The Exchange

Barofsky: The Monster Is Alive, and Still Too Big to Fail

The Exchange

By Neil Barofsky, former special inspector general for TARP

Last week, Vice President Joseph Biden made another gaffe on the campaign trail. This time he told a predominantly African-American audience in Virginia that if elected President, Mitt Romney was "going to let the big banks once again write their own rules, unchain Wall Street," suggesting that the Obama administration, in contrast, had successfully put shackles on the too-big-to-fail banks. The Vice President then added, of course, that as a result of a return to deregulation, the audience itself would soon be put "back in chains."

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Aside from the unnecessary and inflammatory reference to slavery, the first part of Biden's statement is revealing. After the repeal of the Glass-Steagall Act in 1999, banks became free to acquire, merge and combine to form financial behemoths that placed traditional banking, investment banking, and seemingly any other financial service imaginable under a single taxpayer-supported roof. As we know all too well from the bailouts, before long these corporate Frankenstein monsters were roaming the earth, taking extraordinary risks that returned obscene profits when they paid off and helping wreck the global economy when they did not.

Can the Monster Be Tamed?

In the aftermath of the financial crisis, the country was faced with a choice of what to do with these corporate abominations. Furiously beating back the efforts of reformers who sought to dismantle these monsters once and for all, the Obama administration chose to keep them largely intact. Instead, it sought to control their predatory and dangerous nature through the Dodd-Frank Wall Street Reform Act, a complex set of regulatory shackles that comprised more than 800 pages of legislation and called for hundreds of new regulatory rules. In essence, the administration's approach was to entrust the regulators to build the perfect set of chains to prevent the banks from recreating financial Armageddon.

Biden argues that Romney will remove the Dodd-Frank restraints and return to the pre-crisis "light touch" regulation that relies on the banks to adopt a level of self-discipline that has historically been as illusory as regulatory competence. The belief is that Frankenstein can be tamed and civilized, like the singing and dancing version of the monster in Mel Brooks' Young Frankenstein. As I saw first hand while providing oversight of the bank bailouts as the Special Inspector General of the Troubled Asset Relief Program and as I detail in my recently released book Bailout, this perception was embraced by both Bush and Obama Treasury officials, who repeatedly turned away my efforts to impose conditions, restrictions and transparency on the banks. They declared such measures unnecessary because the banks "would never risk their reputations" by putting profit over the public interest. (These statements were always delivered with an Igor-like obliviousness reminiscent of Brooks' film).

[For more from Neil Barofsky, check out his recent appearance on The Daily Ticker below.]

Still Waiting for a Solution

Of course, as any fan of horror movies knows, it is pure hubris to think that man can either tame the monster or design chains strong enough to control it; sooner or later it reverts to its primal instincts or breaks free, once again leaving a trail of destruction in its path. Two years after the passage of Dodd-Frank, and in the wake of the recent proliferation of scandals involving the largest banks, many are now embracing this cinematic truth, with even the banker's Dr. Frankenstein himself, Sandy Weil (whose Citigroup was the founding model of the megabanks of today), picking up a pitchfork and joining the growing mob of academics, regulators, former bank executives, Occupiers and Tea Partiers in calling for the monster to be torn apart.

On the national stage, however, only one of the four candidates for top office, Representative Paul Ryan, seems to recognize that the government should neither rely on the largest banks' better nature nor try to shackle them, telling a group of constituents in Wisconsin a few months ago that "if you're a bank and you want to operate like some nonbank entity like a hedge fund, then don't be a bank. Don't let banks use their customers' money to do anything other than traditional banking." While some have called on Romney to embrace this position in the general election and reclaim the GOP's populist mantle, the corrupting grasp of the megabanks has proven to be difficult for either party to shake. As Biden's speech makes clear, the Obama administration is not walking away from its protection of the big banks through Dodd-Frank (albeit in a somewhat shackled form), and with Wall Street's campaign dollars pouring into Romney's war chest, a dramatic shift from him seems equally unlikely. Alas, the monster: it's alive.

Neil Barofsky is the former Special Inspector General for TARP and author of the recently released book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. He is currently a Senior Fellow at NYU School of Law.

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