Neil Barofsky Was Sick To His Stomach When He realised What A Sweet Deal Banks Were Getting In The Bailout

Neil Barofksky, the special Inspector General in charge of TARP oversight, has written a book about his days in D.C. trying to bring the U.S. economy back from the brink. It’s called ‘Bailout: And Insider Account of How Washington Abandoned Main Street While Rescuing Wall Street.’

The book’s a quick, intense, read, and though it doesn’t technically come out until tomorrow, we thought we’d share some key passages with you in advance.

One passage that definitely caught our attention was about TALF, The Federal Reserve’s Term Asset-Backed Securities Loan Facility program, which was meant to lend banks money that they could then lend out to consumers in the form of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

Because the program was funded by the Fed, Congress didn’t have to approve it. By 2011, though, politicians were asking the Fed to open its books and show the world how TALF was doing.

One read of Barofsky’s conversation with NY Fed acting President William Dudley as TALF was being conceived indicates that Congress should have taken a look much, much sooner.

In terms of compliance for the program, Dudley told Barofksy that it basically wouldn’t exist. To force measures beyond simply having banks fill out certificates would be too costly. The Fed simply didn’t have the resources. That made Barofsky a little sick to his stomach, but Dudley told him there would be another measure to reassure him.

What was it? The Fed would require that any bonds eligible for the program have AAA ratings from two ratings agencies.

From the book:

…'”Bill,” I said, “Let me get this straight. We’re going to put $200 billion of taxpayer money on the line to buy asset backed securities that are similar to those that got us into this whole mess in the first place and we’re going to rely only on credit-rating agencies and investor due diligence and nothing else? I asked.

Dudley replied, “right.”‘

The passage continues with Barofsky totally flipping out, as you can probably imagine.

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