Neil Barofsky is not the sort of guy you want popping up in a tight election race, not if you’re Barack Obama.
That's first because Barofsky is an all-too-credible critic of the Obama administration’s lopsided approach to the economy, which included throwing enormous resources into bucking up big banks and then allowing them to grow even bigger while slighting the underwater homeowners whose plight has weighed down the recovery on which the president's reelection probably depends. Second, it's because Barofsky is out there trying to sell a new book — Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street — which offersa devastating indictment of Obama’s team, especially his Treasury secretary, Tim Geithner.
According to Barofsky, the former inspector general in charge of overseeing the $700 billion Troubled Asset Relief Program, the current scandal over the banks’ manipulation of Libor — the London Interbank Offered Rate, one of the most important benchmarks in the world since banks use it to set rates for lending to each other — is just more evidence that Wall Street’s biggest banks have further captured the financial system on Obama’s watch. And no one can do anything about it, unless they are broken up.
“This goes to the bigger problem of 'too big to fail,' ” Barofsky said in an interview. “Because you can’t indict one of these banks. You can’t bring an indictment that would bring down our entire financial system.”
Beyond that, says Barofsky, the response of Geithner and the regulators to the Libor scandal runs an “incredible parallel” to their feckless attitude toward the misconduct of the banks in the administration’s Home Affordable Modification Program, or HAMP. “Check a box, send an e-mail, but don’t do anything to address the problems,” he says. Barofsky was referring to official reports that, at the height of the financial crisis in 2008, British bank Barclays admitted to the New York Fed that it was booking artificially lower borrowing rates to help its bottom line and that Geithner, as the head of the New York Fed, sent an e-mail to the Bank of England about the problem, but without any apparent follow-up.
In more unwelcome election-year publicity for the administration, Geithner is expected to testify before the House and Senate banking committees this week about his response to the Libor scandal. In a recent appearance at a private conference, Geithner took credit for notifying the British and regulators at “a very early stage.”
"The United States, to its credit, set in motion at that stage a very, very powerful enforcement response, the first of which you've now seen," Geithner said last week at the CNBC Institutional Investor Delivering Alpha Conference in New York.
But Barofsky criticizes Geithner over “the conversation that didn’t happen,” which would have been “to call up the Department of Justice and say, ‘We just had a bank [Barclay’s] confess on tape to participating in a global conspiracy to fix the interest rate.’ Instead, the Department of Justice didn’t open a case until 2010.”
In the interim, Barofsky says, Geithner and other U.S. regulators conveyed to the market that the manipulation was not a serious matter to them, even basing their rescue programs and the bailout of AIG on what they had reason to suspect were artificially lowered Libor rates. This was done in an apparent effort to rescue the banks at all costs not only during the crisis, but after the worst of it had passed.
Barofsky is not alone in his criticism. Last week, Sheila Bair, the former head of the Federal Deposit Insurance Corp., also criticized Geithner and U.S. regulators. "Looking at those e-mails, it looks like they had pretty explicit notification of some very bad behavior, and I don't understand why they didn't investigate," she said.
It took nearly four years for penalties to be brought. Last month, Barclays agreed to pay $453 million in fines and penalties. CNBC reported on Monday that U.S. prosecutors and British investigators are also close to bringing charges against some traders who manipulated interest rates.
As with Libor, the banking industry’s abuse of the HAMP program is well documented, as is the administration’s failure to curb those abuses. For the most part, Treasury simply stood by while the banks strung along thousands of mortgage holders, promising “modification” of their loan terms that never happened and sending them needlessly into deeper debt. The administration also fretted over the “moral hazard” of helping reckless homeowners, though in more cases than not those homeowners had been led on by securities firms manipulating the mortgage bubble, and the administration had long since stopped worrying about the moral hazard of bailing out too-big-to-fail banks. In particular, Geithner and Obama’s chief economic adviser, Larry Summers, avoided pushing for a "cramdown," which would have allowed federal bankruptcy judges to force banks to reduce mortgage balances, cut interest rates, and lengthen the terms of loans to help borrowers get out of trouble. Even Obama's own housing secretary, Shaun Donovan, later told National Journal that that was a "missed opportunity."
And in the end, the administration used only a fraction of the total amount of rescue money allocated under TARP to help underwater homeowners. “They had $250 billion, allocated, that they could use without a single vote in Congress. And they gave it back,” says Barofsky. “People need to be held accountable.”
Perhaps some of them will be -- on Nov. 6.
Asked to respond to the criticisms in Barofsky’s book, a Treasury spokesman said only, “We haven’t seen the book, but we wish Mr. Barofsky well.”