Barofsky and Bair on Banks and Bailouts*


As the United States continues to pull itself out of the credit crisis, these two books shed light on the Washington infighting behind the government's response to the crisis and, more broadly, the shape of financial regulatory reform. Both authors were actors in that drama clearly dissatisfied with the way it played out. Both are adept at using their books and the press to get their views across. While their accounts are from differing viewpoints within the government, each arrives at the conclusion that the motivation for the bail out was to protect big banks and financial firms, not ordinary people facing foreclosure or other adverse consequences of the government's failure to supervise these behemoths. For both, the personification of this allegedly wrongly directed focus is Treasury Secretary Timothy Geithner. Both share an immense dislike of Secretary Geithner for what they see as his singular interest in saving large banks. Now that Geithner has stepped down from his role as Treasury Secretary it will be interesting to see whether he too will recount to readers his views of the players in the bail out, including these two authors.

The less interesting of the two books is the one by Neil Barofsky. His book continually reminds the reader that he was a tough criminal prosecutor and ademocrat. The reminders, though at times involving interesting war stories of bringing drug cartels to justice, are superfluous. It is clear that to Barofsky the big banks were no better - in fact, more dangerous - to the American people than the drug czars he had helped bring to justice. Sheila Bair, by contrast, spends little time establishing the credentials that gave her a seat at the bail out table. Barofsky was named by the Bush Administration as Special Inspector General (SIG) for the government's bail out fund, the Troubled Assets Relief Program (TARP). An Inspector General (IG) is a form of internal auditor of a federal government agency. Congress felt that TARP required a special IG, referred to as SIGTARP, because of the large amount of funds involved that in and of themselves presented an invitation for potential fraud and waste. Barofsky' s book makes the point that no one at Treasury or the Federal Reserve Board seemed to share that concern. One could argue that Congress may have shared that concern, and for that reason required SIGTARP to begin with. Treasury and the Federal Reserve Board did, after all, have their hands full trying to bring the US economy back from the brink of depression. Barofsky, however, sees both as having the singular focus of protecting the interests of Wall Street. That seems too myopic a view. It was Secretary Geithner, after all, who crafted the Obama Administration's proposal that ultimately became the Dodd-Frank Wall Street Reform and Consumer Protection Act - the most significant overhaul of the US financial system and the authority of the financial regulators to supervise its sustained financial stability in nearly a century.

Originally published in International Finance - 2013.

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