Sunday, 28 July 2013

Book Review: Bailout by Neil Barofsky

I recently finished reading Neil Barofsky’s book Bailout. This is the autobiographical tale of how a prosecutor from the U.S. Attorney’s Office in New York City ends up monitoring the spending of the greatest private sector bailout this country has ever seen -- that of the giant Wall Street banks that started in 2008.

I almost didn’t buy this book. By now, I’ve read so much (books, magazine articles, blog posts) about the financial crisis, that I feel like my cynical carapace has grown a cynical carapace. But I liked the idea of getting a fresh perspective, and I’ve enjoyed some of Barofsky’s commentary on the Internet.

So, in slideshow deck fashion (without the actual annoying slideshow deck), here are six impressions of Bailout and its message.

1. Geez, was Barofsky really that naive?

He often comes across as a bit too earnest and wide-eyed and incredulous, like he’s starring in the regulatory version of “Mr. Smith Goes to Washington.” Or maybe, again: I’ve just gotten really, really cynical.

2. Surprise! Politicians are the good guys, more often than not. Indignant senators and congressmen help a frustrated Barofsky by giving captured regulators and play-it-safe bureaucrats a good swift rump kick from time to time.

Maybe it shouldn’t come as a surprise -- Congress created Barofsky’s office, after all. Still, in an age when regard for Congress hovers between that for a dung beetle and parasitical tapeworm, the revelations are pleasantly dissonant.

3. HAMP (the Home Affordable Modification Program) was an ill-conceived mess from the get go. Strangely, the main flaw was obvious to everyone except apparently the program’s creators. Mike Konczal at Rortybomb, for example, blogged about it several times, such as here.

In brief: Treasury put the mortgage servicers in charge of the program. The incentives of the servicers were at odds with HAMP’s goals. So the program was more or less designed to do a face plant.

4. Funny but sad epiphanies: Barofsky has a great “Hey, wait a minute” moment when then Treasury Secretary Timothy Geithner talks about HAMP. Geithner seems rather pleased with the program’s poor performance, saying it has “foamed the runway.”

It “foamed the runway” so the plane won’t crash. But who’s onboard the metaphorical plane? Barofsky realizes it’s not millions of homeowners with underwater mortgages. Rather, it’s the Wall Street banks. HAMP “foamed the runway” and gave the banks some breathing room to deal with their bad housing investments.

5. The term “moral hazard” was invoked in a curiously inconsistent way.

The suggestion to help homeowners with their underwater mortgages prompted officials at the Treasury Department to fret about moral hazard. However that same suggestion, applied to the big banks with regard to shoring up their tattered balance sheets, elicited the exact opposite response. When it came to the Wall Street banks, Treasury couldn’t seem to get the bags of cash out the door fast enough. In fact, the crowning irony was that Treasury hesitated to put conditions on the banks related to the funds they received, for fear they wouldn’t accept the money. Meanwhile, homeownevers had to jump through all kinds of hoops just to get trial mortgage modifications.

6. And then there were a few surprises to stir outrage.

The rationale for the bonuses paid to AIG executives -- because they were the only ones who could unwind the complex credit-default swap trades -- is revealed as a farce. A $7,700 payment went to a kitchen assistant and $7,000 landed in the pocket of a mailroom assistant -- both of whom presumably knew as much about default swaps as they did about quantum electrodynamics. Just something else to make the blood boil.

So: My final assessment of Bailout is that it's definitely a good read. It will leave you frustrated and mad (yet again). Much of the terrain is familiar. But I think as citizens we need to keep a high awareness of the many things that went wrong, leading up to the financial crisis and in our response to it.