Jenner & Block Partner Neil Barofsky on Monitorships and Inspectors General

Neil Barofsky was the inspector general for the federal bailout of the banks more than ten years ago.

Neil Barofsky
Jenner & Block
New York, New York

Barofsky’s job was to make sure that the banks didn’t rip off the taxpayer.

As such, he was constantly feuding with Democrats and Republicans whom he saw as beholden to the banks and Wall Street.

This led to animosity. 

In 2012, he wrote a book about the whole sordid episode titled – Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. 

“I had no idea that the U.S. government had been captured by the banks,” Barofsky wrote.

And to this day, as a Twitter sage put it recently – people in Washington still hate Barofsky.

Barofsky, now a partner at Jenner & Block in New York, is in the news lately because of the coronavirus pandemic bailout that just zipped through Congress. 

That bill has an almost identical provision that created the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). 

And the question is – how much oversight should we have overseeing the billions as they fly out the door?

Last week, Ezra Klein interviewed Jason Furman. Furman is at Harvard’s Kennedy School and was President Obama’s top economic advisor. 

Here’s the back and forth.

Ezra Klein: The more you worry about fraud, the more conditions you put on, the harder it becomes for that money to go out the door because the people who have to make those decisions are understaffed, this is a huge project and they are worried for being on the hook for the one that goes wrong much more than they feel they are going to get any credit for what goes right.

How do you think about that tension about getting the money out the door and not being blamed later for a business that took the money and didn’t do what we hoped it would?

Jason Furman: You have to decide what you prioritize. If what you prioritize is jobs and the well being of workers, then putting too many conditions that are not directly related to that is going to trade off against that. 

We had a special investigator general for TARP – SIGTARP. That office still exists today. It was a massive office. And frankly, I think it was chilling. And it reduced the number of financial institutions that accepted extra capital. It meant fewer loans were made, more businesses failed, more people didn’t get a mortgage and it hurt people. I am very reluctant about giving this President, this administration discretion and doing it without oversight. 

But I am probably more sympathetic to at least doing a decent amount of discretion and delegation to them because anything else might make it harder to get money out the door and we really need this money to get out the door.

We asked Barofsky – what’s your take on what Furman is saying?

“That just explains the tension,” Barofsky said in an interview with Corporate Crime Reporter last week. “There is always going to be an element within the administration when there is any type of program like this that is more or less completely indifferent to fraud. We saw a lot of that. They are indifferent to the idea that maybe $100 million or a billion or ten billion dollars could be lost to criminal elements, that programs could be shockingly inefficient, cost two or three times more than they otherwise would cost for the exact same result. They believe that any effort to reign that in is counterproductive.”

“I remember hearing at that time, not from Mr. Furman whom I never dealt with, but from others who said – fraudsters provide stimulus too. If someone defrauds a program and puts the money in their pocket, they are going to spend that money. In some ways, that still achieves the goals of the program. Perhaps that was tongue in cheek, but that is the justification that is out there. There are people who said that it is okay to lose tens or hundreds of billions of dollars to inefficiencies or fraud as long as the money gets out the door and it is circulating within the economy. They are entitled to that opinion.”

“My response is yes – we absolutely dissuaded certain individuals and institutions from participating in the TARP program. And my response is – that was my job. In fact, I can’t think of anything more important in doing my job than being a deterrent to people who would otherwise come in and rob the taxpayer.” 

“And any bank or financial institution that was otherwise qualified to participate in these programs and enjoy all of their benefits and decided not to do so because they were afraid that having a robust body that was looking to deter fraud from happening and was so terrifying to them that they did not participate – good. Those are the types of institutions that you do not want in your program. They are the ones who are committing fraud.” 

“If you look at the broad array of financial institutions, it looks as if most of them participated. There are very few significant financial institutions who did not come into the TARP program. I find statements like that to be perhaps not surprising, but very wrongheaded and out of sync with the historical record of what happened in the TARP program.”

“I had my differences with Treasury Secretary Henry Paulson and very significant differences with former Treasury Secretary Timothy Geithner. But both of them have said to me that one of the real values that we delivered was keeping bad players from participating in the program. They both acknowledged that losses to fraud would have been far more significant but for our efforts.”

“I put little value into his (Furman’s) statements. With the amount of discretion in this new bill and the opportunities for fraud and abuse that are present, the idea that any government official would advocate for less oversight rather than more, would be advocating for just trusting the administration without having a special set of eyes on the lookout for waste fraud and abuse – that part is surprising and disturbing as well.”

“I saw a comment on Twitter where someone said – they really do hate Barofsky. I guess for some individuals, they can’t let go for what happened some years ago.”

President Trump will appoint the new inspector general for the pandemic response bailout. 

Will you be able to look at the nominee, at the nominee’s resume, and tell if they will be up to the task?

“If someone has held a similar type of position and demonstrated the independence, the subject matter knowledge and expertise, you could probably get a pretty good guess. I have to say anyone looking at my application back then, you wouldn’t have been able to make the determination. I had the subject matter knowledge. I was a securities fraud prosecutor. I was a mortgage fraud prosecutor. But I had never built or run an agency from scratch. I had never tangled with the types of issues that I had to tangle with in Washington. It is a very difficult job.” 

“You have to build something from scratch, you have to recruit people. You have to install a culture. If you are going to do the job independently, you are going to make some people in very powerful positions very unhappy.”

“You can’t make big mistakes. Any big mistake that you make can be used to destroy your credibility. And you can’t be cowed by the notion that if you make a big mistake, your agency will be hampered and you could be personally ruined. You can’t think too much about that because then you become paralyzed and get nothing done.”

“You have to be on the lookout for waste, fraud and abuse and advocate for effective policies. That is your touchstone and the most important thing. But you also have to recognize that in reality, there is a balance. If you insist on everything being 100 percent protected from fraud, then you are not going to have effective programs. The only way to insure zero percent fraud is to have zero percent money go out the door. You have to engage in that type of negotiation – what is reasonable protection against fraud versus stuff that could destroy the effectiveness of the program. There are thousands of judgment calls.” 

“There are people within the administration who were going to tell you that if they adopt any anti-fraud provisions that you think are essential to protect the American people, you are going to destroy the program. I was told I was going to destroy TARP, I was going to destroy the banking system, that I was going to render these programs useless because of some of the provisions I was advocating for. If I took that at face value and didn’t test and question, we would be in a different place right now looking back on this program. You would have seen tens and potentially hundreds of billions of dollars of losses. It’s a difficult job.” 

“Being able to predict whether someone will be successful based on the resume is a tough call. It’s going to be about the resources that person can draw on, who they can hire to be around them to give them support and just what their philosophy and approach is.”

Barofsky heads Jenner & Block’s monitorship practice.

How many monitorships have you done?

“I have done two monitorships to date. Our practice group has done seven or so.”

Is it unusual for a law firm to have a dedicated  monitorship practice?

“It is. In fact, we might be the only law firm with such a practice. The reason we decided to form a practice is that we do have an unusual amount of experience as monitors. In addition to myself, our firm chair Tom Perrelli has served as monitor on multiple occasions. We just brought in a couple of new partners who are doing the Deutsche Bank monitorship.” 

“We have learned so many lessons and climbed such a learning curve and developed so many resources that we thought it would make sense to dedicate a bit of our bandwidth to developing this as a practice – in part, because we do it differently from other firms that do monitorships. We do it in a way that strictly adheres to our independence and in a way that makes sense for companies. We view the companies as partners with an eye toward going through the necessary cultural and compliance reforms in a way that makes sense for the company so that it can continue to be a company – to be successful and profitable, but to do so in a way that is ethically compliant and culturally appropriate.”

“Having learned those lessons and developed policies and procedures and most important a philosophy of cultural change – we wanted to implement that and hopefully on a broader scale.”

[For the complete q/a format Interview with Neil Barofsky, 34 Corporate Crime Reporter 14(10), Monday April 6, 2020, print edition only.]

Copyright © Corporate Crime Reporter
In Print 48 Weeks A Year

Built on Notes Blog Core
Powered by WordPress