I wrote that almost four years ago. If you think I am simply some crank in an institution somewhere, you will find this week's book review in The Economist of great interest. Both books are on my reading list as soon as I finish "Why Nations Fail".
The bank bail-out
Crisis mismanagement
How America bailed out the banks rather than its citizens
Oct 27th 2012 | from the print edition
A full-time occupation
Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street from Itself. By Sheila Bair. Simon and Schuster; 415 pages; $26.99. Buy from Amazon.com
IN JULY 2008 the Federal Deposit Insurance Corporation (FDIC) closed IndyMac, a Californian lender. Anyone who had more than $100,000 in savings suffered heavy losses, including a woman who had just deposited her son’s life- insurance benefits after he was killed in Afghanistan. Later that year the government insisted that derivatives contracts sold by AIG, the failed insurer, would be honoured at a cost of tens of billions of taxpayers’ dollars.
Is the government too deferential to the concerns of the big banks and insufficiently attentive to the needs of ordinary people? Yes, according to two new books: “Bailout” by Neil Barofsky and Sheila Bair’s “Bull by the Horns”. Both accounts correct other, more triumphalist histories of the financial crisis, such as David Wessel’s “In Fed We Trust”, which came out in 2009.
Mr Barofsky was asked to serve as the Special Inspector General for the Troubled Asset Relief Program (TARP) by the outgoing Bush administration. He was an inspired choice, a tough New York prosecutor who had led fraud cases against futures brokers that hid losses and predatory mortgage lenders. Earlier in his career, Mr Barofsky charged dozens of Colombian Marxist guerrillas, narrowly avoiding assassination in Bogotá. But he was not interested in leaving a job he loved to fight turf-obsessed bureaucrats. Mr Barofsky accepted the assignment only after his boss made an earthy appeal to his sense of patriotism: “Who else is going to protect the public from what could be a $700 billion clusterfuck of fraud?”
Indeed, Mr Barofsky reports that no one in the Treasury Department and almost nobody at the Federal Reserve seemed concerned that some might try to exploit the government’s largesse. Whenever Mr Barofsky tried to ensure that banks were using TARP funds to make loans—the stated purpose of the programme—he was told that it would be impossible because “all money is green”. Yet the bankers themselves had no problem telling journalists how they planned to use the cheap capital to buy competitors or hoard cash for a rainy day. Mr Barofsky’s team was able to add safeguards to some of the Treasury’s worst ideas only thanks to pressure from Congress and the media.
Ms Bair was asked to run the FDIC when the job seemed hopelessly boring: no insured bank had failed between June 2004 and February 2007. Yet she quickly found herself fighting the Europeans, the Japanese and Wall Street to prevent bank capital from shrinking under the new Basel II accord—a war that would last for years. As an author, Ms Bair quickly turns to the government’s response to the housing bust. She explains how securitisation had created a web of interests that was causing millions of unnecessary foreclosures, depressing home prices and harming investors. Had it tried, the government could have solved this “co-ordination problem”—especially since Fannie Mae and Freddie Mac, two government-sponsored agencies that were created to support the growth of the American housing market, owned one-third of the toxic assets. But few cared.
Both books show that the Obama administration devoted much more energy and attention to helping Wall Street than to stemming the foreclosure crisis, despite having been given TARP money to do so. Ms Bair recounts how the methodology used to calculate the “stress tests” was cleverly altered so that Citi would keep its tax breaks. This resourcefulness was not applied to help keep people in their homes, however. Whereas incompetence was common—the rules determining which mortgages would be modified were changed nine times in the first year alone—a bigger problem was that these schemes were not designed with ordinary people in mind. When asked how the government’s efforts were supposed to help homeowners, Timothy Geithner, the treasury secretary, responded by explaining that they would aid the banks by slowing down the pace of foreclosures.
For all the books’ virtues, they also contain some flaws. Oddly for a financial expert, Ms Bair repeatedly writes that banks “hold” equity when they actually sell it to investors. She also believes that Mr Geithner, an appointed official, acted against the president’s wishes for years. This seems unlikely. Mr Barofsky’s “Bailout” is also more confusing than it need be, going back and forth chronologically without any obvious reason. Both books, however, do something essential: they show the paths not taken. The financial crisis did not have to be so unfair.
from the print edition | Books and arts
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