tom hartman in washington d.c. and tonight we bring you another special edition of the big picture revisiting two previous conversations with great minds one with former special inspector general for tarp neil barofsky and one with g.m.o. expert jeffrey smith and we're going to begin tonight with the conversation tom had with neil barofsky just a few days ago on thursday the federal reserve sold off its last remaining shares in troubled insurance giant. you might remember in two thousand and eight to bring down the entire economy so was bailed out with one hundred eighty two billion dollars in taxpayer money as part of the tarp program well today fed officials are

calling the move a huge success saying taxpayers earn nearly eighteen billion dollars off the rescue but it's an irresponsible bank or insurance giant benchmark of success neil barofsky would say no and in this conversation he explained why tarp was alternately a failure that did nothing to address the ongoing housing crisis and nothing to put an end to too big to fail on wall street so here it is tom's conversations with great minds with neil barofsky. joining me tonight for a special edition of conversations of the great minds is neil barofsky ill is the former special united states treasury department inspector general charged with overseeing the seven hundred billion dollars tarp bailout prior to coming to washington neil was a former united states assistant attorney for the southern district of new york and

a bachelor's degree in economics from the wharton school of business at the university of pennsylvania and graduated with honors in the new york university school of law one thousand nine hundred five l. is also the author of the critically acclaimed book bailout an inside account of how washington abandoned all rescuing wall street neil joins me from our new york studios neal welcome. thank you let's start with you if you don't mind what path led you to overseeing this historic government program the apparently was designed to save the american economy from depression. but it was kind of strange i was a prosecutor here the u.s. attorney's office in manhattan in two thousand and eight in the previous years i had done international prosecutions and then had moved on to securities fraud and in earlier in two thousand and eight i was actually started up a mortgage fraud unit and after the tarp bill passed in the included this brand new oversight agency this new law enforcement agency really called st tarp the white house put out a request the different prosecutor's offices for recommendations and might the u.s.

attorney at that time might garcia basically called me into his office and convinced me that i should put in for it an issue i really wasn't interested in entering into the the murky world of washington but he really gave me what he called the time is god and country speech and sort of pointed out that we were in the economic equivalent of nine eleven and called on me to sort of use the experience i had again to try to be a watchdog to help avoid the potential fraud that would definitely be. the potential for huge amounts of fraud in a seven hundred billion dollars ballot sure you know it's quite remarkable the bush administration one of their hallmarks is probably too strong a word but was too high or partisan i mean right down to the fact right down to the point of hiring interns and lawyers from you know second rate religious universities but gee their politics were right you were a democrat and you were not hiding and you've been a prosecutor and i'm guessing you know yeah there was

a lot of potential for fraud but they probably didn't want their laundry aired it would have looked bad the bush administration re surprised that the bush administration wanted you to have this rule. oh i was shocked when when the when mike was actually trying to give in to me to take the job and i was trying to talk my way out of it i'd point out that literally just about ten days before i had actually contributed a couple hundred dollars to the obama campaign and i was sure the time that was going to get me off the hook but he told me the time that it was not going to be a political pick it was purely a merit based pick i think what i learned later was that realistically at that point with the democrats in control of the senate they never would have gotten a republican through so i think they needed to find a democrat and i also think frankly you got to remember this is late october two thousand and eight. i think they're a little checked out i don't think there was concerned as you know save it was two thousand and six two thousand and seven you know they were there well into their lame duck and you know they i think they wanted to have someone who had a good prosecutor prosecutorial experience to get in there and do the job right

let's let's talk about tarp the troubled asset relief program what was it what what was the goal how did it work. it's an important question because i think so much today about what it was originally supposed to do has become so muddied especially in washington where there's really been this effort to redefine the program and its goals to to meet what it actually has accomplished and to ignore what it was originally supposed to do so originally the idea was that seven hundred billion dollars was going to be spent the ridgeline it was actually to buy were called troubled assets that's the key of the day which was basically mortgage related assets bonds that were backed by mortgages and really cause other complex financial instruments called c.e.o.'s that were made up of those bonds and the theory was that the banks who had suffered such severe losses because the drops of value of these assets that the government would come in and buy them up and the original idea behind the program in the way treasury was able to get it passed through

congress was through a promise that once it bought up all these assets it would then use use its control over all these mortgage related assets to actually modify mortgages and that was something that was written right into the bill so the idea behind tarp originally was two parts one bailout the banks absolutely but the second leg of it and the part that was really necessary for it to get the necessary votes from the democrats who still controlled both houses of congress was this promise for a big mortgage modification program and it was written right there on the front page to preserve homeownership of course what happened after the bill got passed so unfortunately or fortunately depending on your perspective they never went through with that plan and instead they took hundreds of billions of dollars and use it basically to buy stock in the banks preferred shares in order to fill those capital holes and uncle sam became an investor and as to that commitment to then modify all those mortgages well that got shelved what at what level was the decision made to

basically screw the consumers and help out the bankers instead of doing what the legislation is you're describing describing it was originally written to do. well the original decision was made by by then secretary hank paulson who made the announcement and you know from his his view was that it would was not a particularly well crafted plan to buy these and he was running out of time and the banks were bad he explained to us us later the banks were all about to fail they thought that morgan stanley was going to go that morgan that goldman sachs was going to drop soon after that and they explained that they didn't think that they had time to do that original program so they moved to this this capital injection you know buy up the stock of the banks. ultimately the decision not to move forward on the housing program that gets a little murkier nothing was introduced in the waning days of the bush administration. they explained to me at the time and i think it's later confirmed by barney frank that that essentially they were asked by the obama administration

to hold off on doing something so the obama people could put together an advance their own plan that eventually that happened in two thousand and nine the ministration announce a plan to help homeowners but unfortunately that program to was was really a complete failure and never particularly well designed and never really intended to help homeowners as much as was another way to support the banks so to answer your question everyone yet it was the same guy or hank paulson it was the bush crew the obama crew they all came to the same result which was basically save the banks and screw the screw the homeowner on main street to what extent do you think that might have been the consequence of a political financing system run amok where politicians be the bush or obama administration politicians knew that they needed the money from wall street wall street was blogging heavily some of these people on wall street individuals making

a billion two billion dollars a year i mean they could squash a politician like a bug it was do you think that that was a factor that influenced this decision to add all these different levels and all these different ways to to just go to help out the banks. i think that was a significant part of it and the lobbying and political power of the big banks in washington was something that i got to witness firsthand and i think that was really important part of it both because of that lure of campaign dollars which is very very significant of course but all the of the other benefits that come with it you know through lobbying they really control i guess sort of it's asymmetrical information so that the views of the banks are presented overwhelmingly and with so much more force than the views of anyone else that it becomes in washington almost a conventional wisdom and i think the other part of it is the fact that who is running the bailouts it was the same people from these bags goldman sachs morgan stanley bear stearns the people i was dealing with on a daily basis all came from the same financial institutions that they had wrecked

the economy and caused the need for a balance out and be with them now dictating the terms of their own bailout and and as we dug in and started doing our jobs that's what we saw all over you know a couple of occasions that it was the institutions themselves on wall street that were designing the details of these programs which is why they were so lopsided such opportunities for windfalls for the financial institutions and really so little concern for the banks so i think it's a combination of all that lobbying and money and political power that they flexed as well as really taking over through this ideological capture by having their people impregnated into the government programs that were running them who brought all that wall street ideology with them when running the bailouts how much money went to the banks and how much money went to consumers. well almost nothing went to consumers so you know a couple of your bill you know you have you want a billion dollars went to the banks financial institutions then you had money that

went to ai g. you had a bunch of money that went to the auto industry g.m. and chrysler and their auto financing arm and unless i'm out to some of the investment houses ridgeley now to be about a trillion dollars but we help limit the potential danger from that program and came to be about twenty billion other went to investment houses that were buying securities and some other smaller programs but you know most if not all of the money went to the the big bags and the related financial institutions does the reason why more scandal. bring any bells i mean is there any resonance there or is this another symptom of the same problem of. or even another part of the same problem. i think it's all part and parcel i mean you know one of the things i saw in washington repeatedly was how much the treasury officials i was dealing with as well as officials of the federal reserve so it benefits with the interests of the banks themselves so you know when we were pushing for different types of oversight

provisions or conditions where we could identify ok here's a conflict of interest that might be a real problem here is an area of fraud that you really need to be concerned about a response was was really a roll of the i pad it had on the head and say like look you don't understand these are banks they would never do this they would never put their profit over over that of of you know that or the public interest they would never and the quote was risk their reputation which is really an alan greenspan ian concept that we don't need to protect the market from fraud because the banks will just behave and you know i think you see that same attitude when you see what happened when the federal reserve bank of new york under tim geithner's leadership got notified in two thousand and eight about the fact that there was this manipulation of what happened to be the most important interest rate in the entire world it was that same blahs a attitude you know there was no calling department of justice there was no you

know forceful action calling the banks in and telling them to stop it right now there was no notification of the market you know they had a meeting they sent an email and then they use that same corrupted manipulated live or rate and built into the bailout programs it was part of tarp some of the interest rate that the united states taxpayer was receiving was it was it was tied to an interest rate that they knew was probably being manipulated so you know i think that same deference and just subservience to washington you know is very much underlies what happens in the live war amazing scam within the scam more of our special conversation with great minds with neil barofsky right after this break . pepper spray that just burns your eyes right right i mean it's like a derivative of actual pepper it's a food product essentially. this is much stronger than anything it's by absolutely thousands of times we're stronger than any kind of ever put you know.

you know sometimes you see a story and it seems so bleak you think you understand it and then you glimpse something else and you hear or see some other part of it and realized everything you thought you knew you don't know i'm sorry welcome to the big picture. into it only i. do not work to bring justice or accountability. i have every right to know what my government should do if you want to know why i pay taxes. i would characterize obama as a charismatic version of american exceptionalism.

welcome to the capital account i'm laurin mr. what about your special edition of conversations of grapevines with neil barofsky it was the former special united states treasury department inspector general charged with overseeing the seven hundred billion dollars tarp bailout bill is also

the author of the critically acclaimed book bailout and inside account of how washington abandons main street all rescuing wall street neil reed joins me now from our new york studios deal welcome back. my i don't pretend to be a scholar of the great depression but my recollection and please correct me if i have any of these details wrong or wrong is that at the time back in the in the early thirty's when the great depression happened most people had five year balloon mortgages that there was so much speculation going on in the twenty's people were just rolling these things over there was a huge land explosion that had gone on land values started in florida back in one hundred twenty six that bubble popped in twenty eight and that one of the one of the things that f.d.r. did was he said ok that's it we're just getting the banks out of this business i mean most of it failed anyway and converting as many of these as possible to thirty year fixed rates which will drop the price so that even somebody who's underwater can still afford their home and basically saved the housing industry in the middle

class. correct me if i'm if my details are wrong isn't though that or something like that what should have been pursued instead of what was. well i think that you know that the issue of underwater mortgages is was is and will continue to be a major problem in this country and when you know the administration did it now it's their housing program to try to fill that original promise we're talking about before for as part of tarp there really was the potential at that point to do a principal reduction program which would be spotted in part by the government and in part the losses as they they well should have been borne by by the banks and and the investors in the mortgage backed securities and there really was an opportunity for that unfortunately secretary geithner you know flat out refused to implement a program and we sort of went round and round with him in the treasury department and instead they had this program which was which was just awful was riddled with

conflicts of interest it really seemed to benefit the banks much more than homeowners and gave the banks really this tremendous opportunities. to really hurt homeowners but by racking up all sorts of fees and then pulling the rug out from home and throwing them into the foreclosure scrapheap real conflicts of interest built into the program and you know in two thousand and nine we're at a large oversight meeting with warren who is then had the congressional oversight panel was there and she was really grilling geithner on this program and how it was not fulfilling its original goal to help four million homeowners and his response was very telling because he defended the program by saying essentially look you know we these banks can only handle so much foreclosures over so many period of time and this program is going to help in his words foam the runway for the banks in other words it was going to extend out the foreclosure crisis extend out these foreclosures so the financial institutions could rebuild their balance sheets profit i was told in another meeting you know so they could earn their way out of

the crisis and that's really what the program became unfortunately that foam for the banks to give them a soft landing was was you know the bodies of the mill. of foreclosed families who could of but never did benefit from this program and they never rolled out a meaningful principal reduction program that could have dealt with that underwater problem and you know this is still remains a loadstone around the neck of the american economy and it was a tragic missed opportunity and really at its core it was a portrait promised to congress and so the american people you were the special and investigator general as i recall. and i'm curious did you find fraud. oh yeah of course i mean we had we built a law enforcement agency from scratch and i think of we had to date i think there's about one hundred people who've been criminally charged with the to try to steal from the program or profit criminally off the program our biggest case was a c.e.o. of a financial station down in florida called c.b.w.

which actually had conspired with another bank colonial bank to steal more than a half a billion dollars of tarp funds and we were able to stop that fraud before the money went out the door and lock up a bunch of the bankers who are you know who are involved in that fraud including that c.e.o. is now serving thirty years and we also saw a lot of fraud that i think that would have been preventable which was fraudsters taking advantage of struggling homeowners through that broken bad mortgage modification program you know that we've had debt if i had i'd seen similar schemes from my prosecutorial career and i remember literally begging the treasury department to go out there with information campaigns for advertising so as to warn homeowners about this type of fraud in advance fee fraud where basically bad guys promise to get modifications for upfront fees and do nothing but unfortunately treasury really ignored my concerns and and that really took up a lot of our resources trying to shut those schemes down and try to put those people in jail i understand the if you were

a bank. because of the ways that you could count the value of the property at its inflated value you could count the you could take the money that you got from the homeowner whatever the equity might be you could. write off pieces other pieces of the value of the home when it sold at auction you get the money and that there was some sort of a benefit from the federal government or the banks that that the way the part of this was structured there was actually an incentive for banks some some banks to maybe many banks actually need more money and for applause in then they would have on modifications is that the fact and if so why how did that get into law. so what they did was it's absolutely correct so that you know the banks mortgage servicing arms are for running which essentially treasury outsource the program to them so one of the one of the big didn't built built in conflicts of interest was that let's say you're paying two thousand dollars a month or two thousand dollars

a month on your mortgage and you got what was called a trial modification and the idea was that they had a homeowner who had to make a few months of payments before they would get the permanent modification which would be have all the tarp treasury bells and whistles now let's say your modified payment was fifteen hundred dollars and let's see never missed a payment you made your two thousand dollars payments and you got into this temporary trial program and you made your fifteen hundred dollars payments now what you might not have known and what treasury allowed the banks to do was to charge and a crew a late fee a penalty for each month that you actually major on time fifteen hundred dollars payment under the justification that you were late on that original two thousand dollars payment now what would happen is you would see that up front but that the bank could a crew that be month after month so before long these three months of trials became a year of twelve months of racking up these monthly fees and then treasury told the banks listen if you convert this and make it into one of our permanent treasury modifications you got to waive and write off all those fees but if you foreclose

you pull the rug out from under the under the homeowner you actually get to keep all those fees and cash in them during a foreclosure sale so for a mortgage servicer at times it actually became more profitable and more of an incentive to string a borrower out and throw them on the scrap heap than to actually go through and do what the policy required and follow the rules and do permanent modifications and to answer your question this was something built into the program we had one treasury about it we explain to treasury that this was not in the best interest of the program and we also race of them that that the banks were using this to really violate the rules and trample over homeowners rights by by quote unquote losing documents. and really just ignoring the rules and the response of the treasury was was basically nothing they refused to hold the hold the banks accountable even after addict after anecdote instance after instance of misconduct they came up with the oh different excuses of the week one week it was there for eight if they

promised they would leave the program then that then there was something else but we don't have the legal authority but the end of the line they never did anything and in part because look that's not what it was about it was never about helping homeowners it was helping to phone the runway for the banks and even when you understand that so many of the failures of the programs and sort of the strange things like these fees suddenly become made sense. it seems that there's two places where a lot of this could have originated first in the writing of the legislation this had to be written by congress and the second being the notion of regulatory capture i'm curious. like you know we're we have had an example a couple of weeks ago where a guy used to work for monsanto and then he took a much lower paying job as the u.s.d.a. or f.d.a. approved one of their products and then went back to work for them with a giant bonus and you know a lot of these agencies that the military is famous for this you know if you're a general and you order enough jets you know you'll have

a million dollar job waiting for you when you retire those kinds of things are we looking at regulatory capture i mean has that actually happened at the treasury department or was this just crummy legislation the banks getting their lobbyist to insert these kinds of things into this legislation or both. look i treasure e. is a federally thoroughly captured agency and i saw that you know that's how so many of these decisions got made the revolving door between wall street and washington where people go back and forth from government service to working in these financial companies is very very much a problem and because they bring that wall street ideology with them when they're coming from washington and part of the other part of the problem is as you were pointing out is the promise of a big payday if you leave the government you know it's i was told point blank in two thousand and ten by a senior treasury official guy running the tarp point blank that i was her causing harm to myself my my wife was pregnant the time about to have our first kid and he

said you're doing real harm to your future for you and your family because of the harsh tone that you have towards the government and towards wall street and he said you know what do you want to do afterwards you know if you want to get a job on wall street or move up in the government you know you have to change your tone you have to have a more positive tone and then all sorts of things were possible maybe even a federal judgeship from the obama administration and you know that it was sort of starting to me that it was posted in such a blatant way but that's the same decision that's basing every regulator in this country do i play ball and ease up on wall street and therefore have the promise of getting a rich payday or do i do i do my job and be aggressive and intentionally not only cut off that opportunity but draw the anger of my boss he came from one of those banks and has that ideology that's a real problem in our country as it is in multitude of industries you know we have a little less than a minute left i wish we had another hour where does this go are we are we set up

now for even more disasters as a consequence of this. i think we are you know the one of the big fuel for the last crisis where the big causes was too big to fail banks and and the perverse perverse incentives that they have that drive them to take more and more risk confident that if their risk they get to keep the money and if it fails the government will bail them out those banks are now about twenty five percent bigger than they were before the financial crisis because of government policy that encourages active solid ation in the beginning of the crisis so they're more they're bigger they're more dangerous than ever and it seems almost inevitable that those incentives are going to lead us down the path to another financial crisis and less we take control and break these banks up amazing neil barofsky thanks so much for being with us and for writing this brilliant book. thank you to see this in other conversations the great minds go to our website at conversations with great minds dot com.

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