Barofsky Says Criminal Charges Possible in Alleged AIG Coverup

Photographer: Brendan Hoffman/Bloomberg

Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), testifies at a House Oversight and Government Reform Committee hearing on preventing home foreclosures in Washington, D.C., on March 25, 2010. Close

Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP),... Read More

Close
Open
Photographer: Brendan Hoffman/Bloomberg

Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), testifies at a House Oversight and Government Reform Committee hearing on preventing home foreclosures in Washington, D.C., on March 25, 2010.

Neil Barofsky was unpacking boxes in December 2008 when the stench of sewage wafted through the hallways at the 168-year-old Main Treasury Building. The space assigned to him as head of the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, was shoehorned into the basement, three floors below U.S. Treasury Secretary Henry Paulson’s offices.

“They eventually discovered a broken sewer main beneath the floor,” says Barofsky, 40, adding that he doesn’t think any slight was intended by relegating him to the malodorous quarters. Still, he says with a smile, “I wasn’t given the prime real estate in Treasury.”

The incident was noted by Beltway insiders, Bloomberg Markets magazine reports in its June issue.

“It became an apt metaphor for the foul relations between Treasury and SIGTARP,” says Michael Smallberg, an investigator at the Project on Government Oversight, a Washington watchdog group.

That tense relationship has grown out of Barofsky’s mandate to monitor and root out fraud and waste in the management of TARP, the $700 billion program passed in October 2008 to remove toxic debt from the banks. The special inspector general, in a series of reports, interviews and congressional hearings, has heaped criticism on the Treasury Department’s operation of the program.

Barofsky’s most recent broadside came on April 20, when a SIGTARP report labeled a housing-loan modification program funded with $50 billion of TARP money as ineffectual.

230,000 Homeowners

Treasury spokesman Andrew Williams counters that the program has resulted in modifications for more than 230,000 homeowners.

The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.

The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.

In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16.

Leading the Charge

“I’ve been in contact with the SEC,” he told the committee. “We’re going to coordinate with them, but we’re going to lead the charge. We’re going to review these transactions.”

Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP money, for example.

“There was a time when, if you got that word the stock price would go up, and if you were to trade on that information prior to the public announcement, that would be classic insider trading,” Barofsky says.

‘Tea Partiers’

A Democrat named by a Republican president, Barofsky says missteps by both the George W. Bush and Barack Obama administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about,” says Barofsky, referring to the anti- Obama political movement. “This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an October 2009 report, saying Paulson publicly described the initial nine TARP bank recipients as healthy when he knew that at least one of them risked failure.

In a letter responding to Barofsky, Assistant Treasury Secretary Herbert Allison wrote: “Any review of such announcements must be considered in light of the unprecedented circumstances in which they were made.”

Geithner and Paulson both declined to comment for this story.

Praise from Grassley

Barofsky, who has thinning jet-black hair and favors dark- gray suits, has won praise from both sides of the aisle in Congress.

“The special inspector general for TARP hit the ground running,” says Senator Charles Grassley, an Iowa Republican who helped draft the legislation creating SIGTARP. “He’s the kind of watchdog taxpayers need and deserve.”

From the day Congress created it, TARP has been troubled. Paulson crafted it as an initiative to buy the toxic assets that were then threatening to capsize the world’s banking system. Since then, the Treasury and Congress have transformed it into a hydra-headed beast encompassing 13 financial aid plans.

TARP had invested $204.9 billion in 707 banks, thrifts and credit unions through its Capital Purchase Program as of March 31; $69.1 billion remained to be paid back. It has committed to paying out $39.9 billion to modify mortgages, though it has disbursed only $91 million.

Hydra-Headed TARP

The Treasury Department has pledged to dole out tens of billions more to programs as varied as the Unlocking Credit for Small Business initiative and the Automotive Industry Financing Program, through which it owns 60.8 percent of General Motors Co. and 9.9 percent of Chrysler Group LLC.

Says Representative Jeb Hensarling, a Republican from Texas and former member of the Congressional Oversight Panel that guides TARP policy, “It’s almost a program that defies oversight.”

Of the $700 billion in TARP funding authorized by Congress in October 2008, the Treasury has planned for $545.1 billion in investments, committed $489.8 billion and disbursed $380.3 billion as of March 31. Institutions had repaid $180.8 billion.

SIGTARP has more than 40 agents, including former Secret Service, Federal Bureau of Investigation and Internal Revenue Service investigators, who sport blue windbreakers emblazoned with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky does not -- make arrests, and subpoena and seize records.

Still Too Big

In its late-January report, SIGTARP said that the banks rescued by TARP remained “too big to fail.” They still have an incentive to make risky wagers in order to generate the profits that will reward their executives, the report says.

“The definition of insanity is repeating the same actions over and over again and expecting a different result,” Barofsky says. “If the goal of TARP was to make sure we don’t have another financial collapse, well, obviously it’s made the likelihood of that much, much greater.”

Neil Michael Barofsky’s background prepared him well for a job that involves law enforcement, economics and political diplomacy. Born in Abington, Pennsylvania, a suburb of Philadelphia, he simultaneously earned degrees in economics and international relations from the University of Pennsylvania. He graduated magna cum laude from New York University Law School in 1995.

He soon landed at what is now Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer P.C., a New York-based firm filled with former prosecutors.

Dream Job

It was Barofsky’s ticket to what he says was his dream job, as a lawyer for the U.S. Attorney’s Office for the Southern District of New York, where he started in 2000.

Toiling in the criminal division’s offices at 1 St. Andrews Plaza in Manhattan, Barofsky acquired a reputation as someone who worked prodigiously to build cases.

“My impression was, Neil was always working,” says his former boss, ex-Southern District U.S. Attorney Michael Garcia.

Beginning in 2004, Barofsky worked on “Tango Chaser,” an investigation into the Revolutionary Armed Forces of Colombia, or FARC, a rebel army that funds its operations partly through narcotics trafficking. The still-ongoing probe has resulted in the indictments of 50 traffickers.

In 2005, Barofsky learned he had been the target of a kidnapping plot during one of his visits to Colombia. A female informant who was planning to set him up relented and later told him of the plan. Barofsky keeps a FARC bayonet on his office windowsill as a memento of the case.

Refco Prosecutor

Barofsky’s most prominent white-collar case was the successful prosecution of Refco Group Ltd. President Tone Grant, who was found guilty of conspiracy, fraud and money laundering in April 2008.

Barofsky was running a mortgage fraud enforcement program for the Southern District in November 2008 when Garcia took a call from the White House personnel office, which was looking for a special inspector general for TARP.

“The most qualified person for this job is you,” Garcia recalls telling Barofsky. “This is the crisis of the hour.” Then Garcia warned him: “People will not like you.”

Barofsky wasn’t intimidated.

“Neil is not deterred by the prospect of powerful people or his supervisors coming down on him,” says Anthony Barkow, executive director of the Center on the Administration of Criminal Law at New York University, who worked with Barofsky in the U.S. Attorney’s Office. “He is an independent thinker and not afraid to ruffle feathers.”

Against the Grain

David Kotz, inspector general of the SEC, says, Neil Barofsky has done a laudable job of taking aggressive positions where necessary. Inspector generals at one time or another must be prepared to go against the institutional grain.”

Geithner’s Treasury Department disputes the assertion that it has not been open about TARP.

“This is frankly one of the most transparent programs in the government,” says Tim Massad, chief counsel of Treasury’s Office of Financial Stability. “We’ve probably had 200 meetings with Neil and his staff.”

In April 2009, Treasury asked the Justice Department for a ruling on whether Barofsky and SIGTARP reported to Secretary Geithner. In a letter to Justice, Barofsky argued that he reported only to the president.

“We are absolutely an independent agency,” he says.

Treasury withdrew its request.

TARP’s Small Business

In February of this year, the department moved to exclude the Small Business Lending Fund from Barofsky’s oversight. The program is funded with $30 billion of TARP money.

“On its face, it looks like Treasury is trying to supersede SIGTARP’s position by having the program operate outside TARP,” says Smallberg of the Project on Government Oversight. “Barofsky is certainly a thorn in the side of Geithner.”

Meanwhile, Barofsky’s investigators continue to lay into TARP. In a January report, SIGTARP cited an unnamed money manager in TARP’s Public-Private Investment Program, which buys toxic assets, saying the person sold a recently downgraded mortgage-backed bond from a company fund, then promptly purchased the same security in the same amount at a higher price for a fund backed by TARP money.

Allison responded in a letter to Barofsky that the suspicious trade was referred to SIGTARP by Treasury compliance officers in the first place.

Insurance Banks

In a December report, Barofsky showed how insurance giants Hartford Financial Services Group Inc. and Lincoln National Corp. bought tiny thrifts -- one with just $7 million in assets -- to qualify for the TARP Capital Protection Program, which is designed to encourage bank lending. Hartford and Lincoln used the more than $4.3 billion in TARP funds they received almost entirely to finance insurance operations, according to the report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., says Barofsky hasn’t been aggressive enough. She says SIGTARP should be running criminal probes of the bankers who underwrote and managed the collateralized debt obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt sold to investors.

Tavakoli says the CDO managers sometimes replaced relatively high-quality securities with new ones that were more likely to default.

‘Phony Labels’

“It is securities fraud if you take securities and package them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting and sale of CDOs are ongoing.

Barofsky is no longer confined to a fetid basement office. SIGTARP is now in a brown-granite building on L Street, nine blocks away from the Treasury. Sitting in his office, the investigator says he was at first surprised by the resistance he got from the Treasury to his inquiries.

“When I took the job, it wasn’t like I had really contemplated for a millisecond the political aspects,” says the lawman, sipping from a can of Diet Coke.

Barofsky says he’s battling an entrenched culture of secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned from this entire financial crisis is that the reflexive reaction against transparency, that disclosure will bring terrible things, has not been proven true,” he says.

Culture of Secrecy

He offers the AIG bailout as an example. For more than a year, the New York Fed kept key aspects of the AIG bailout secret, including details of its own involvement and its decision to have AIG pay the insurer’s bank counterparties 100 cents on the dollar on the credit protection they’d bought against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed efforts to obtain discounts from the banks.

After the banks had been paid in late 2008, a lawyer from the New York Fed sought to have AIG keep the banks’ identities under wraps, as well as data about the CDOs that would have revealed which firms had underwritten the toxic bonds and which ones had managed them.

“There’s a lot of things about AIG that were not disclosed, based on the assumption that the sky would fall,” Barofsky says. “Transparency does a lot more good than bad.”

TARP Police

Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against individuals or we’re going to have a report,” Barofsky says. “This is too important for us not to share our findings.”

He won’t say whether the investigation is targeting Geithner personally.

In a statement, the New York Fed said: “Allegations that the New York Fed engaged in a coverup of its intervention in AIG are not true. The New York Fed has fully cooperated with the Special Inspector General.”

Barofsky’s to-do list grows. SIGTARP now has 120 employees, has initiated 20 audits and was involved with 84 investigations as of March 31. In January, it opened a New York office, with San Francisco and Los Angeles branches scheduled for later this year.

As long as the Treasury Department continues throwing money at the financial crisis, Barofsky’s TARP police will be watching.

To contact the reporter on this story: Richard Teitelbaum in New York at rteitelbaum1@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.