Books are still being written about the financial crisis, almost four years later. Some, like "Too Big to Fail," came out too early and cut the story off too soon. Some, like "All the Devils Are Here," may have waited too long and sold more mortgage woe into a saturated market. Who doesn't think they've heard every anecdote about what color Hank Paulson's tie was the night he decided to allow Lehman to fail?
Neil Barofsky's new book, "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street," is a necessary addition to the financial crisis oeuvre. Barofsky, former special inspector general in charge of oversight of the Troubled Asset Relief Program, was there, on the ground, in the trenches.
Actually, Barofsky and his trusted deputy Kevin Puvalowski worked in an office suite in the subbasement of the Treasury from December of 2008 to March of 2011. Internal and external auditors, and bank examiners, will recognize this tactic. Agency watchdogs or bank examiners given an inconvenient, dank, dark, dirty and desolate office maybe won't stay long.
Puvalowski tells Barofsky he thinks Treasury officials put dead fish behind the office's ceiling panels. Barofsky uses colorful language throughout the book to describe the malodorous conditions his team worked under. The organized crime allusion was not lost on me.
After a series of highly publicized frauds in the federal government in the 1970s, Congress passed the Inspector General Act of 1978. The purpose of an IG is "to conduct and supervise audits and investigations … and to promote economy, efficiency, and effectiveness" in agencies of the US government. Richard Chambers, CEO of the Institute of Internal Auditors and a former inspector general at the Tennessee Valley Authority, says IGs have a tough job because they are independent.
"IGs like Barofsky with a presidential appointment are extraordinarily independent. No one can tell them what or who to audit," Chambers says. "But that independence is a double-edged sword. They often struggle to develop relationships and trust. No one will come to them voluntarily because of the risk of public exposure and scrutiny."
Barofsky's book focuses on his efforts as SIGTARP to prevent fraud, not just investigate it after the fact. Frustration grows when he realizes no one at Treasury is much interested in his suggestions on how to structure programs to provide simple safeguards. Barofsky is a former U.S. attorney, a prosecutor who earned his tough-guy reputation putting Refco executives in jail for fraud and bringing Colombian drug dealers to justice. But an IG has to balance the softer goals of audits – supporting improvements and measurement of results in the agency – with the hard-time purpose of investigations which typically intimidate subjects. Barofsky repeats an adage familiar to all auditors: Be a good watchdog, rather than a lapdog or a junkyard dog. Walking that line is tough when you see potential fraud exposure in the billions, like Barofsky did.
My biggest complaint with the book is its length. It's too short. There's plenty of deliciously wonky detail about the myriad programs – Tarp, Talf, Hamp and CPP – intended to stave off the bogeyman, financial Armageddon. Barofsky concludes that those programs sold out homeowners and taxpayers in the name of an illusory financial stability and a soft landing for big banks on foreclosure exposure by "foaming the runway" with taxpayer billions. There's also insight on the use of the press to promote an agenda and engender support from Congress. Barofsky gets very good at using the press, considering he used to be a close-lipped U.S. attorney.
I would have liked to see more about the stretching of Tarp, a program designed to save the U.S. financial sector, to rescue industrial companies like GM and Chrysler and foreign banks. Bloomberg News' report last November on the billions given to banks big and small, to foreign banks, and to industrial companies was an eye-opener. How did that happen with so few controls and monitoring in place to ensure it would not be misused or misappropriated?
The book has many references to audits and investigations that were ongoing when Barofsky resigned in the spring of 2011. I asked Barofsky in a short phone interview to include an update on these matters in a paperback edition.
I also asked him about the auditors, the external auditors that were on all sides of the bailout. PwC stood by as AIG was rescued, as Goldman Sachs took advantage of others' weaknesses and as Freddie Mac ended up in conservatorship. KPMG audits the Treasury and Citigroup and watched Countrywide and New Century produce the flawed mortgages that torpedoed so many. Deloitte audited Bear Stearns and still audits GM and the Fed. Ernst & Young is infamous for its involvement with Lehman Brothers. Where were the auditors when he was investigating the failures and the government's attempts to pull us out of the depths?
Barofsky told me the Big Four audit firms do not appear because, in his story, they are a nonentity.
"The auditors have proven themselves to me, over and over again, to be more concerned about the steady stream of fees than in doing their job."
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.