NPR: Let's talk about whether the problem has been fixed. Why have you been saying that more bank bailouts are more or less inevitable?
Neil Barofsky: Well, first let me say that information is provided to us by Secretary Geithner in an interview we did with him in December with respect to a recent audit. 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 bailout, 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.
NPR: 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! The government will bail them out. Is that what you think?
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 they're intending to change their rating methodology to make it a "permanent assumption" that the government will bail out 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, capital and debt more easily. They say this even with respect to the regulatory reform in the Dodd-Frank act the 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 bail out a systemically significant or big bank.
NPR: I'm glad you mentioned regulatory reform and the Dodd-Frank Act because the Treasury Department official raised that at the Congressional hearing yesterday when you made some of these same points as the Inspector General for TARP. The Treasury official said, "Look! We've got the tools now. We can break apart a failing company. We're not going to have to get to the stage of bailing them out!" Isn't there some argument for that?
Barofsky: I think there are two really 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. It's going to require a lot of regulatory will, 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 [inaudible]. Because even if they have all the tools in the world, if the market believes the government will bail out these institutions, then all of the disastrous consequences that flow from that -- the banks getting bigger, not being disciplined, and all the dangers you put out like investors putting their money in without doing their homework because they assume the bailout will continue ... and the banks will get bigger and bigger.
NPR: You've mentioned a couple of times that banks are getting bigger, that that's part of the reason there's still a huge risk. There was a problem in 2008 and you say it's a bigger problem now. But that does raise the question: what would you do differently? Would you break up the banks if it were up to you?
Barofsky: I think Sheila Bair, chairman of the FDIC, who's part of this financial oversight council -- she talks about one of the things they can do to help accomplish that goal. And that's to use the provisions to indentify where, if banks don't have a credible plan -- if there's not 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, have them spin off the most dangerous portions of the banks so there is a credible alternative, so the markets can be convinced that the government will not support the...
NPR: 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 have to break up the bank. That's what you're saying?
Barofsky: I think the regulators are going to have that opportunity. I think her suggestion is a good one.
NPR: I know this is such a complicated topic but I want to get a bottom-line assessment of the TARP program. When you measure the results, that a depression was at least arguably prevented, much of the money has been earned back though not all of it. Was this a good deal in the end?
Barofsky: It's hard to wrap up in a few seconds. I think it was very successful for Wall Street. I think it was good for the country and prevented what I think otherwise would have been a catastrophic financial collapse. But I think it has 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 has failed to meet that goal.
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