Why Ordinary Americans Should Be Really Angry About the Wall Street Bailout: Goldman Sachs Group, Inc. (GS)

During a meeting in 2009 about the performance of the Home Affordable Modification Program, or HAMP, Elizabeth Warren, who was head of the Congressional Oversight Panel for the Troubled Asset Relief Program, or TARP, kept challenging Treasury Secretary Tim Geithner about the program’s lack of progress in helping homeowners. At one point, an exasperated Geithner blurted out: “We estimate that they [the banks] can handle 10 million foreclosures, over time. This program will foam the runway for them.”

Goldman Sachs (GS)The expression “foam the runway” is often used to refer to the injecting of cash into a company that’s about to go bankrupt, which is somewhat similar in principle to an airport spreading fire-suppression foam on a runway to minimize the effects of an emergency landing. What Geithner was actually saying here was that home-mortgage modifications were helping the banks by preventing all of the likely foreclosures from hitting the banking system at precisely the same time. HAMP would ultimately allow the banks to spread out the foreclosures, while they restored their financial strength with government bailouts.

Now it all makes sense
Just as Geithner uttered those words, the full meaning of the bailout of Wall Street’s banks became crystal clear to Neil Barofsky, who was the special inspector general for TARP. Geithner was being asked about how HAMP was helping homeowners, but he responded by saying how the program would help the banks. Barofsky now understood completely that it didn’t matter if the modifications failed or if struggling borrowers ended up worse off, as long as the banks could “stretch out their pain until their profits returned.”

Barofsky describes his epiphany in his outstanding Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. The book’s central argument is that all of the bailouts resulting from the financial crisis were ultimately designed to benefit the big Wall Street banks, and the interests of homeowners, auto dealers, and other ordinary Americans didn’t receive similar concern or attention. Barofsky, who was once a very effective prosecutor, builds an extremely detailed and compelling case against the government. I suspect that most readers will come away extremely angry about the fundamental unfairness of these bailouts.

The simple thesis that bailing out the big Wall Street banks was the overwhelming priority of the U.S. government in response to the financial crisis explains a lot. Why, for example, have there been so few criminal prosecutions related to the crisis? In a recent editorial in the Financial Times, Barofsky notes that there “would be no criminal prosecutions while the banks still teetered on the brink of collapse.” He continued: “The risk of causing them to fail, and thereby undoing all of the bailout efforts, was too high.”

And why did the ill-conceived HAMP fail so abysmally? An aggressive attempt to assist homeowners could have had adverse effects on the big banks, which would possibly, of course, put some of those institutions in jeopardy.

The inmates are running the asylum
Barofsky shows in depressing detail how the U.S. government had been thoroughly captured by the Wall Street banks. Indeed, many of the individuals running the bailout program came from precisely the same institutions that received the most benefits. For example, Herbert Allison, former assistant secretary of the Treasury for financial stability under Geithner, was a former CEO of Fannie Mae and a former president of Merrill Lynch. And, of course, Neel Kashkari, who preceded Allison in that role, was a former vice president at Goldman Sachs Group, Inc. (NYSE:GS). Kashkari was selected for his position by former Treasury Secretary Hank Paulson, who served as chairman and CEO of Goldman Sachs Group, Inc. (NYSE:GS). When Geithner came on board, he selected Mark Patterson, a former Goldman Sachs Group, Inc. (NYSE:GS) lobbyist, as his chief of staff.

We could, of course, go on and on like this. Regardless of whether or not our Treasury department was thoroughly captured by Wall Street, one result of the bailouts is that the largest banks are now 25% bigger than they were before the crisis. Barofsky notes that “even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.” Unfortunately, Barofsky doesn’t see Dodd-Frank as meaningful reform — he notes that it “didn’t change the postcrisis status quo of too-big-to-fail banks; it cemented it.”