FDL The Seminal: Barofsky Sounds “Moral Hazard” Alarm in TARP Report and Congress Responds-

[chill_wind]

With Misdirection

Barofsky Sounds “Moral Hazard” Alarm in TARP Report and Congress Responds — With Misdirection

Jim White Friday November 20, 2009 7:51 am

(see full intro)


Yes, the AIG bailout was entirely secretive and probably only served to prop up Goldman Sachs, the home base of much of Obama’s financial team. But Barofsky is telling us that in addition to following the misapplication of funds in TARP, we face a renewed crisis if we do not address the structural problems that led to the crisis in the first place. We face the same crisis again if we do not restore the real risk of financial losses when big firms make large, risky gambles and lose.

While yesterday’s preliminary success on the auditing of the Fed was a giant first step in that direction, there doesn’t seem to be an effort from anyone in Washington to take on the real structural problems of the economy. In addition to auditing the Fed, where is the call for ending the conflict of interest for the bond ratings agencies? Where is the call to regulate the markets so that the gigantic players can’t bring the system down through overly risky behavior? Where is the call to restore risk to large financial firms?

The current calls for Geithner’s resignation flow from the fact, as Brady pointed out in his confrontation with Geithner, that "the public has lost all confidence" in Geithner. I suspect that the public is paying a lot more attention than Congress thinks. It looks to me as though Congress thinks that the misdirection of going after Geithner will be a convenient bone to throw to the public without doing anything of substance to correct the underlying structural problems in the financial system. I think the public has been paying close enough attention to realize that the system has not changed and that the risk of failure still is borne by the government rather than the parties taking the risks. It will be very interesting to follow the next few moves to see if any kind of true grassroots effort at real structural reform gathers steam.

It seems unlikely that Barofsky will be satisfied with merely replacing Geithner. Here is his biographical sketch from the SIGTARP website:

Prior to assuming the position of Special Inspector General, Mr. Barofsky was a federal prosecutor in the United States Attorney’s Office for the Southern District of New York for more than eight years. In that office, Mr. Barofsky was a Senior Trial Counsel who headed the Mortgage Fraud Group, which investigated and prosecuted all aspects of mortgage fraud, from retail mortgage fraud cases to investigations involving potential securities fraud with respect to collateralized debt obligations. Mr. Barofsky also had extensive experience as a line prosecutor leading white collar prosecutions during his tenure as a member of the Securities and Commodities Fraud Unit, which included the case that led to the conviction of the former President of Refco Inc., Tone Grant, and the guilty plea of Phillip Bennett, Refco’ s former Chief Executive Officer. Mr. Barofsky received the Attorney General’s John Marshall Award for his work on the Refco matter. Mr. Barofsky also led the investigation that resulted in the indictment of the top 50 leaders of the Revolutionary Armed Forces of Colombia (FARC) on narcotics charges, a case described by the then Attorney General as the largest narcotics indictment filed in U.S. history.

Since he comes from a background of unraveling financial crimes and pursuing fraud on the large scale, I expect Barofsky to continue pounding on the issue of the structural elements of the financial system still allowing the same problems that led to the meltdown. He may be our best hope of a movement toward meaningful reform.


http://seminal.firedoglake.com/diary/15504

(italics and bold-face mine)

[slipslidingaway]

1. knr nt

[chill_wind]

3. Thanks. Earl Devaney has a few notches on his belt too

Big ones. I often wished he was the Tarp IG instead of his other post, but there were things here I didn't know about Barofsky. These were two seeming really good Obama picks we never hear much about in the day-to-day.

Devaney, IG of Abramoff Fame.

http://www.propublica.org/ion/stimulus/item/ig-of-abramoff-fame-to-oversee-stimulus-spending

[slipslidingaway]

5. Thanks for the additional link, need to spend more time reading through this again...

and also the link below, as far as I know Obama did not pick Barofsky, he was appointed as part of the oversight team after TARP passed.

:shrug:

AIG and Systemic Risk
Geithner says credit-default swaps weren't the problem, after all.

http://online.wsj.com/article/SB10001424052748704204304574543822135042160.html

"TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.

Hello?

For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

......."

[snot]

2. Hope you're right. V. scary how few voices are heard calling for restoration/expansion of

Glass-Steagall and the like.

[chill_wind]

4. Scary is a good word.