WPPB

10 Years Later, The Financial Crisis Still Resonates

Sep 14, 2018
Originally published on September 14, 2018 7:48 pm
Copyright 2018 NPR. To see more, visit http://www.npr.org/.

ARI SHAPIRO, HOST:

Today the U.S. economy is growing. Unemployment is near record lows. The stock market is at all-time highs. And all that can make the financial panic that gripped the country 10 years ago this weekend feel distant.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #1: Lehman Brothers, a 158-year-old firm, filed for bankruptcy.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #2: The stock market suffered one of its worst days in years Monday.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #3: Meanwhile, Merrill Lynch fearing it could be next...

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #4: The U.S. government is extending an $85 billion lifeline to American International Group, or AIG.

SHAPIRO: Pillars of the financial system were toppling. At the time, Neil Barofsky was a federal prosecutor in Manhattan.

NEIL BAROFSKY: The image that just resounds for me is just the image of bankers in their suits and ties walking out of the building with their boxes of files and personal belongings and that sort of look of hopelessness and really that fear of what's next. If these institutions could fall, what does that mean for all of us?

SHAPIRO: Congress soon approved a $700 billion fund to shore up the crumbling banking system. It was called TARP, the Troubled Asset Relief Program. And Neil Barofsky was appointed inspector general. His job was to oversee how the government dispensed that money. Now 10 years after the crash, I asked Barofsky what he sees as the fund's legacy.

BAROFSKY: You know, it was extraordinarily important in helping to stop the financial crisis, to sort of blunt its impact and keep the banks from failing. But of course the flip side of that legacy is all of things that this TARP fund was supposed to do but it never actually did 'cause it wasn't just about saving the banks.

When Congress passed that bill, it was very important that it helped not just Wall Street but Main Street. So it was supposed to help restore lending to the middle class, to small businesses. It was supposed to be used to help the struggling homeowners who were being thrown out of their homes through this foreclosure crisis at a record pace. And I think that the fact that the policymakers in Washington didn't ensure and didn't pay the necessary attention to those goals - I think that's part of the real legacy of TARP. And even today, there's still so much anger surrounding these bailouts.

SHAPIRO: How much do you think TARP contributed to the wealth divide and inequality that we see today - because, as you point out, banks got help, but millions of homeowners went into foreclosure, and a typical worker did not get a bailout like the big banks did.

BAROFSKY: Yeah, it's more of the opportunity cost, right? It's the things that TARP could have done but didn't do. And it all went in to help the big banks. And of course as a result, you know, just months really after the bailouts, you saw these sort of almost record-setting bonuses returning to Wall Street. You saw huge amounts of government money, TARP money, that essentially went into the pockets of the very AIG executives who brought that institution to its knees and the global economy alongside of it. So you have that image on one side of literally government money going to these executives and, on the flip side, just standing by idly as people lost their homes, their livelihood. And the government just sort of blindly looked away and let it happen.

SHAPIRO: I was going to ask, whose fault was it? Was it the Treasury Department and the White House? Was it the banks that were supposed to allocate the money differently? Like, who failed to send the money to a wider range of places?

BAROFSKY: I think the responsibility really falls squarely within the Treasury Department. Banks are banks, right? I mean, banks are going to respond to whatever incentives and requirements that they have. They're going to try to make as much money as possible. They're not here to provide a social purpose. They're going to serve their shareholders.

But the Treasury Department had an enormous amount of leverage when it started pumping all this money into the banks. And in return, they were required to - they were supposed to restore lending. That was sort of one of the big key phrases of the time - that TARP is going to restore lending. But Treasury never put that into the deal. They never said, OK, we're going to give you this $25 billion, but you know what? You need to use some of it to increase your lending.

SHAPIRO: Before the crash ten years ago, people were making false assumptions about risk. Like, they assumed that home prices would never fall, that unqualified borrowers would never default on their loans in large numbers. Do you think that today there are false assumptions that people are making that are comparable?

BAROFSKY: I think it's undoubtedly true that that is the case. I think that is the nature of capitalism. I think as long as there's been a financial system, there have been bubbles that have been based on false presumptions. And financial crises are in some ways totally inevitable. For me, the bigger question is, are we prepared for the next crisis knowing that one is going to happen? Are we in a materially safer place than we were in 2008, and are we in fact safe?

SHAPIRO: And how do you answer that question?

BAROFSKY: We're not safe, I think is the answer. I think we are safer. I think that you look at the post-crisis regulatory reforms that went into place. You addressed some of the issues that were at the heart of the crisis. Banks are required to have more capital on hand so that when losses inevitably come as part of the next crisis, they have a bigger buffer before they're threatened with bankruptcy. And that's a good thing.

On the other side, one of the reasons why we had the bailouts is we had a handful of institutions that were so large and so interconnected that the failure of any one of which could bring down our financial system. Today those banks are bigger. They're more interconnected and in many ways just as if not more dangerous. It's good that they have more capital, more protection, but it doesn't seem necessarily that it's enough to withstand another crisis.

Plus you have the probably even bigger concern - the political winds have changed a lot in the last few years. And you have this big de-regulatory push going on in Washington that is undoing each of those changes. And that really does threaten the resiliency of our system when the next crisis inevitably comes.

SHAPIRO: Neil Barofsky, thanks for taking this trip back in time with us.

BAROFSKY: Always happy to go down memory lane. Thank you.

SHAPIRO: He's former inspector general for the Troubled Asset Relief Program. Today he's a partner with the law firm Jenner & Block in New York.

(SOUNDBITE OF ROY HARGROVE'S "I'M NOT SO SURE") Transcript provided by NPR, Copyright NPR.