Big Banks' Hold on Regulators Must Be Broken: Barofsky

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Lawsuits against banks are flying, the presidential candidates are promising action – yet none of it will solve the lingering financial mess.

So says Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program. He was as critical as ever of policymakers and financial firms, and called for more independent regulation in a talk at the Museum of American Finance in New York on Thursday evening. 

The recent wave of lawsuits by the government against Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and other banks over their practices in the run-up to the mortgage meltdown will have a negligible impact, he predicted. But the allegations, if true, point to an enduring pattern of conduct, he says.

“They paint a picture of the exact same misconduct going on after these banks received Tarp money as before,” said Barofsky, who was the special IG until early last year. “They were too big to fail -- they’re now too big to jail.”

He also holds little hope for a shake-up of the system regardless of who wins the presidential election next month.

“It’s really an election between bad and worse,” Barofsky said. “Obama wants to work within Dodd-Frank to make it a little more painful. Romney wants to repeal Dodd-Frank and replace it with we’re not sure what.”

Barofsky adds that if Obama loses the election it will be because the president failed to act more aggressively to aid struggling homeowners.

Anyone who has read of “Bailout,” Barofsky’s account of his 27 months as the inspector general of Tarp, or watched American Banker’s extensive interviews with him, knows Barofsky clashed repeatedly with fellow regulators who, as Barofsky tells it, rescued the nation’s banks while abandoning homeowners.

The financial industry’s grip on regulators and lawmakers was, and still is, a major problem that has to be solved, he said.

“Many of the people running the programs came from the financial institutions that got us into the mess,” he said in discussing his arrival in Washington four years ago. After Barack Obama became president in January 2009, “the only thing that changed were the names,” Barofsky recalled.

The way the government carried out of the Home Affordable Modification Program gave banks little incentive to aid homeowners. “It actually became profitable to string borrowers out, take all their money, then throw them on the foreclosure scrap heap,” Barofsky said.

Barofsky described a meeting in 2009 with Treasury Secretary Timothy Geithner and Elizabeth Warren, the Democratic Senate hopeful from Massachusetts who then chaired a panel charged with overseeing the bailout. According to Barofsky, Geithner told them Hamp would help to “foam the runway for banks.”

Though regulators may have viewed their top task as the rescue of the financial system, to Barofsky their actions enshrined a framework that remains rickety. “As for saving the financial system, what did we really save?” asked Barofsky, who says the banks that were too big to fail before 2008 are even bigger today.

Barofsky sees little prospect for improving the system until the government rejects the presumption that some financial institutions are too big to fail. “Capitalism without failure is like religion without sin,” he said. “It simply just doesn’t exist.” Besides breaking up the banks, Barofsky calls for capping the size of financial institutions and boosting regulatory capital levels significantly.

To make regulators more objective, Barofsky calls for laws that have “clear black lines” and leave little room for the armies of lobbyists who can overwhelm regulators. “For every reform-minded person out there, there’s probably 10 to 15 lobbyists for the financial industry,” he said.

There were some lighter moments in the talk by Barofsky, who now teaches at New York University Law School.

He acknowledged some naivete coming in to his special IG job, which he thought would  resemble his work pursuing Colombian drug lords and corrupt mortgage lenders as a federal prosecutor in Manhattan. Instead, it was more like being an auditor.

“I thought my job was going to be to bust the bad guys,” Barofsky said. “It became very quickly evident I was wrong. Most of my time was spent on the other part of the job.”

And even he would agree that life is always clearer in a rearview mirror.

A reporter asked Barofsky, a New York Yankees fan, what he would advise the team if he were made special IG for the Bronx Bombers.

“Since I’ve been accused of having 20-20 hindsight, I would have never signed A-Rod to that contract,” Barofsky said

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