Barofsky: More Bank Bailouts Are Inevitable

Steve Inskeep talks to Neil Barofsky, the special inspector general of the Troubled Asset Relief Program. On Wednesday, Barofsky delivered his latest quarterly report to Congress on the state of the big bank bailout program, and how the money is being spent.

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STEVE INSKEEP, host:

We're going to get an update, now, from the man who's an independent watchdog over the financial bailouts. Neil Barofsky tracks money spent and recovered by TARP - Troubled Asset Relief Program. He's the special inspector general for that program, and he delivered his quarterly report to Congress yesterday. He's on the line.

Welcome to the program, sir.

Mr. NEIL BAROFSKY (Special inspector general, Troubled Asset Relief Program): Thank you. It's great to be back.

INSKEEP: Yeah. Glad you are back.

Let's talk about whether the problem has been fixed, here. Why have you been saying that more bank bailouts are more or less inevitable?

Mr. BAROFSKY: Well, it's not just me saying it. It was really information that was provided to us by Secretary Geithner in an interview that we did with him in December with respect to a recent audit. And the problem is that the notion of too big to fail - these large financial institutions that were just too big to allow them to go under - since the 2008 bailouts, they've only gotten bigger and bigger, more concentrated, larger in size. And what's really discouraging is that if you look at how the market treats them, it treats them as if they're going to get a government bailout, which destroys market discipline and really puts us in a very dangerous place.

INSKEEP: Let me make sure I understand what you're saying. You're saying that credit rating agencies and investors, when they look at the risk of investing in a bank, they say, well, they can do whatever they want because the government will bail them out. That's what you think.

Mr. BAROFSKY: Exactly. And it's not just what I think. Recently, just this past month, S&P, one of the largest of the rating agencies, did something remarkable. They said that they're intending to change their rating methodology to make it a permanent assumption that the government will bailout (technical difficulties) the largest institutions, give those banks higher ratings. Which means they're going to be able to borrow money more cheaply. They're going to be able to access credit and capital and debt more easily.

And they say this even with respect the deregulatory reform and the Dodd-Frank Act that Congress has put in place, that they still believe the United States, as a government, is one that is moderately high, that they're going to bailout a systemically significant or big bank.

INSKEEP: I'm glad you mentioned regulatory reform and the Dodd-Frank Act, because a Treasury Department official raised that a congressional hearing yesterday, when you made some of these same points, says the inspector general for TARP, the Treasury official basically saying, look. We've got the tools now. We can break apart a failing company, that we're not going to have to get to the stage of bailing them out.

Isn't there some argument for that?

Mr. BAROFSKY: Steve, I think there's two real important points on this. One is, while they may have the tools, they haven't given us a structure and suggested how they're going to use those tools. And it's going to require a lot of regulatory will and a lot of political will to use them in a way to rein in these banks.

But second - and this is equally as important. It really doesn't matter unless they can convince the market that they're going to be able to rein these banks in and let one fail. Because even if they have all the tools in the world, if the market believes the government will bailout these institutions, then all of the disastrous consequences that flow - the banks getting bigger, they're not being disciplined, investors - all the dangers that you put out, investors putting money in without doing their homework because of the assumption that the bailout will continue, and the banks will continue to get bigger and bigger.

INSKEEP: You've mentioned a couple of times that the banks are getting bigger, that that's part of the reason that there's still this huge risk. It was a problem in 2008. You say it's a bigger problem now.

But that does raise the question, Mr. Barofsky: what you would do differently. Would you break up the banks if it were up to you?

Mr. BAROFSKY: Well, I think Sheila Bair - chairman of the FDIC, and who's part of this Financial Stability Oversight Council - she talks about one of the things that they can do to help accomplish that goal, and that's to use the provisions to identify where, if banks don't have a credible plan - if there's not a credible plan in place to resolve a bank, to wrap it up, to put it out of its misery if necessary without bringing down the whole system - to use those tools where necessary to shrink the banks and have them spin off the most dangerous portions of the banks so that there is a credible alternative, so the markets can be convinced that the government will not support these...

INSKEEP: Wait a minute. You're saying make sure the bank has that plan, even before there's a crisis. And if there's no plan, you've got to break up the bank. That's what you're saying.

Mr. BAROFSKY: I think that the regulators are going to have that opportunity, and I think that her suggestion is a good one.

INSKEEP: I've just got a few seconds here, and I know this is such a complicated topic. But I want to just get a bottom-line assessment of the Troubled Asset Relief Program. When you measure the results that the depression was - arguably, at least - prevented, that much of the money has been earned back, although not all of it. But in a few seconds, was this a good deal in the end, Mr. Barofsky?

Mr. BAROFSKY: It's hard to do in a few seconds. I think it was very successful for Wall Street. I think it was good for the country, and it provided(ph) what I think otherwise would have been a catastrophic financial collapse. But I think it's failed to meet some of its very important goals for helping those on Main Street, particularly keeping people in their homes, which was a specific goal of this program. And to date, it's failed to meet that goal.

INSKEEP: I think you did a great job in a few seconds there. And we'll be back - we'll have you back to talk in more detail. Neil Barofsky, thanks very much.

Mr. BAROFSKY: Thank you.

INSKEEP: He is special inspector general of the Troubled Asset Relief Program, and his office delivered its quarterly report to Congress this week.

You're listening to MORNING EDITION, from NPR News.

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