The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

 Neil Barofsky, Special Inspector General for the controversial Troubled Asset Relief Program (TARP) officially resigned his post yesterday. In 2008 Barofsky accepted what he calls “a dream job”, but what most others would call a nightmare. Barofsky’s job was to monitor the TARP program and to ensure that federal dollars were spent responsibly and on worthy programs. Curtailing and prosecuting corporate greed was Barofsky’s greatest challenge – one he met with an impressive degree of ability and resourcefulness.

The Washington Post reports that Barofsky’s supporters saw him as a much needed cop monitoring for waste and fraud within TARP. His detractors, on the other hand, couldn’t stand how often he was in the way and how tough he seemed to act on the job. But in the end, Barofsky’s work is nearly unanimously praised and his positive effect on the nation, though largely unnoticed by the public, has been profound. Barofsky opened offices in New York, Atlanta, San Francisco, and Washington to investigate, audit, and prosecute fraud and misconduct related to the TARP program. Though Barofsky is leaving the post he has held since its inception, his legacy as a tough overseer will endure as the quasi-agency he built from the ground up monitors the final stages of TARP’s implementation.

Barofsky took on a job that few would have had the courage to accept and at which fewer still had the ability to succeed. Even the Wall Street Journal, a champion of deregulation, gave Barofsky his due in a short interview-styled article today. (click here) A tough warrior against corporate greed, Barofsky maintained his resolve and took on the industry at every turn. For this we congratulate him on a job well done and wish him well.

He serves as a model for the kind of person needed when the government gets in the business of giving away taxpayer money and lots of it: someone who has the character and credibility to be taken seriously and who will work doggedly to protect our money.

Assisted by Zachary Kady

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All those Ivy League graduates working on trading formulas that yes, will yield some short-term profits, but in the end merely rachet up volatility and risk in the market – that will no doubt find Wall Streeters back in the halls of Congress looking for a handout.

Just when we thought maybe, just maybe, greed would take a back seat to long term value and prudent compensation that incentivizes sound risk taking, the WSJ reports that pay at public companies on Wall Street will reach a new record: $135 billion.  Wow.

What’s up with that?  The same Wall Street that brought us to the brink of a worldwide catastrophic depression; just ask Federal Reserve Board Chairman Ben Bernanke and Former Treasury Secretary Hank “I’m vomiting in public from all the stress” Paulson how close we were.  The same Wall Street that came hat in hand to Uncle Sam and the American Public, seeking oh, “about a trillion dollars” should do it.  

Ok.  So some of that money was paid back.  But from my vantage point, the driver there was Wall Street’s singular desire to be out from under additional regulation imposed on them by the TARP and other federal bailout programs.

I would not be so outraged if the American public were getting something for these record-breaking salaries.  Hey how 'bout the creation of some jobs fellas?  Last time I checked unemployment remained dangerously close to 10%.  What about some innovative financial product to reduce the deficit or some effort to stem the tide of home foreclosures?  Nope.  Instead it’s the same story.  Trading on exotic financial instruments, arbitrage, shorting markets, stocks and commodities.  That’s where the money is and that’s what we’ll get.  All those Ivy League graduates working on trading formulas that yes, will yield some short-term profits, but in the end merely rachet up volatility and risk in the market – that will no doubt find Wall Streeters back in the halls of Congress looking for a handout.

I hope when that happens – and it will – policy makers have the guts to stand up to the Street and impose limitations and sanity to future compensation.

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Then many months later [the Commission] issued another report for the bookshelves, destined only to gather dust next to hundreds of other reports of one catastrophe or another.

Remember that little financial meltdown we had just a few years ago?  You know the one.  Stock portfolio of American households lost a collective $XXX billion.  Poof, gone.  It was widely believed by knowledgeable insiders that we were on the precipice of a worldwide depression.  Even the mighty Hank Paulsen was scared.

The government’s immediate response (which I supported) was TARP and the near-trillion dollar bailout.  But according to the crisis playbook, Congress authorized (with much bluster and pomp) the formation of a Commission to get to the bottom of this threat so it doesn’t happen again.  The usual suspects were rounded up—the Commission’s leaders are former California Treasurer Phil Angelides and 28-year congressman Bill Thomas—and they had a few hearings.  Then many months later they issued another report for the bookshelves, destined only to gather dust next to hundreds of other reports of one catastrophe or another.

To be sure these well-meaning public servants did their best.  I am not for a second suggesting they were somehow unduly influenced, biased or corrupt in any way.  Rather they fell victim to the pasteurization of the bi-partisan political commission.

So, no surprise, the report is a yawn.  Nothing particularly insightful.  Heck if you want to understand the meltdown while enjoying a good read I recommend Joe Nocera and Bethany McLean’s All the Devils Are Here or Michael Lewis’ The Big Short.

Unfortunately the guys at the FCIC were not just writing a book.  They had some enforcement authority.  They had the power to root out the bad guys and send referrals to the Department of Justice.  It has been widely reported that they may refer a few individuals for civil prosecution, but even that seems unlikely and who knows what DOJ will do.

Ok smart alec, who should be drawn and quartered, who should be sent up the river?  The simple answer is someone, everyone, entire Departments, anyone.  Criminal prosecutions have a way of getting people’s attention and changing behavior for a wide swath of people around the accused.

Specifics, give us specifics: okay how ‘bout those guys at Countrywide, all of whom knowingly engaged in a mortgage-backed orgy, day in and day out allowing anyone with a pen to sign for a no-doc mortgage.  What of those Wall Street warriors who kept selling mortgage-backed securities long after they knew they had questionable value?  And do you mean to tell me that no one at Fannie Mae or Freddie Mac had the facts but kept playing the game?  That they weren't hoping beyond hope that by the time the music stopped they would be long gone, enjoying a multimillion dollar pension.

Sadly, history will repeat itself.  In the end financial meltdowns can be good business for many.  Commissions are window dressing and just part of the playbook.

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What is Goldman up to nowadays?  Oh, just raising compensation by 3.5% despite a projected 13.5% decrease in revenue.  Do they call that a lack-of-performance-based raise?

For years the public mostly turned a blind eye to Wall Street’s corporate practices, including the lucrative (and ludicrous) bonuses and salaries paid to top executives, largely for speculative trading.  Wall Street produces no products.  But so long as their companies made enough to pay out such exorbitant amounts, we rationalized, what was the problem?  The financial collapse should have served as ice water poured on our snoozing faces.  Incentivized by a pay structure that valued risk, we were all led to the brink of disaster.  It was only the infusion of $450 billion in taxpayer money that saved us from The Great Depression, Part II.  So why on earth are Wall Street’s top companies set to pay a record $144 billion in compensation this year?

I feel like a broken record.  Yes, the majority of TARP loans have been repaid and we are on the slow road to recovery, but we cannot become complacent.  The next step must change the paradigm.  It must tighten regulation and oversight of corporate compensation.  And that applies to all companies—even the unassailable Goldman Sachs, which was saved by the rescue of AIG, its principal insurer.  What is Goldman up to nowadays?  Oh, just raising compensation by 3.5% despite a projected 13.5% decrease in revenue.  Do they call that a lack-of-performance-based raise?

This is why we need regulations sooner rather than later.  SEC Chair Mary Schapiro (no stranger to compensation issues) at last has detailed a timeline for the regulations that will soon govern the entire industry.

Most of the Commission’s timeline occurs before the New Year, but that is not soon enough.  We propose a more immediate solution to the compensation problem: redirect any salary or bonus that is based on purely speculative trading towards public infrastructure.  Instead of paying millions of dollars to each executive that nearly ran our economy into the ground, let’s use the excess to modernize transportation systems, fix bridges and pay teachers.

It won’t happen but it should.  Let’s hope the SEC gets in gear and moves quickly to enact effective rules to protect the public from another crisis.

Assisted by David Martin

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Today we feature another guest post from Jeff Goldberg, who blogged last week about soaring unemployment versus the falling crime rate.  Enjoy.

Frustrating as this is in hard times, our system is built for inaction, compromise and half measures.

From left and right our government is assailed for its inability to act decisively to meet our current national challenges.  

Rarely in our history do we see decisive political action for the unalloyed public good.  The single boldest legislative action taken in American history was the vote of the southern legislatures to secede from the union.  Those votes were decisive but were they right and were they good?  If bleeding the country was necessary to end slavery then perhaps the votes can be seen in a positive light, but history does not heap praise on the secessionists.

In the fall of 2008 the federal government acted decisively to prevent the perceived imminent collapse of the US financial sector.  A Republican president, democratic presidential nominee and the congressional leadership from both parties acted to pass TARP, often contrary to their constituents’ express desires and their own political beliefs. 

Recent reports suggest that TARP has worked reasonably well and that the program will end up costing much less than originally budgeted and feared.  "For what it's worth, it's worked," Fed Chairman Ben Bernanke said in a meeting with college students in Rhode Island.  "It's stabilized the system.  The financial system is now much healthier than it was.  It's no longer in crisis, and moreover, the money that went into these financial firms is coming back to the taxpayers with interest.  So it turns out to have been not only a successful program, but for the most part, a pretty good investment for taxpayers."  Yet a number of federal officeholders, particularly on the right, have paid or will pay a political price for voting in favor of TARP.  

Our government is specifically designed to prevent decisive action.  Montesquieu wrote of the need to separate and balance the functions and powers of the branches of government.  In Federalist 10 Madison wrote that government should serve to temper misdirected passions of the people.  Frustrating as this is in hard times, our system is built for inaction, compromise and half measures. 

On a recent Real Time With Bill Maher, Cornel West asked why the crisis mentality that led to TARP doesn’t exist for the problem of unemployment?  This poignant formulation echoes the larger charge -- that the system is broken and unable to act.  TARP provides a partial and partially unsatisfying answer -- leadership can transcend politics but rarely.  In all other times we muddle through.  Tweaks to the system and the protests of an angry electorate will not change the basic nature of the system, which is built on the founders’ keen understanding of human weakness.

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Uncharacteristically, FINRA plans to propose a rule that makes it easier and fairer for securities disputes to be decided.  Arbitration, currently presided over by a group least one member of the securities industry, would shift to a committee of only members of the public.

The SEC continues to crack down on phone investment scams that target innocent investors.  For a complete list of press releases regarding their cases, see the Commission’s press releases.

Some large banks have fully repaid their TARP loans, but we must not forget the billions loaned out to smaller banks, many of which are struggling to repay.  Less than 20% of the banks that accepted loans have repaid fully, and over $60 billion was still due to the Treasury as of August, Reuters reports.

Assisted by David Martin

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 “Instead of writing Secretary Geithner, what Congressman Sestak really needs to do is use his good offices to propose legislation creating a private right of action to curb TARP abuses.” 

Recently, Representative Joe Sestak (D-Pa) opined on The Hill’s Congress Blog that we need more oversight and transparency for TARP funds.  You think???  Of course we do.  It is the largest federal spending program in a generation.

Back in July, I called attention to this issue, seeking to protect Main Street from being victimized once again.  I want to congratulate Congressman Sestak for seeing the light on this issue.  In a time when it’s easy to doubt Capitol Hill, it is refreshing to see Mr. Sestak focused on protecting Main Street.

Surely one method of protecting Main Street, as Mr. Sestak points out, is enhanced transparency regarding the use of TARP funds.  But transparency – perhaps the most popular word in politics – is hardly going to be enough.

We have a brewing crisis, complaint numbers (each of which requires investigation) are off the charts and incentives are still strong for companies to misuse TARP funds.  As commendable as it is that Mr. Sestak calls attention to this critical issue, his effort will fall short of helping Main Street.  Put bluntly, a single letter to Treasury Secretary Geithner may help with your constituents but it won’t hinder the fraud and abuse lurking in the TARP program. 

Back in July, already thousands of tips were received concerning possible fraud.  The government can’t investigate everyone, but private attorneys can and need the right and incentive to do so. 

Instead of writing Secretary Geithner, what Congressman Sestak really needs to do is use his good offices to propose legislation creating a private right of action to curb TARP abuses.  Give the thousands of hungry, young, talented and committed attorneys in this country a chance to help both themselves and Main Street by zealously pursuing abuses of TARP funds. 

Congressman, we stand ready to help you draft that legislation.  It is time.  You would be doing a great service to the millions of Americans who were forced to shoulder the financial consequences of Wall Street abuse.

Assisted by David Martin and Jessica Begen

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 A “Private Right of Action” Must Be Added to the TARP Legislation

TARP monies must not become a slush fund for the ethically challenged.

On July 21, Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, released his office’s quarterly report.  To his credit, he demonstrates the kind of transparency taxpayers who are footing the bill deserve.  Notably on page 5-6 of the report, he identifies and describes in some detail 35 investigations brought by his office.  He also describes in depth two matters that have already been publicly filed.  Good stuff indeed.  But the magnitude of this program (trillions of dollars), the profound seriousness of this endeavor to our economy, and the hopes of future generations demand more. 

A far greater degree of enforcement must be available. 

In just a few months, Mr. Barofsky has received 3,200 tips.  This means trouble is afoot as many feared. It needs to be “nipped in the bud”.  Confidence must be maintained and the TARP monies must not become a slush fund for the ethically challenged.

We recommend Mr. Barofsky seek additional funding for more staff and investigators.  The Administration should also request that Congress amend the TARP to allow a “private right of action."  Private attorneys ferreting out fraud can make a real difference.  We need more than 2 filed cases to serve as a deterrent, protect the essential mission of the TARP, and limit the cost to taxpayers.

We cannot afford to wait.

The More Transparency the Better

We applaud the report as a small step in the right direction.  Much has been made of the $27.3 trillion that the report warns could end up as the overall cost of resolving the economic crisis.  Although this figure represents a worse-case scenario, the magnitude of that amount should alarm taxpayers and regulators alike.  To avoid coming close to that number, the Treasury must heed the recommendations of the report by: (1) enacting realistic mandatory transparency requirements; and (2) opening its own methods and decisions to the glare of public scrutiny.

As Justice Douglas said in framing the Securities Act of 1933, in the midst of the Depression, “Clean Air is the best disinfectant.”

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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