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Inspecting the banks, then and now – the Wall Street bailout five years later

Christy Romero: 'These bankers lied, pure and simple'

Yes, the financial system has stabilized, in part due to the Tarp bailout, but are we rid of the toxic corporate culture that led to the financial crisis? Not sufficiently.

Excessive executive pay is still far too routine, in spite of corporate scandals and continued losses. The root cause of the financial crisis was a pervasive culture of rampant risk-taking and greed, combined with unchecked power.

This destructive culture existed not only in the largest financial companies on Wall Street, but also in banks outside of Wall Street.

At SIGTARP, we have arrested and continue to arrest bankers who cultivated a culture of reckless arrogance, believing they were untouchable even as they broke the law.

When their risky gambling went south these bankers lied, plain and simple. They hid bad loans and bad balance sheets through illegal accounting trickery. Some sought taxpayer dollars to fill in the holes on the fraud-riddled books. Some criminally concealed that the bank itself was funding their luxury lifestyles, believing they were entitled to the best even while they foreclosed on homeowners.

Regulators can change the rules of the road, but there will be those who specialize in loopholes, workarounds and criminal deception. At SIGTARP, we will continue to change corrupt culture the way we do it best, by putting as many rotten apples in jail as we can.

Tarp was not meant to finance criminal activity, but our jurisdiction is narrow, and law enforcement is but one effective method. Companies must change from within. Adopting strong board and management oversight, for instance, will help curb risk and greed to the point where a company can absorb its own losses without coming to taxpayers, hat in hand, again.

Christy Romero is the special inspector general for the Troubled Asset Relief Program. Before joining President Obama's Tarp team in 2009 as chief of staff, she was counsel to SEC chairs Mary Schapiro and Christopher Cox.

Neil Barofsky: "Capitalism without failure is like religion without sin"

I believed at the time – and I continue to believe now – that action on the scale and scope of Tarp was absolutely necessary. Unfortunately, that notion gets conflated with the idea that we did everything in the appropriate manner – we didn't. Even in the heat of the moment, steps could have been taken to pursue the policy goals set by Congress. Those promises set the theme that Tarp wasn't just saving Wall Street; this was the start of a robust financial recovery.

Ultimately, the Treasury lost sight of and ignored some of those policy promises.

One was housing. There could be no Tarp without the Treasury's promise to Congress to do something about foreclosure crisis. Congress thought the Treasury would buy mortgages, and the Treasury all but ignored that direction. Dropping the ball on an effective mortgage modification program was one Tarp's major failures.

Second, the idea of putting equity into banks was to restore lending in the economy. But there were no incentives to accomplish that goal or penalties for failure, so the Treasury largely ignored it.

The third problem was a "moral hazard be damned" attitude when shoveling money out to the banks, which provided for the explicit promise that they could be bailed out. Here we find ourselves, five years later, with banks like giant Frankenstein monsters, roaming the earth and wreaking havoc. Ultimately these giants might be Tarp's biggest legacy.

Are we being safer, or are we really safe? I think we are safer, but not safe. Rather than deal with the fundamental problem of "too big to fail" institutions, Dodd-Frank nibbles around the edges of the status quo, which preserves the status of the megabanks.

But these jumbo financial institutions are too large and too interconnected not to threaten the economy, and we should be worried about the lack of political will to break up their influence. Risk will mount higher and higher because of the proven "heads I win, tails you bail me out" construct, until sooner or later something must be done. We have to overcome the incredible, vise-like grasp of these institutions – not just on members of Congress, but on the executive branch as well.

It's a myth that before Tarp, our system reflected free market capitalism; the presumption of a bailout is a major distortion of that system. In these three and a half years of Dodd-Frank, it's clear that the law is not sufficient.

If you like free markets, you should want to break up these banks, and you won't want to give them this government subsidy, which Bloomberg puts at a value of $83bn a year. That's not free market capitalism, that's corporate socialism. Everyone's inner capitalist should be cheering to break up these institutions.

There's an apt saying: capitalism without failure is like religion without sin.

Neil Barofsky was the first special general inspector of Tarp and the author of the book "Bailout. He is an adjunct professor of law at New York University and a partner of the law firm Jenner & Block. This has been reproduced as told to Heidi Moore.