As Neil Barofsky leaves office, he isn't so much burning bridges as blowing them to smithereens.

The special inspector general for the Troubled Asset Relief Program will wrap up his two-year-plus tour on Wednesday, and he has nothing good to say about the Treasury Department's implementation of the $700 billion bailout.

Take Hamp, the mortgage modification program funded by Tarp. Barofsky is far from alone in criticizing it, but his views mix frustration over missed opportunities with disgust over political gamesmanship.

"Hamp is fixable, but this Treasury Department will never fix it," he said in an exit interview. "This Treasury Department is so content with the wretched, shameful status quo. … They refuse to even acknowledge that the program is a failure. Is it too politically damaging to acknowledge the truth? Is this about protecting the banks? Is this about foaming the runway of the foreclosure crisis for the banks? Was that what this program was always really intended to do, to stretch out the foreclosure crisis?

"These are questions that are demanded to be asked because of the refusal to acknowledge and fix the program. They are fair questions. I don't know the answers, but by not being transparent and not being straightforward, Treasury invites those questions."

Barofsky, 40, said the $28 billion left in Tarp should be used to revamp the program, including increasing the incentive payments to servicers that excel in modifying mortgages.

"You have $28 billion that will likely never get spent," he said. "That is such a lost opportunity to deal with this, frankly depressing, situation where you actually have the money sitting there, obligated, and not wanting to do the right thing to find a way to spend it to help struggling homeowners, and instead for political reasons talk about Joe of Columbus or Bob from Bowie.

"It is just crazy."

Joe and Bob are references to the people the Treasury highlights on its website as benefiting from Hamp. The frequent posts, according to Barofsky, are evidence that Treasury is "just fiddling away while the mortgage crisis continues to burn. Rather than address the serious issue, it's more about political spin than helping people."


Part of Barofsky's job as special IG was to make recommendations for designing programs, particularly to prevent any Tarp funds being lost to fraud. Clearly he views Hamp as an example of a program where his agency's advice wasn't taken. But to Barofsky, the problem is more fundamental.

"The basic idea of a well-run government program is to have clear goals; have a plan to meet those goals; measure progress along the way against those goals; change your program when necessary so you can still achieve those goals."

But this is how he sees Tarp's implementation: "Set goals. Ignore goals entirely. Hope for the best. When the best is different, change your goals, and say you never really meant it when you had those goals. Pretend that the program is a success even though it is not meeting those goals.

"I am describing Hamp, but it is not just Hamp. CPP is another good example."

The original goal of the Capital Purchase Program was to increase lending. "There had to be a justification," Barofsky said, "and it wasn't 'Save banks from financial ruin.' It was 'Restore lending.' Did it meet that goal? Of course not. The data doesn't lie."

Barofsky said the Treasury should have required lenders to disclose how Tarp funds were used.

"What is Treasury's response [to the lack of lending]? They changed the goal. The [new] goal was to make money. The CCP, according to Treasury officials, by any objective measure, was a success. What about the objective measure that you announced, to restore lending? It didn't work. But again, if you change your goals along the way you get to declare everything a success. That doesn't make it a good government program."

Barofsky said the Treasury has no strategy for dealing with the 150 banks that are behind on their Tarp dividend payments.

"There is no articulated exit strategy with what to do with banks that are struggling," he said. "The closest thing you have is the Small Business Lending Fund." Congress authorized that fund last September, allowing some banks to convert up to $30 billion in Tarp funds. "It's a Tarp bailout in a lot of ways," Barofsky said of the lending fund.


Barofsky is proud that Tarp's expected losses keep shrinking — the latest estimate is $25 billion. And he says the number would be a lot higher if his agency had not been created in the fall of 2008 by the Emergency Economic Stabilization Act that authorized the Treasury to spend $700 billion to shore up the financial system.

He cites the Federal Reserve's Term Asset-Backed Securities Loan Facility program, unveiled in November 2008, as a great example of a program that was improved after SigTarp took a look at it.

When Fed officials outlined how they originally envisioned Talf, designed to jump-start the ABS market, Barofsky said his agency raised a number of concerns. Fed officials didn't balk, he said. "Rather than staking out a political fight with us, the Fed brought their economists in and we sat down and discussed it. They said things like, 'We never thought of it that way.' Those are comments we never heard from anyone at Treasury."

In fact, Barofsky said the Fed took the special IG's suggestions and improved on them.

"No one will know how many tens or hundreds of billions of dollars were saved by the economists and compliance people at the Fed."

He's not wholly uncritical of the central bank, however.

The Fed moved too soon, he said, to lift restrictions on what banks can do with their capital, giving the green light last week to some of the largest banks to repurchase stock and lift dividends. There are too many unknowns, Barofsky said, like how deep the mortgage-putback hole will be. And many banks still have their debt guaranteed by the Federal Deposit Insurance Corp. under its Temporary Liquidity Guarantee Program.

The Dodd-Frank Act and Basel III have not yet been implemented and the world economy remains vulnerable to another big shock.

"It doesn't seem like a terribly good idea," he said. "They are taking capital out of the system, and what if there is another major bump in the road?"


Barofsky sees Dodd-Frank, the reform law enacted last July, as the antidote to Tarp.

Where Tarp solidified "too big to fail" by protecting all the major financial institutions, Dodd-Frank gives regulators the power to take them over and unwind them according to "living wills" that they must keep up to date.

Barofsky is skeptical that this system will work. He said Congress should have adopted the Brown-Kaufman amendment and imposed size and growth limits on banks.

While it is possible that a combination of Dodd-Frank and tougher Basel III capital rules can tame "too big to fail," Barofsky said "it is a very difficult path, and what we have seen so far doesn't give you a lot of hope or encouragement."

Barofsky applauds FDIC Chairman Sheila Bair's vision of living wills as a tool to force the largest firms to simplify their operations and shrink. But her term expires this summer and that's not enough time to get the new system in place. Besides, he said, none of her counterparts at the other agencies are reinforcing her hard line.

"What has been the response to Sheila Bair's continuing banging of this drum? Has anyone echoed it? Has anyone agreed with it?"

If Dodd-Frank it is not implemented swiftly and strongly, it "will not end 'too big to fail.' If Sheila Bair's suggestion or something very similar to it is not brought into place, the law will fail. Because too big to fail means too big to fail. It is what it says, and unless you do something about the size and the interconnectedness" the system will remain vulnerable to meltdown.

Barofsky is disappointed by the Financial Stability Oversight Council created by Dodd-Frank to ride herd over systemic risks. Treasury Secretary Tim Geithner chairs the council, which includes a dozen other regulators and has met just four times in the eight months since its creation.

"We haven't seen a lot of things to inspire hope," he said of the FSOC. Its proposals are "very vague, very general."

"I don't think that there really is a strong belief [among council members] in addressing 'too big to fail' by making them less big," he said.

He knows some people believe the country needs large banks to complete globally. "But it doesn't bother me deeply that our banks are not competitive with other banks that are essentially backed by sovereign governments," he said. "I would rather take the taxpayers' side and say we'll deal with banks that don't have implicit guarantees. Ultimately over time they will be better, more profitable banks."

Barofsky knows he sounds like Chicken Little — and that doesn't bother him either.

"Bright-line rules like Brown-Kaufman or aggressive use of the authorities as suggested by Sheila Bair is the only real way to deal with 'too big to fail,' " he said. "People who are sounding the warning like myself and Sen. Kaufman, saying that this is going to be a spectacular armageddon when it happens again, are we the Roubinis of 2011 who you pat on the head and say you are just negative people who worry all the time?" (The economics professor Nouriel Roubini was among the first to predict the mortgage crisis.)


A few days after Barofsky announced his resignation, the dean of New York University's law school e-mailed him to gauge his interest in teaching. Barofsky earned his law degree there in 1995 and before taking the SigTarp job he was an assistant U.S. attorney for the Southern District of New York.

Barofsky agreed to teach a course on the financial crisis this fall, and he says he is excited to get a chance to reflect on the last few years. He might write a book, and expects to hit the lecture circuit, saying he feels an obligation to talk about his experience at SigTarp.

How did someone like Barofsky, with no political connections, get this job?

Barofsky says the Bush White House called his boss at the Southern District, asking if anyone there might be right for the position. Barofsky, as the leader of the office's mortgage fraud group, topped the list.

With the Obama transition team's consent, the White House nominated Barofsky and within days he had completed his Senate confirmation hearings. Within weeks, he had the job.

Barofsky said he is not optimistic that his successor's path will be so smooth; he has endorsed his deputy Christy Romero.

"Apparently there is some effort by Treasury to get anyone but someone from SigTarp in the position," Barofsky said, referencing a recent New York Times story that cited three anonymous sources saying Treasury IG Eric Thorson was lobbying the Senate to appoint an outsider. The Times said Thorson denied it through a lawyer.

A Treasury spokesman pointed to Senate testimony acting Assistant Secretary Tim Massad gave March 17 describing the department's interaction with SigTarp and other overseers. "The work performed by Tarp's oversight bodies has made, and continues to make, important contributions to the development, strength and transparency of Tarp programs," Massad testified. "Treasury welcomes this oversight and, to date, has adopted more than 120 of the recommendations made by the oversight bodies."

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