Neil Barofsky
When the funding problems of European governments (starting with Greece ) first revealed themselves not too long ago, this column along with not a few others noted what was obvious to anyone with a pulse: Greece wasn't being bailed out, though banks with exposure to Greek government debt were. Increasingly these days, and horrifyingly with economic growth in mind, it's always about the banks.
On January 31, 2009 the Washington Post published an article, "Bailout Fund Letters Are Held Up", in which it was written that:
"The Obama administration is blocking the chief watchdog of the $700 billion federal bailout of the financial system from immediately sending banks requests about how they are using taxpayer funds."
The above quote and its underlying story is for the most part the tale within Neil Barofsky's Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. Barofsky, the original (and now former) special inspector general for TARP (SIGTARP), is the "watchdog" referred to in the Post article, and Bailout is a somewhat bland, often weakly analyzed, and very self-serving account of his fraud oversight efforts back when both political parties lost their heads on the way to economy-restraining bailouts of banking institutions and automobile companies. Then as now, it's always about the banks.
Considering the quote, Barofsky, a self-proclaimed "lifelong Democrat", expected his anti-fraud efforts would run up against less resistance once the Obama-appointed Tim Geithner was in place. Much of Bailout covers how incorrect this assumption was, and applied to the quote that begins this review, the Geithner Treasury (defended by Bush holdover Neel Kashkari in this instance) blocked efforts to force banks to disclose what they'd done with TARP money given their partially correct view that money is fungible. No doubt that's true, but Barofsky understandably felt banks should have been able to offer more in the way of specifics about their actions post-TARP, though it says here both sides simply didn't get it.
The greater truth revealed by the Post article is how very impossible are bailouts to begin with. As this column has observed countless times over the years, once a private business takes bailout money it is no longer in business. That is so because businesses are profit-seeking institutions, whereas bailed out entities are serving political masters who don't care about profits, but who instead view corporations as social ideas meant to achieve social outcomes that are frequently inimical to profits. Whether banks lent the money handed them by the feds, traded the funds in the marketplace, or simply used it to shore up sick balance sheets, was ultimately not the point. The feds had a level of control over banks much greater than before, and because they did, the bailouts themselves were worse than the bankruptcy alternative.
Of course in Barofsky's case he wasn't making policy, rather he was put in place to root out fraud that was bound to occur with so much money at stake. The irony there is that as his interviews for the SIGTARP post attest, when he expressed fear that "some banks would try to cook their books" in order to attain TARP funds, Barofsky missed the point. "Cook their books" to get their hands on funds that would make them wards of the state? Not very likely. Instead, Barofsky and those overseeing TARP themselves should have known that any bank trying to look good with TARP funds in mind was almost by definition lying about its solvency. That is so because no institution (financial or otherwise) would welcome political scrutiny of its lending, trading and bonus practices (to name three) unless it had nowhere else to turn. Fraud? That should have been the easy part for Barofsky et al, and it didn't require bank disclosure of post-TARP injection activities.
About Barofsky, it should be stressed that he goes to no pains to hide his view of the world from the reader. Mentioned earlier was his description of himself as a "lifelong Democrat", he alerted the Bushies overseeing the creation of SIGTARP that he'd donated $200 to then presidential candidate Barack Obama, he felt a kinship with Elizabeth Warren who was the originator of "you didn't build that", and then about Barney Frank, he of "I think we see entities that are fundamentally sound financially" (Fannie Mae and Freddie Mac) fame, Barofsky at one point in Bailout mentions that having seen Frank quite a lot on television talk shows, "I agreed with his positions far more often than not." Basically Barofsky was clear early on and throughout the book about his political leanings, along with his view of the symbol of finance that is "Wall Street."
All of the above is included to set the stage for his comment on the book's fifth page about "Wall Street's blind quest for profit and fees. I had seen the predatory practices of those criminals, which still had the capacity to shock me even after spending years prosecuting international narcotics kingpins." Barofsky is a lefty, and worse, a nanny state lefty who thinks he's actually achieving societal good in going after dealers (before SIGTARP, he was assistant U.S. attorney for the southern district of New York) of chemicals that our Washington minders deem "illegal." Buy or not buy the book with this in mind.
Needless to say, "Wall Street" businesses are like any others in their relentless pursuit of profits (it's a matter of serving the interests of the very shareholders without which Wall Street wouldn't exist), and as for "predatory practices", how is it predatory to lend money to bad credit risks who lie about their income (or lack thereof) without down payment such that the lender's risk of loss grows? Weren't the dishonest borrowers the predators?
Predictably "banks" are the enemy throughout Bailout, but as is often the case with poorly edited books, Barofsky seems to be arguing with himself quite a lot. Indeed, on page 8, Barofsky trots out the tired and easily discredited (that so many banks needed bailouts due to impaired balance sheets being the source of discredit) line that the "profits from the securitization mill were too high, and the losses would not be borne by them [the banks] but by the investors buying the bonds", but then two pages later he acknowledges what is really a tautology, that in 2008 "many of the banks had started to eat their own cooking."
Further on, Barofsky self-righteously observed about Wall Street from his time at the U.S. Attorney's office that "The most important lesson I learned (p. 13)" "was that virtually no one doing business on Wall Street-rating agencies, accountants, investment banks, or others-cared to look very hard at the fraud that was occurring right under their nose as long as they were getting paid their astronomical fees." That too is an interesting, and easily disprovable assertion.
Indeed, it wasn't regulators (to Barofsky's credit he correctly writes that "one of the most important lessons that should have been learned from the financial crisis was the remarkable fallibility of the regulators") who sniffed out balance sheet problems at financial institutions, rather it was their fee and profit hungry financial institution counterparties who, ever mindful of staying in business, cut off the Bear Stearns and Lehman Brothers of the world when their collateral didn't prove worthy of credit. Arguing with himself yet again, Barofsky acknowledged on page 17 just how very caring financial institutions are about shareholder capital such that with Refco, they wasted no time cutting off the insolvent in their midst.
Perhaps inadvertently, Barofsky revealed just how wasteful, and non-stimulative is government spending. If it's acknowledged first that governments really don't spend, instead they spend monies extracted from the private sector, it should be said that they're very wasteful with the funds shifted to them from the productive class. In an eye-opening account of how he got SIGTARP started, Barofsky referenced a $50M budget and how "Bizarrely, I began receiving calls from various government agencies pitching services to us, at a steep cost."
Though one can go to just about any mobile phone store and walk out with a Blackberry all for the price of a two-year contract, service providers inside government offered Blackberry's to SIGTARP at $2,194/per, according to Barofsky. Revealing an ability to be embarrassed that is rare among political types (more on that later), Barofsky sheepishly explained away the waste as "intragovernmental transfers" such that the costs "were at limited expense to the taxpayer." Wrong. As simple logic tells us, private sector businesses that destroy capital in the way governments do are happily starved of funds so that more effective stewards can replace them as investment recipients. Put plainly, buggy manufacturers to some degree had to go out of business so that carmakers could replace them, but with governments not disciplined by profit and loss, the taxpayer is first burned through spending on his or her dime, and is burdened yet again with a less vibrant economy thanks to governmental waste of always limited capital.
Barofsky then notes just a few pages later what the priorities of his fellow federal "watchdogs" were "in order of importance: maintaining and hopefully increasing their budget; giving the appearance of activity; and not making too many waves." Though Bailout didn't prove terribly valuable as a memoir of the financial crisis, as an inside look into the economy sapping waste that is government, it is quite worthy.
Of course Barofsky would most likely say that he and his staff were immune to the perverse incentives that seem to infect all government employees. That's the case because to read Bailout is to read the musings of someone who can seemingly do no wrong. Put simply, Barofsky's self-regard is staggering such that even his negative qualities are always the result of even more positive ones.
About his self-diagnosed "Asperger's-like bluntness", Barofsky attributes it to an "aversion to bullshit and hypocrisy." Recounting his dealings with Washington before being asked to take on SIGTARP, Barofsky recalls telling a colleague that "I will never, ever take a job in Washington. The people down there don't care about justice or protecting the United States. It's all about bullshit, ego, politics, turf, and credit."
No doubt it would be hard to inhabit a flawed world for flawless sorts like Barofsky, and in one chalkboard scratching account of how the innocent Barofsky became aware of the corrupt ways of D.C., he wrote about how "I realized that I had done one of the stupidest things possible: I had trusted someone." Ever eager to place his morality above the political and Washington world that his SIGTARP position suggests he was expert at navigating, Barofsky nearly always writes himself as the idealistic crusader; never the heavy, always the victim.
Recounting how he stood up to one of President Obama's functionaries who commanded the use of SIGTARP's Treasury offices in the name of the President, Barofsky writes that "I had apparently impressed Cathy [his deputy chief of staff] with my obstinacy. She later told me she'd been thrilled because we were the exact opposite of business-as-usual Washington." You see, Obama's flunky backed down, SIGTARP kept its offices, so another self-proclaimed Barofsky weakness - obstinacy - was written to prove yet another virtuous positive about him in terms of his alleged unwillingness to play the revolting game that is Washington. Call Mt. Rushmore?
Regarding persons dealt with, Barofsky recounts a funny Joe Biden story (as John Podhoretz wrote recently in the New York Post, everyone has a Joe Biden story), and then he notably headed SIGTARP while both Henry Paulson and Tim Geithner were at Treasury. Geithner he clearly didn't like much at all for what he deemed obstructionist ways, narcissism, and a mouth ("Neil, I have been the most fucking transparent secretary of the Treasury in this country's entire fucking history!") that would perhaps make sailors blush.
As for Paulson, Barofsky is mostly laudatory, plus he asserts that Paulson was "primarily responsible for the bold steps that helped prevent the crisis from escalating totally out of control and causing a second Great Depression." Really? Never explained by the myriad commentators on the left and right who think as Barofsky does is why several - or hundreds - of bank failures would have wrecked our economy.
Beyond the historical and logical truth that failure is the author of all commercial success for commercial failures being starved so that new managers can take over poorly run human, physical and financial capital, the simple truth is that Japan and Germany were literally leveled during World War II, only to bounce back (Japan had no Marshall Plan, so that can't be trotted out as the reason for its revival) very quickly once the war ended. If both countries could rebound despite losing their best and brightest to a needless war, is it remotely credible for Barofsky et al to suggest that the U.S. economy couldn't have bounced back from the death of Citigroup?
The title of Barofsky's book after "Bailout" is "How Washington Abandoned Main Street While Rescuing Wall Street", but in a book that always argues with itself, Barofsky writes with a forked pen. Indeed, if it's true as he asserts, that Paulson essentially saved us from Armageddon, then he presumably saved a "Main Street" with which the ever self-righteous Barofsky feels kinship. I don't agree, I think the bailouts of both Streets were a disaster for the economy, but it would have been nice if the author had stuck to a story.
Beyond that, for an author who professes to not abide hypocrisy, Barofsky doesn't lack it. Evidence is his often engrossing account of AIG's bailout. Barofsky was correctly bothered by what he and many authors properly deemed a "backdoor bailout of the banks", yet what really bothered him was that the bailouts were occurring while homeowners were getting "pummeled" by "the foreclosure crisis with no meaningful relief in sight."
Not defending the wrongheaded bank or auto bailouts for even a second, how hypocritical for Barofsky to seemingly sign off on much the same for the little people. Were those who took out loans they couldn't afford, loans that according to him ultimately put us on the brink of a "Great Depression", really so pure? Furthermore, to give mortgage or principal relief to struggling homeowners is to by definition fleece the savers. Don't many of those savers reside on the Main Street that Scarsdale,NY-raised Barofsky seeks to protect?
Taking Barofsky's oh-so-righteous thinking further, he decries the "Wall Street fiction that certain financial executives were preternaturally gifted supermen who deserved every penny of the staggering paychecks." Barofsky clearly thinks "Wall Street" executives are overpaid, but not acknowledged by him is that the free markets agreed. Lest we forget, the markets were desperately trying to send a high number of Wall Street executives into unemployment back in '08, all the while wiping out their net worth, yet Democrats and Republicans alike banded together to make sure this wouldn't occur based on Barofsky's own illogic about an inevitable "Great Depression."
Thinking about the above, what's odd but not surprising about Barofsky's book is how little mention free markets are given. No doubt this was on purpose, Barofsky is fairly clear about his ideology, but it's the free markets that would have proven his wrongly arrived at assertion about Wall Street pay correct; that is if markets had been allowed to work their magic.
Considering the size of the biggest U.S. banks today, Barofsky deems them too large, and blames the false attempts at reform since '08 for their growth. Writing about the Brown-Kaufman amendment to the Dodd-Frank bill, Barofsky asserts that "I was an advocate of the amendment, which would have forced the breakup of the largest banks." This is mentioned to reinforce the point that far from a fan of markets, Barofsky's default stance is force by government. Of course lost on the author is the simple truth that a strict policy of no bailouts would achieve that which he desires in terms of smaller banks. If counterparties were fully aware of a policy in which no bank would be "too big to fail", it's a certainty that the biggest banks would shrink due to a desire among counterparties to spread their exposure around.
Ever attracted to all the wrongheaded assumptions about banks, Barofsky presumes from the above that big banks will continue to swing for the fences thanks to the "heads I win; tails the government will bail me out" mentality that he thinks permeates Wall Street. What he misses is that the banks aren't as purposely reckless with the money of others as he assumes. If this is doubted, readers need only contact the former top executives of Bear and Lehman to see how they're doing financially since their implosions. Simply put, there's still little incentive for TBTF banks to swing for the fences, but there is very little incentive for their counterparties to do their own due diligence.
As for Barofsky's dislike of Wall Street's allegedly short-term worship of profit, what Barofsky misses, much like seemingly everyone else who has written about the financial crisis, is that Wall Street executives have every reason to think for the long-term. Indeed, a dirty little secret, albeit one revealed by the aforementioned implosions of Bear and Lehman, is that Wall Street pay is largely in the form of bonuses that come in the form of restricted stock that usually can't be sold for several years. In short, the interests of Wall Street executives are certainly aligned with that of clients and shareholders no matter what books like Bailout tell you.
Regarding the tight lending standards of banks that were recipients of so much TARP money, lost on Barofsky is that the bailouts, far from boosting lending, actually made it tighter. Figure banks that needed TARP funds were necessarily insolvent and gun shy. Their ability to lend was "impaired." But if they'd been allowed to fail, healthy banks could have purchased poorly run institutions and their assets at bargain basement prices. For being able to buy at the market bottom, healthy banks would have been much more aggressive lenders. Naturally this never revealed itself. Market solutions rarely reveal themselves when the subject is banks.
More broadly, the lawyer in Barofsky was ever mindful of fraud among TARP recipients. Fair enough to a degree, but what clearly didn't bother him was the bigger problem of economy-wrecking waste. Markets by 2008 had spoken, they'd said too much credit had found its way to housing, and that a reverse would be healthy. Tragically for all of us today, Republicans and Democrats didn't let market forces work, and then TARP and HAMP poured gasoline on the fire as more limited capital migrated to exactly what the economy didn't need: the out-of-favor housing assets of yesterday.
Despite all the criticism, Bailout does not lack positives. Barofsky was good when it came to exposing the fallibility of regulators, not to mention the notion of "regulatory capture." About GM's bailout and its eventual proclamation that it had paid back its government loans, Barofsky ably reveals how very unethical GM's bailout was but for Paulson's expansive view of TARP, and then he exposes as wildly false all the talk from GM about it having paid off its loans. Regarding HAMP and other government measures meant to keep people in their homes, Barofsky reveals these programs as destroyers of individual credit (the story of Jeremy Fletcher in the book is very sad), and in truth, barriers to foreclosure meant to prop up the banks. Again, it's always about the banks.
Still, it's hard to recommend Bailout mainly because not much new was learned, while a lot of falsehoods in the other crisis books were repeated. Most important, it's hard to recommend Bailout because a book about them misses the essential point that bailouts are the problem to begin with.
