Neil Barofsky continues to take issue with the Administration’s efforts to depict itself as the friend of ordinary Americans when its real loyalties are to banks. In a Reuters op-ed, he took on the hypocrisy of the Administration and its allies in their “fire DeMarco” messaging. If you are late to this row, Ed DeMarco, head of Fannie’s and Freddie’s regulator, the FHFA, nixed the idea of having his wards make principal reductions on mortgages, despite the fact that top mortgage industry analyst Laurie Goodman has ascertained they are far more successful than mods that don’t lower principal balances.
As various commentators, including yours truly, have pointed out, the criticism of DeMarco is sheer scapegoating. DeMarco serves as a convenient bad guy for an Administration that has been utterly indifferent to the fact that many foreclosures are unnecessary and economically destructive (and that’s before you get to the fact that the Administration could have installed a permanent head for the FHFA when the Dems had 60 seats in the Senate).
Barofsky’s piece describes in some detail how Geithner stymied principal modifications, using exactly the same arguments that DeMarco is making now. The bottom line:
The truth is that the administration – whether through principal reduction or otherwise – has never prioritized coming up with an effective approach to helping homeowners and reviving the housing market, even when it had a multi-hundred-billion-dollar TARP war chest at its disposal.
Barofsky’s most damning evidence, and he recounts this long-form in his must-read book Bailout, is that the Administration never cared if the mortgage modification program HAMP worked, if you think that “worked” means “saved homeowners from foreclosure.” Geithner said it was simply to help spread out foreclosures out over time, or “foam the runway”. I’m left with the image of a bank as an overloaded B52 with smoke coming out of one engine and its landing gear refusing to lower landing belly flat on a runway “foamed” with homeowners lying down, side by side, and crushed into bloody pulp as the aircraft hits the ground. That is, after all, pretty much what happened.
Barofsky’s rebuttal of the Administration and its defenders on principal modifications is a small set piece in what has been an ongoing effort to misrepresent Geithner’s (and therefore the Administration’s) abject refusal to take serious action against banks even though they represent a clear and present danger to the rest of the population. The publication of Barofsky’s book has flushed out some of the hard core loyalists, one of them the New York Times’ Jackie Calmes. And the continuation of Barofsky’s lonely efforts to correct the record gives me the opportunity to turn to a piece by Matt Yglesias, “Neil Barofsky vs Tim Geithner: Who’s Right on the Bailouts?” I had wanted to address when it was released in late July.
I’ve dragged my feet on addressing it, precisely because it manages to achieve a remarkable density of misdirection, obfuscation, straw manning and misrepresentation in a mere 745 words. I don’t read Yglesias much because he has gotten the art of propagandizing down so well that it probably comes from him as second nature, just as an author of bodice-rippers knows what story lines, scenes, and turns of phrase will evoke the desired Pavlovian responses in the target audience. So I thought it would be worthwhile to parse this piece not just because it was worth debunking, but also an an exercise in identifying some of his devices.
Yglesias tries to create the impression that critique by Neil Barofsky about the Bush/Obama policies towards the TARP and banking generally is really a personal spat between Barofsky and Geithner, and when you put the pique aside, they really aren’t that far apart. Yglesias tries to minimize the significance of the Barofsky’s observations: it’s a “narrow disagreement,” “not….consequential.” Oh, and it’s really about a “fairly wonky policy disagreement” so if you don’t buy what Yglesias is selling, that’s because it is over your head.
So what is the contretemps about, per Yglesias? It is supposedly about what Treasury is “trying” to do. Notice how even though this piece is supposedly about Barofsky’s particular criticisms of how the Bush and Obama administrations ran the TARP, as set forth in his book, Yglesias ignores the obvious starting point (perhaps because he has not read Barofsky’s book; there’s a complete lack of the sort of specific references you’d expect otherwise). He treats the Administration as protagonist. By implication, Barofsky (in the setup of the piece) has to respond to THEIR position, when in fact the onus is on the Administration and its allies to rebut Barofsky’s charges. From the article:
It’s useful to start with what the Treasury Department says they’ve been doing regarding the financial system since they took office. What they’d tell you is that they’ve been doing two things. One is trying to create the kind of healthy well-capitalized banking system that’s crucial for broader macroeconomic health. The second is trying to create the kind of well-regulated banking system that’s less likely to blow up in the future.
Ooof. Notice, as I indicated above, the repeated use of the word “trying”. “Trying” is an excuse word, or a statement of unrealized intent: “I’m trying to lose weight.” For the Treasury’s loyal backers to characterize their efforts, four years past the crisis, as “trying” to achieve is unwittingly damning.
But even that reading treats Treasury as being honest, which it isn’t. Oh yes, creating a well capitalized banking system is somewhere on the list of what it wants to achieve, just like the person who is “trying” to lose weight does want to lose weight, but lacks the discipline or time to exercise and prepare healthier meals. But Treasury has a prime directive, which is preserving the status quo, and moving toward what it is “trying” to achieve would be disruptive to the incumbents. If the Treasury were serious about having banks be well capitalized, it would be seeking to reach much higher capital levels than it has targeted. And in pursuit of that, it would not have allowed banks to pay back the TARP so quickly. This turned out to be an unexpected point of leverage. TARP had weak (stress very weak) restrictions on executive pay, but even so, the recipients were eager to get out from under them. Keeping the banks in TARP until they hit much higher capital levels would have put fire under the feet of the otherwise uncooperative executives (and yes, we would have had to listen to Jamie Dimon and John Stumpf carry on about how unfair it was because they really didn’t need the money, no, no, it was forced on them). It no doubt would have led the top brass to do something they heretofore insisted was impossible: cutting the pay of the producer level. That sort of thing is in fact very doable if industry-wide conditions force it (and if you don’t believe me, a former Goldman co-chairman is of the same view).
Oh, and let us not forget that, having failed to get tough with the banks to raise capital levels, the “trying to create a well capitalized banking system” is an excuse for ripping off taxpayers to achieve that end, such as the failure of Geithner when he was at the NY Fed to negotiate down the payouts on AIG’s credit default swaps. Although he’d never dare say it publicly, I have no doubt he would have regarded the idea as nonsensical if anyone has presented it to him. Of COURSE the point was to pass more dough to the banks. This was clearly a feature, not a bug.
As far as “trying” to achieve a “well regulated banking system,” let’s see how the record stands. Treasury did nothing in the face of widespread mortgage abuses. Yes, these took place in servicing units, which Treasury does not regulate directly, but a Treasury chief has a powerful bully pulpit were he to use it. In addition, as we have pointed out, there were blatant abuses of REMIC, the part of the 1986 Tax Reform Act that sets forth the rules for mortgage investment conduits to be treated as pass throughs. The IRS sits in Treasury. Admittedly, the tax hit for REMIC abuses would fall on investors, but it would be so large that it would unleash a litigation shitstorm against the banks. So the Treasury had plenty of leverage to make the banks obey existing law but it chose not to use it. Similarly, Geithner kicked the Libor problem over to London, when US banks were also implicated in price manipulation, which is a criminal anti-trust violation. Oh, and what about the scandal du jour, Standard Chartered? Treasury is supposed to take the lead in investigating violations of sanctions against Iran, and it appeared happy to investigate rather than enforce. And remember the posture of both the Paulson and Geithner Treasuries on TARP fraud: the banks would never never risk their reputations by doing such a thing! Barofsky’s demands would scare them away from using TARP and were just prosecutorial paranoia.
After this set-up, he then tries to prove that Barofsky doesn’t have an answer to these claims by Treasury. And rather than deal honestly with the book, which presents considerable counter-evidence (start with its utter lack of interest in pursuing HAMP abuses, like misleading advertising and violations of consumer protection laws), he instead cites an interview with Ezra Klein. And what has Klein asked about? The favorite Pavlovian device for scaring all good liberals into giving the Administration a free pass: talk about what Romney might do. This is the extract:
“Romney is offering them a better deal potentially from their perspective than Obama is,” [Barofsky] said. “They hate anything that could possibly eat into their profits and their ability to exploit their size and power. And Mitt Romney is offering the repeal of Dodd-Frank.”
“So Dodd-Frank was actually very helpful in preserving the status quo for the banks,” Barofsky continued. “But better to have nothing. Better to go back to the go-go days of 2006 and 2007 when they could print money on the backs of American homeowners.”
Now notice the sneaky trick Yglesias played. He introduced this bit by claiming:
He agrees, for example, that Team Tim is in fact trying to better regulate the banking system and that it’s being fought in this effort by the Republican Party:
But that is not what Barofsky said. Yglesias claims to be about to deliver proof that Barofsky and Geithner are on the same page, when the quote demonstrates the reverse. Barofsky stated explicitly that Dodd Frank preserves the status quo, one that he clearly sees as not being within hailing distance of “well regulated”. The fact that the Republicans want something worse is irrelevant to the question of whether Barofsky, or for that matter, anyone not in politics or banking, sees what Geithner has done as adequate.
In the next bit, we get to see how it serves Yglesias to organize his article around what Treasury wants the chump public to believe about its activities. He then take another Barofsky quote from the interview to get to the “healthy and well capitalized” claim. (Oh, and another propaganda trick is evident throughout the piece: count how many times Yglesias put the words “Treasury” and “healthy” and “well capitalized” in the same sentence in the piece. The more you put words in close proximity, the more you create the impression they are connected. That was documented in the efforts to sell the public on the idea that Bin Laden was an ally of Saddam Hussein. The efforts to debunk the connection actually reinforced it in the minds of much of the public, simply by putting the two names in the same sentence.). While Yglesias contends Barofsky only “sort of” agrees, he then tries to argue that both sides have differing views and it is hard to say who is right:
This gets us to the actual dispute. Team Tim would say that they’re trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better served by a policy that imposed steep losses on banks and instead repaired household balance sheets. Beneath all the anger and accusations and counter-accusations is a fairly wonky policy disagreement about the relative importance of household balance sheets versus the credit channel to laying the preconditions for growth.
So who’s right? I think this is actually a much more difficult question than partisans on either side are willing to acknowledge.
This has taken us so far away from the core argument of Barofsky’s book (and hence the core of the dispute) that is it tantamount to straw manning. Barofsky’s point is that both the Bush and Obama administrations, Obama’s worse that Bush’s, were captured by the banks. Barofsky’s job was about preventing fraud, making sure the funds were accounted for, since Congress made it explicit that the rationale for passing TARP was so that banks would lend to the economy. And even though funds are to a fair bit fungible, both accountants and the banks themselves indicated they could say how they used TARP funds (hell, many volunteered the information to reporters).
Yglesias also singles out Barofsky’s mention of homeowners, when he actually said, “this administration and the prior administration—there’s no meaningful difference between the two—consistently chose the interests of Wall Street banks over that of homeowners, over that of the broader economy.” This is not “homeowners versus banks” but “banks versus the real economy” and even more important, as he stresses in his book, “banks versus the rule of law.”
We get this disingenuous bit:
Team Neil has never really presented a coherent alternative course of action that takes real account of the consequences of imposing very large losses on the banks. From the original winter 2008-09 argument over bank nationalization along Swedish lines, I’ve rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional “bailout” money. I think that still would have been the optimal policy, but it’s not a no-brainer and I think the administration’s left-wing critics would have been very disappointed if the White House made universal health care take a back seat to a second round of bank equity injections.
Huh? First, Barofsky does not need to go there. His argument has been much simpler: Congress gave TARP funds with the express understanding that banks would lend more. They didn’t do that. Oh, but they did decide to pay themselves record bonuses in 2009 and 2010.
But Yglesias is also dishonest in his characterize the position of people who have argued for other alternatives to coddling the bank, starting with yours truly. Sorry, Mattie, I’m no fan of the ACA, but even if I were, you present a false choice. Plenty of folks, starting with Nouriel Roubini in 2007, pointed out the far more obvious way to clean up bank balance sheets: wipe out stockholders and cram down bondholders, and have bigger fiscal stimulus to offset the deflationary impact. It’s another Administration policy “bank bondholders shall take no losses,” and refusal to use the power that Obama had at the start of his first term for real change that has stood in the way.
Yglesias also patted himself on the back in the last paragraph by calling himself a “monetary policy guy” which elicited snorts from economists I know. But that’s in keeping with his closing argument that if only the Fed were more aggressive, we could get the economy on track. If he were a real monetary policy guy, as opposed to a water carrier for the Democrats, he’d know the loanable funds theory is bunk.
It’s actually a backhanded compliment to Barofsky that Yglesias had to go so far afield to try to minimize his book and then did so not in a frontal attack, but a strategy of giving Treasury credit where credit is not due and pretending any disagreement is narrow. In a lot of ways, open enemies like Turbo Timmie are much easier to handle.