Be vigilant and be wary. That's the advice Neil Barofsky has for financial professionals following his time as special inspector general overseeing the Troubled Assets Relief Program from 2008 through 2011. Now a senior fellow at New York University School of Law, Barofsky talks with Managing Editor Lorie Konish about his experience in Washington, D.C., that shaped his bestselling book.
1. You were initially reluctant to take on the special inspector general role. Why?
At the time, I didn't have much interest in going to Washington. I had some experience there in the Department of Justice as a federal prosecutor when I was prosecuting the Revolutionary Armed Forces of Colombia. We got into a big turf battle with the U.S. Attorney's office, and it left a bad taste in my mouth. It was also a time in my life when I was very happy with what I was doing. We had just launched a brand new mortgage fraud group that I was running. I was getting ready to get married. But my boss gave me a strong pitch, what he later referred to as his "God and country" speech, appealing to the sense of crisis and my sense of duty. Before I knew it, I was down in Washington interviewing and then confirmed for the job.
2. What surprised you the most during the time that you served in the role?
Maybe I was a little bit naïve. But I was shocked by just how much some of the Treasury officials I worked with and some of the regulators were so captured by the interest of the largest financial institutions that were responsible for causing the crisis. At seemingly every decision point and choice, they put the interests of the financial institutions over those of everyone else. It was this pervasive attitude that as long as we protected, preserved and returned to profitability the largest banks, everything else would follow. And as a result, they really did abandon everyone else. If the policy goal was to get banks to deploy the funds, it was ignored. The housing programs, which were the backbone of TARP, were a promise to help struggling homeowners deal with the foreclosure crisis, but there was never really any interest or commitment to making that program successful and, as a result, it was a disaster. It was this real attitude of banks first.
3. If a crisis happens again, what do you think the best approach would be?
In the panic that took grip in 2008, it is certainly understandable that the policy makerswho in their view were facing economic and financial Armageddontook the step that they did, which was essentially to shovel as much money to the banks as quickly as possible. There should have been some link between their policy goals and their actions. So if the idea was to get the banks to take these funds and lend them, they should have had some conditions or incentives. There should have been more taxpayer-protecting conditions included in setting stronger restrictions on certain risks and incentives, like executive compensation. The bigger problem, though, is having rescued the banks and made the implicit guarantee of too big to fail very, very explicit. There was a moral obligation to end that policy. Unfortunately, we took the biggest banks and made them 20% to 25% bigger than they were going into the crisis, and we protected their status quo. Rather than taking advantage of an opportunity to fix the broken system, the TARP program doubled down and made it worse.
4. Are you going to look for [former Treasury Secretary Timothy] Geithner's book when it comes out?
Tim Geithner has not demonstrated a proclivity for clarity in his statements. Under his leadership, the Treasury Department had a great lack of transparency. The statements were filled with half-truths and misleading statements that were all designed to make Tim Geithner and the Treasury Department look great, even when facts pointed in the other direction. I would expect that Tim Geithner's book would follow that same pattern, and I can't imagine that I would bother reading it. [Geithner's lawyer was not available for comment on these remarks by press time.]
5. What can advisors do to ensure they aren't contributing to the same problems we have seen in the past?
First, have a healthy degree of skepticism about what's coming out of Washington. Unfortunately, government officials are far more concerned with the news cycle. So there's a lot of shading of the truth. Advisors should always look beyond government policies for the greater truths. Second, recognize that many of the things that were broken that helped contribute to the last crisiscredit rating agencies laboring under the conflicts of interest that led to the over-ratings of CDOs and mortgage backed securities, risk-taking incentives of the largest banks, overly complicated capital rules giving banks the appearance of being far more adequately capitalized than they actually wereare still part of our financial system today.