While the current presidential race has predictably devolved into a series food fights over tax returns and awkward speech wordings, the nation’s economy limps weakly along. In addition, the causes of the 2008 financial crisis still remain a dormant threat to the global economy — a point that neither candidate seems interested in addressing. Enter Neil Barofsky, the former Special Investigator General for TARP, the $700 billion bailout fund launched in 2008 in order to stabilize the nation’s financial system and broader economy. Barofsky is out today with a new book Bailout, which he hopes will refocus the national debate towards how little has changed on Wall Street since the shenanigans of too-big-to-fail firms nearly brought down the global economy.
Bailout is an engaging account of the Washington turf wars and power plays that occurred as the Bush and Obama Administrations tried to revive the nation’s economy in the wake of the financial panic of 2008. Barofsky, an Obama-campaign-contributing Democrat, was plucked from a position in the U.S. Attorney’s office in New York City to oversee the government’s $700 billion TARP fund. But when Barofsky got to Washington, he found the Treasury Departments of both the Bush and Obama administration to be populated with those who either share Wall Street’s view that the broader economy is wholly dependent on the thriving of large, multinational banks, or regulators too concerned with their own career prospects to challenge that view. And at every turn, as Barofsky tried to impose more transparency and accountability on banks receiving TARP funds, he found himself met with resistance — most doggedly from Obama Administration Treasury head Timothy Geithner.
This regulatory capture is the main theme of the book. In a phone interview with TIME, Barofsky said exposing this subtle form of corruption was his main motivation for writing the book. And no official gets it worse than Geithner, who, Barofsky argues, “has shown a remarkable deference to the interests of Wall Street, by protecting them at every juncture through the implementation of TARP and the regulatory reform process.” Throughout the narrative, Geithner and other Treasury officials bristle at and obstruct every attempt to turn up the heat on the banks, whether through auditing their use of TARP funds to ensure that they went to increased lending, or to forcibly shrink the banks through bipartisan legislation like the ill-fated SAFE Banking Act, which would have put hard caps on the size of too-big-to-fail banks.
And though the book itself doesn’t directly address President Obama’s role in this resistance, Barofsky ultimately holds him accountable. He supported the President in 2008, and says that he when he first started clashing with Geithner’s Treasury department, he engaged in “mental gymnastics” to absolve Obama of responsibility, thinking that the President wasn’t aware of the department’s obsequiousness towards big Wall Street banks. But over time, he came to realize that the White House itself was ultimately responsible for the misdeeds of the Treasury Department. Said Barofsky:
“You get to a point where as an executive you are responsible for the actions taken by your subordinates . . . and I don’t think these were just mistakes. I think this was the President’s position on the policy choices he wanted to make. And those policy choices have been unsuccessful at best, and disastrous at worst.”
The conclusion of the book is that the only way to mitigate the influence of Wall Street on Washington and its danger it poses to the broader economy is to break up the banks. Barofsky’s view — which is shared by an increasing number of academics and regulators — is that no amount of regulation will save us when banks are too big to fail and too powerful to contain politically. As he notes in his book, the nation’s largest banks are still receiving a distinct funding advantage to their smaller peers. This means financial markets still believe that the government will come to their aid if any of them were to fail. And it’s this incentive which enables these firms to take outsize risks, like JPMorgan’s recent multibillion dollar loss in the derivatives market, or engage in fraudulent behavior like the recent LIBOR scandal. Barofsky said that our financial system, even post Dodd-Frank, is one:
“that doesn’t have the normal disincentives for fraud and manipulation by banks that are too big to fail and too big to jail because if we were actually to indict one of these institutions it would bring down our entire financial system.”
Not only would breaking up the banks make our financial system safer, he said, but it would severely mitigate the regulatory capture that is epidemic at Treasury and the nation’s financial regulators. Wall Street bank’s power is in part derived from their size and systemic importance. Barofsky’s book is well worth the read if you hope to understand how Washington can so easily come under the thumb of powerful interests, but his takeaway is simple: regulatory capture isn’t completely preventable, but you can seriously mitigate it if you reduce the power of the those doing the capturing.