Why Ordinary Americans Should Be Really Angry About the Wall Street Bailout

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During a meeting in 2009 about the performance of the Home Affordable Modification Program, or HAMP, Elizabeth Warren, who was head of the Congressional Oversight Panel for the Troubled Asset Relief Program, or TARP, kept challenging Treasury Secretary Tim Geithner about the program's lack of progress in helping homeowners. At one point, an exasperated Geithner blurted out: "We estimate that they [the banks] can handle 10 million foreclosures, over time. This program will foam the runway for them."

The expression "foam the runway" is often used to refer to the injecting of cash into a company that's about to go bankrupt, which is somewhat similar in principle to an airport spreading fire-suppression foam on a runway to minimize the effects of an emergency landing. What Geithner was actually saying here was that home-mortgage modifications were helping the banks by preventing all of the likely foreclosures from hitting the banking system at precisely the same time. HAMP would ultimately allow the banks to spread out the foreclosures, while they restored their financial strength with government bailouts.

Now it all makes sense
Just as Geithner uttered those words, the full meaning of the bailout of Wall Street's banks became crystal clear to Neil Barofsky, who was the special inspector general for TARP. Geithner was being asked about how HAMP was helping homeowners, but he responded by saying how the program would help the banks. Barofsky now understood completely that it didn't matter if the modifications failed or if struggling borrowers ended up worse off, as long as the banks could "stretch out their pain until their profits returned."

Barofsky describes his epiphany in his outstanding Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. The book's central argument is that all of the bailouts resulting from the financial crisis were ultimately designed to benefit the big Wall Street banks, and the interests of homeowners, auto dealers, and other ordinary Americans didn't receive similar concern or attention. Barofsky, who was once a very effective prosecutor, builds an extremely detailed and compelling case against the government. I suspect that most readers will come away extremely angry about the fundamental unfairness of these bailouts.

The simple thesis that bailing out the big Wall Street banks was the overwhelming priority of the U.S. government in response to the financial crisis explains a lot. Why, for example, have there been so few criminal prosecutions related to the crisis? In a recent editorial in the Financial Times, Barofsky notes that there "would be no criminal prosecutions while the banks still teetered on the brink of collapse." He continued: "The risk of causing them to fail, and thereby undoing all of the bailout efforts, was too high."

And why did the ill-conceived HAMP fail so abysmally? An aggressive attempt to assist homeowners could have had adverse effects on the big banks, which would possibly, of course, put some of those institutions in jeopardy.

The inmates are running the asylum
Barofsky shows in depressing detail how the U.S. government had been thoroughly captured by the Wall Street banks. Indeed, many of the individuals running the bailout program came from precisely the same institutions that received the most benefits. For example, Herbert Allison, former assistant secretary of the Treasury for financial stability under Geithner, was a former CEO of Fannie Mae and a former president of Merrill Lynch. And, of course, Neel Kashkari, who preceded Allison in that role, was a former vice president at Goldman Sachs (NYSE: GS  ) . Kashkari was selected for his position by former Treasury Secretary Hank Paulson, who served as chairman and CEO of Goldman. When Geithner came on board, he selected Mark Patterson, a former Goldman lobbyist, as his chief of staff.

We could, of course, go on and on like this. Regardless of whether or not our Treasury department was thoroughly captured by Wall Street, one result of the bailouts is that the largest banks are now 25% bigger than they were before the crisis. Barofsky notes that "even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car." Unfortunately, Barofsky doesn't see Dodd-Frank as meaningful reform -- he notes that it "didn't change the postcrisis status quo of too-big-to-fail banks; it cemented it."

The boss is a massive narcissist
Readers of this book may be surprised by the animosity between Barofsky, a registered Democrat, and Geithner. Geithner, who never embraced the principle of oversight for TARP, is portrayed as a profane bully who surreptitiously sought to undermine efforts at greater transparency for all of the various programs.

Barofsky is relentless in building his case against Geithner. He describes the Treasury Secretary's Financial Stability program as "an unprecedented trillion-dollar playground for fraud and self-dealing." And he notes that Geithner's Treasury Department showered billions on Wall Street banks, while "the terms delivered by the government seemed to border on being corrupt."

Barofsky is at his most critical of Geithner when he's discussing the $170 billion that taxpayers put up to "keep AIG's (NYSE: AIG  ) collapse from precipitating a meltdown of the financial system." While heading up the New York Fed, Geithner oversaw the payment of $60 billion to AIG's counterparties to buy bonds that were worth considerably less than that amount. Ultimately, Barofsky never learned why Geithner didn't try to get a better deal for the taxpayer.

One final anecdote about Geithner illustrates exactly how Barofsky felt about him. One of Barofsky's colleagues believed that Geithner suffered from narcissism, which meant that it wasn't psychologically possible for him to admit a mistake. And that diagnosis seemed dead on, when Geithner answered a question about errors he may have made in administering TARP by saying: "The only real mistake that I can think of was that there were times when we were unnecessarily unsure of ourselves. We should have realized at the time just how right each of our decisions were." Really? That was the only real mistake?

A heartbreaking work of staggering genius
Of all the major books I've read on the financial crisis, this one is the very best at showing the dysfunctional inner workings of the unholy alliance between Wall Street and Washington, D.C. As a result of the unprecedented destructiveness of the financial crisis, we actually had a once-in-a-century opportunity to reform our seriously flawed financial system, while also assisting ordinary Americans who suffered tremendously as a result of the disaster. Neil Barofsky shows us exactly how and why we missed this incredible reform opportunity. It's a very sad, depressing tale.

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Read/Post Comments (14) | Recommend This Article (35)

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  • Report this Comment On March 11, 2013, at 9:52 PM, bluesimp wrote:

    Ordinary Americans are angry. It's just that we are ignored by the powers that be.

  • Report this Comment On March 11, 2013, at 10:19 PM, daveweave2 wrote:

    Although I was not privy to the words Geithner uttered at that meeting I have always believed what the author says in his book. Warren asks exactly the right question and is pretty much ignored. It was evident from the result of the bailous and the lack of prosecution that this was and will always be the government's policy as long as Democrats and Republicans control Washington. I have a undergrad and grad in Political Science and I often feel foolish because what they taught is how government is supposed to work, not the reality. My new mantra is death to the two party system that is owned by Wall Street and the rich, and a return to Democracy, because Democracy withers a little more every day. My education did help me see the real news behind the news and it makes me angry and sick. We really do need a revolution but America needs to stop listening to soundbites and being misdirected by partisanship. I know I am dreaming.

  • Report this Comment On March 11, 2013, at 10:41 PM, Steve9534 wrote:

    Not to be too sarcastic, but congratulations for finally figuring out what's happened. If it takes reading a book to explain it, then I guess reading the book is the thing to do. At least someone in the media now understands that having government officials take hundreds of billions in taxpayer money and passing it around to their buddies who've run the banks, insurance companies, and investment houses into insolvency might be a problem. Maybe in a few more years another book will be written about the Feds continued pillaging of government funds to enrich the bond traders and you can write about that, too. Steve

  • Report this Comment On March 12, 2013, at 12:36 AM, JHWillson wrote:

    Mr. Reeves, like most media, fails to address or even mention a true failing of the Obama administration and TARP. Granted, Neil Barofsky did not delve deeply into the illegal and unequal activiity behind the Autobailout in his book to the detriment of the Delphi Salaried Retirees.

    Twenty thousand earned pensions were slashed up to 70% by the PBGC, U.S. Treasury and the administration's Auto Task Force, This action was taken to "foam the runway" for the expedited General Motors bankruptcy. TARP funds were provided to General Motors and were the incentive for "topping up" of the major unions' pensions.

    The Delphi Salaried Retirees have been battling the bureaucracy in Michigan's Federal District Court sindce 2009. Background and information may be found here:

    Current SIGTARP Christy Romero is in the process of finalizing a report on the actions of the U.S. Treasury against the fully funded pension plan of the Delphi Salaried Retirees.

  • Report this Comment On March 12, 2013, at 5:31 PM, wally3791 wrote:

    @ JHWillson-

    I'm not sure, but it almost sounds like your bashing a journalist thats actually trying to shed light on the questionable actions of our government. So he didn't mention Delphi Salaried Retirees or the PBBC-- are you being critical of that? From the content and tone of your comment, it sounds like you and Mr. Reeves should be on the same side.

  • Report this Comment On March 13, 2013, at 7:02 PM, colin112 wrote:

    Its stories like this that make me ashamed of this once great nation.

  • Report this Comment On March 13, 2013, at 7:41 PM, ivanhoe292 wrote:

    The PBGC is an INSURANCE program...!!

  • Report this Comment On March 13, 2013, at 7:45 PM, CMFTomBooker wrote:

    Thank you John.

    I followed both Warren and particularly Barofsky. Not because I have some agenda, but because they were put in their positions to represent my (Our) interests.

    It was almost impossible to find media who were actually following them and developing a coherent narrative from their strong exceptions to what was going on.

    This created an "Are you going to believe me, or your lyin' damned eyes and ears." reality.

    Hard to imagine, but afterall, we had plenty of practice at that with Iraq and Afghanistan.

    Small compensation was watching Geithner squirm when Warren confronted him with numbers and facts.

    Occasionally, somebody highlights Barofsky's experience. For a few moments, I know that I wasn't nuts as I watched the Bank Bailouts ensue.

    I fret this Nation won't get well again until we come to grips with that which happened, and continues on today.

    Anyway, thanks, I needed that. ;)

  • Report this Comment On March 13, 2013, at 8:27 PM, alohadrj wrote:

    No one seems to mention the government imposed bankruptcy at GM that did not follow bankruptcy law and left many bond holders with empty paper.

    The unions were made whole and the retired bond investors left holding the bag.

    Do what you can do to buy a vote.

    This is certainly not the USA I can be proud of.

  • Report this Comment On March 13, 2013, at 9:39 PM, Lou1962 wrote:

    Always amazed me that there were absolutely no strings, restrictions or obligations put on the banks that reaped this great harvest... our pols (both sides of the aisle) are completely and utterly bought and paid for shills of Wall St.

    Glass-Steagall should have immediately and without hesitation been reinstituted and these banks should have been forced to be managed by a govt appointed board until which time they could have been safely and securely reconstituted into either investment banks or commercial banks.

    Instead, these fools held our nation hostage and were paid off. Does anyone really believe that will be the last time?

  • Report this Comment On March 13, 2013, at 11:43 PM, TMFDarwood11 wrote:

    Well, I don't even know where to begin.

    I'll agree say that Barofsky did figure it out. Of course, many of us in the U.S. did too, but he was there and heard the truth come out. He also wrote a very compelling book.

    In Washington, they don't represent us, the people. It's a sham.

    "we actually had a once-in-a-century opportunity to reform our seriously flawed financial system" may be accurate. However, the electorate got the politicians they wanted and they had another agenda. That's the agenda that passed in Washington.

    I concluded long ago that the only thing the politicians can do is tax and spend our, that is, the ordinary taxpayers money. Hundreds of billions are spent "greasing the skids" for millions via food stamps, entitlements of all kinds, special programs, etc. And that's enough to keep the system in place. That's the price we citizens pay for this pact with the devil.

    5 years later, I think it's pretty clear that it will take going over the cliff to create meaningful change. However, in the process hundreds of millions will suffer and an entire generation will be lost. That's the risk and the politicians have decided they can win at that game, and the bankers have decided they can profit at it. It's collusion.

  • Report this Comment On March 14, 2013, at 12:48 AM, TerryHogan wrote:

    I'll admit that I'm not privy to all the facts here (I'm also Canadian). But didn't the bailout actually make money for the US government?

    And we will never know what would have happened if more banks or AIG were allowed to fail, but I'd say there's a better than even chance things would have turned out worse for Main street in that case.

    I'm not saying everything was done perfectly, or that institutional capture isn't rampant in the U.S. But I am saying that maybe it was the least odious of many crappy alternatives.

  • Report this Comment On March 14, 2013, at 7:31 AM, BMFPitt wrote:

    I've been saying that every member of Congress who voted for it plus Bush & Paulson were guilty of treason since the ink was still wet.

  • Report this Comment On March 14, 2013, at 8:41 AM, TMFBane wrote:

    Thanks for all of the great comments, everyone! I really appreciate everyone taking the time to weigh in.


    I think you’ve raised some very reasonable questions. Barofsky states in the book that he felt something meaningful needed to be done in the fall of 2008, and he understands that quick action can often result in unintended consequences. In the months after the initial bailouts, however, a consistent pattern emerged where heaven and earth was moved for the banks, and very little was done for ordinary Americans.

    Here’s an interesting quote from the book,

    "Congress approved TARP in large part because buying those assets from the banks would not only prevent the banks from failing, but because the Treasury would then be in control of so many of the troubled mortgage loans that had gone into the toxic assets – that would allow Treasury to modify the terms of the loans in order to give foreclosure relief to struggling homeowners across the country which would then help the cratering housing market."

    As we all know, the original intent of TARP was soon abandoned. And effective relief for homeowners never quite materialized. It’s also interesting that officials minimized the fears around moral hazard when it came to the big banks, but these same officials were extremely mindful of moral hazard when it came to individual homeowners.

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