Barofsky: TARP made bank problems worse

Barofsky: TARP made bank problems worse

The man who oversaw TARP has harsh words for regulators

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By Sam Mamudi, MarketWatch

NEW YORK (MarketWatch) — A key plan of the federal effort to combat the 2008 financial crisis has only made the problems that caused the crisis worse, according to the man who oversaw the program.

What’s more, the Wall Street-Washington revolving door makes it unlikely that any serious reform will happen before the next crisis.

Neil Barofsky, senior fellow at the New York University School of Law and outspoken critic of the Washington establishment, made these remarks at The Big Picture Conference in New York on Wednesday. He offered his evaluation of how the government’s Troubled Asset Relief Program has fared. Follow this writer on Twitter for more updates from the conference.

Barofsky, formerly Special Inspector General in charge of overseeing TARP, gave the program a mixed report. Read blog post: Barofsky slams regulators.

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Barofsky said TARP deserves good marks for helping to avert a bigger financial crisis and maximize taxpayer returns, but said it failed to increase lending and preserve home ownership.

But the big issue, as he saw it, is that TARP only made the problems behind the 2008 crisis worse.

“TARP was a double-edged sword,” said Barofsky, who wrote the recently published book ‘Bailout.’ “[For all its success] it said some banks would be protected from the normal capitalistic functions of the market.”

Bank executives kept their pay, he noted, counterparties and creditors were made whole, and the too-big-to-fail banks were not only kept whole but even made stronger: today, they are 20% to 25% bigger, he noted.

The big banks today are essentially government-sponsored entities — they function outside the market, according to Barofsky.

The root of the problem, he explained, is the so-called revolving door between government and the private sector that results in, for example, the former chief executive of Goldman Sachs Group Inc., Hank Paulson, becoming Treasury secretary.

“I don’t think these guys went out of their way to help their former employers, but [their old jobs] did reflect the deep ideological capture reflected with those institutions,” he said.

That lack of efforts to rein in banks even in the wake of the 2008 crisis reflect that ideological capture. For instance, even after it was clear that banks’ greed and irresponsibility helped cause the meltdowns, Barofksy found that prevailing wisdom among regulators was that these institutions could still be trusted.

“When I first got down [to Washington, DC]…I was told over and over again […] ’these are banks, they’d never risk their reputation by putting profit over public good’ — that concept endured through the financial crisis.” As a result, while the banks themselves need to be tackled, so do the regulators, according to Barofsky.

“We need to break up the banks…[but] we need to do something fundamental on our regulator side […] There’s a big pot of gold at the end of the Wall Street rainbow as you go through the revolving door,” he said.

One way to address the problem would be to give regulators less discretion to act. The Dodd-Frank legislation gives regulators all the tools they need to break up the banks, but using those tools requires a political will that doesn’t exist, he said — it lets politicians boast about having enacted reform without seeing any real reform take place.

Barofsky suggested that Congress should pass strong legislation that makes clear the steps that need to be taken.

“I think they should use a meat cleaver not a scalpel,” he said.

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