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Former U.S. bailout cop says another crash is inevitable

February 15th, 2013
12:01 PM ET

By Mick Krever, CNN

Just as the world struggles to emerge from a deep financial hole, the former top cop of the U.S.’s bank bailout says that a new crash is inevitable.

He is Neil Barofsky, and from the end of 2008 to 2011 he was tasked with ensuring that there was no abuse of the government’s bank bailout, or “Troubled Asset Relief Program” (TARP).

The idea that the U.S. has had any meaningful regulatory reform, Barofsky told CNN’s Christiane Amanpour, “is a fiction.” “All those bad incentives that flow from the implicit guarantee that the government will bail [the banks] out again are in place or made more solid,” he said.

Barofsky’s best-selling book, now out in paperback, is “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.”

Banks are much larger than they were before the crash, he writes, and no matter how much politicians on both sides of the aisle say no more bailouts, there is an implicit understanding by Wall Street that should another crisis strike, the government will be there to prop up the banks.

And that “understanding” is all that it needed, because investors see companies that will have any losses covered by a government bailout.

But the way that the bailout was administered, Barofsky said, “was the ultimate betrayal.”

“It was supposed to help four million people stay in their homes,” he said. “Every opportunity that they had they chose the interest of the largest banks and left everyone else behind.”

Considering Barofsky himself worked in government, policing the bailout, it is not unreasonable to ask why he himself was unable to avoid the problem.

He writes that though they had success in uncovering fraud and abuse, there was simply too much political opposition to wholesale change.

Congress created Barofsky’s job – Special Inspector General for TARP – when it approved the bank bailout, over the objections of the White House and the Treasury Department.

Barofsky’s job was to be a policeman, but when it came to the big issues of how the banks were using the bailout money and what rules they had to follow, he was treated as an empty suit.

Before moving to Washington, Barofsky was a little-known federal narcotics prosecutor in New York. The two jobs had more in common than you might think.

He calls it “the bullet or the bribe.”

“I was told by a very senior treasury official that I was going to do real harm to myself and my family because of my harsh tone towards Washington and the Obama Administration, as well as my criticism towards the banks,” Barofsky said. “That was the bullet. Then the bribe came as, well, if I softened my tone, was a little bit more upbeat, then all those things could happen for me, including maybe … a federal appointment of a judgeship, which for a lawyer is a really big deal.”

At the time, he joked that it sounded suspiciously similar to the ultimatums that drug kingpin Pablo Escobar used to make with Colombian police.

The deal, Barofsky said, was “either you’re going to do my bidding and take this giant bag of pesos, or you’re going to get a bullet in your head.”

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soundoff (13 Responses)
  1. raymond elsen

    CA fundamental flaw in the system is indeed the "too big to fail" feeling leading to a positive feedback to excessive risk taking. Maybe the rule "too big to save" should be implemented, to keep banks at a reasonable size.

    February 15, 2013 at 3:15 pm | Reply
  2. Beefburger

    Iceland sent all of their "too big to fail" banksters to jail. Now they are nearly fully recovered and doing well.

    February 16, 2013 at 3:06 am | Reply
    • Ryan

      While that may be admirable, Iceland's total economy is about half the size of Vermont's. Vermont has the smallest economy of any U.S. State. For perspective, California's economy is 135x the size of Iceland's. So calling any of the banks in Iceland "too big to fail" is really pretty laughable by U.S. standards. Even their largest bank is equivalent to some little mom-and-pop bank in the middle of nowhere, Missouri with one branch and an ATM machine.

      February 16, 2013 at 11:34 pm | Reply
      • Beezlegrunk

        Relative to the U.S., what you wrote is technically true — as far as it goes. But in terms of Iceland's economy, their too-big-too-fail banks were just as big *to them* as our too-big-too-fail banks are to our economy, so your point doesn't really make any sense.

        It's sort of like saying that a 30-story building collapsing in Reykjavik, Iceland, isn't really worth writing about because we have much bigger buildings in the U.S. So what? To the people in Iceland (and I suspect most places, including the U.S.), the collapse of a 30-story building is big enough to care and write about, and so were their banks.

        The collapse of what you dismiss as "small" Icelandic banks threatened to bring down the entire Icelandic economy, so it doesn't really matter what their size was relative to a handful of even bigger U.S. banks — they were "big enough".

        And if you'd lost your house, your life savings, and/or your job because of the collapse of the Icelandic banks, you wouldn't really care if there are bigger banks in the U.S. ...

        February 17, 2013 at 1:13 am |
      • ArghONaught


        February 17, 2013 at 8:26 pm |
      • raymond elsen

        You seem to ignore that even in real, absolute terms some Icelandic Banks were bigger than most American Banks.

        February 19, 2013 at 3:05 pm |
  3. raj

    another crash hope its a myth than facts we heard of fiscal cliff seems some changes in the pay cheque but seems ok with the people not much of a shout and groomy looks financial statements and calculations are always complex once in good hands are better managed once in not so good hands bound to draw problems and complexities at the end not everyone can be made happy nor everyone can be sad hence its always the percentage game...

    February 18, 2013 at 1:41 am | Reply
  4. Nadia Elizabeth Hakemi, hrh

    Christianne: Marry me. Think about it. We can dodge this financial crisis together and let the religious chips fall where they may. Back to the feminine again. For love and country. Let the brotherhood take that to the bank.

    February 25, 2013 at 9:16 am | Reply
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