Neil “Not Here to Make Friends” Barofsky is no longer in DC, but the comedy gold he collected in his short time there is timeless. Also, a preliminary investigation into Geithner’s “brain” Lee Sachs…
I sincerely did not think it would be possible at this point to lower my opinion of Tim Geithner. Nor did I think it possible, after the year and a half I just spent there, to make me think less of DC. That former TARP watchdog Neil Barofsky has accomplished both with his just-published book Bailout is a testament to…a lot of things, chiefly the utter fuckedness of this country, though there’s at least a silver lining in that regard: relative to TG, everyone else in this book comes off really well. Flawed, sure, but sympathetic…in some cases human even. None, in any case, can dream of equalling the Treasury Secretary’s degree moral torpor, his pubescent nihilism, his essential lameness of character…
This includes, by the way: Darrell Issa.
And Neel Kashkari. And the well-meaning, Talmud-referencing wonks at the New York Fed. And (flawed but fundamentally, at least in hindsight and relative to his successsor, honest) Hank Paulson. And Ben Bernanke. It left me longing for a follow up from Barofsky’s communications director Kris Belisle, previously of the Iraq Reconstruction and Bunim-Murray Productions, so we could see Geithner stacks up next to L. Paul Bremer and Don Rumsfeld and Trishelle from the Real World Las Vegas.
Which brings me to one of the more gratifying contributions of this book, which is its detailed documentation of the extent to which people in Washington conduct affairs of state as though “affairs of state” is actually a reality show, replete with:
Gratuitous melodramatic hand gestures:
Geithner got dramatic. “Neil, you think I don’t hear those criticisms? I hear them. And each one, they cut me,” he said, pausing and then making an emphatic cutting motion with one hand as he said “like a knife.”
Shameless attempts to incite internecine warfare:
The [Treasury] official stopped me and gave me a lengthy discourse on how much he had learned—confidentially, of course‚ just how much Elizabeth Warren hated me, was jealous of me, and was plotting my demise. I knew that not a word he was saying was true, but I just thanked him for the heads-up and took off.
Unintentionally hilarious misuse of basic terms:
One Treasury official had accosted one of our employees at a cocktail party and berated her for working for “a fascist.” I also heard that a lawyer in the general counsel’s office had described me as “the walking embodiment of evil.” They had also started to try to chip away at my credibility by suggesting that I was carrying water for the GOP, describing me as a “closet Republican” and telling reporters that I was planning on switching political parties to run for New York State attorney general as a Republican.
As we parried back and forth, Geithner repeatedly reached a pitch of anger, regaling me with detailed expletive-filled explanations that established my apparent idiocy. He would then calm himself down and give me a forced, almost demonic smile.
Solemn, portentous moments with no apparent meaning:
Before I left [Topher Grace IRL character Jim] Wilkinson said, “One more thing, Neil. I want to give you some advice. When Hank asked me to take this job, I made sure that there were certain conditions he agreed to, certain requirements that had to be met. And I made sure I got those commitments in writing. I highly advise you do the same before accepting this position. Do you understand what I’m saying?”
I had no idea what he was talking about, nor did anyone else to whom I later repeated his warning, but I told him I understood and thanked him for the advice. It was my first taste of the paranoid weirdness of Washington.
Bizarrely, I began receiving calls from various government agencies pitching services to us, at a steep cost. I had never heard that there were whole subdivisions of government agencies that served as intragovernmental profit centers. Money in Washington is always sure to attract those who are seeking to get some, and although I had expected to be inundated by those in the private sector seeking to part us from our funds, I had no idea of the flurry of pitches I’d get from other governmental agencies. Before I knew it, we were signing contracts with Treasury’s Bureau of Public Debt, which, in addition to overseeing how the government raises funds to meet its obligations, operates a massive one-stop outsourcing business from which we purchased, at exorbitant rates, back-office operations, accounting, human resources, and other services. Even more rapacious were the costs we were to be charged by Treasury’s IT department for computers, printers and BlackBerrys ($2,194 per Blackberry with prepaid service.)
The seamy underbelly you won’t see at home:
The initiation continued when, after lunch, Karen and I, accompanied by Dugas, arrived at the room in the Senate office building in which my hearing was going to be held. A long line of homeless people stretched down the hall from the door.
“Umm, these people waiting in line, they don’t exactly look like the type of people who would normally attend a a TARP-related confirmation hearing,” I commented.
Dugas laughed. “Lobbyists pay them a few bucks each to stand in line for them to reserve a seat for the hearing. It’s a good sign, means you’re in the big leagues,” he explained chipperly.
And the grim truth that no one is too mature or august to stoop to Spencer Pratt-level tactics:
The next morning, though, I was astonished to see that the White House had joined the fray. It posted on its website and blasted out to the press an article full of mischaracterizations and inaccuracies entitled “The Facts of AIG,” written by deputy White House communications director Jen Psaki. Psaki savaged me in the post, saying that I was trying “to generate a false controversy over AIG to try and grab a few cheap headlines,” and was “stuck in a time warp.” Suggesting that I had an anti-White House bias, Psaki also questioned my independence, stating “Any truly independent observer would say that Treasury’s take in AIG will be worth more than taxpayers originally invested in the at company. She even suggested that I didn’t “like movies with a happy ending.”
I saw red. Massad had not yet been confirmed by the Senate, which meant that I outranked him. During a break, I took Lori aside, irate. “Tell Issa’s staffer that there are one hundred senators that would disagree that an acting assistant secretary outranks a presidentially appointed Senate confirmed inspector general. Tell him now that his boss is chairman, it’s his responsibility to make sure that Issa understands basic fucking protocol,” I said, fuming.
When I told Karen later what had happened, she burst out laughing. “Why would you possibly care?” she asked.
I started to explain the deep significance of the humiliating slight but then also started to laugh. “Oh, my god,” I said. “I’m turning into everything I hated about Washington.”
But behind the hubris and histrionics, seriously treasonous crap went down during the last four seasons of this kleptocrat shitshow, and Barofsky’s book also conveys the most substantive assessment we may ever get of who was calling the shots and why. Which is to say, since there’s at least no doubt this time that Geithner is hands down the most toxic asset in his class—and Barofksy, having worked for both administrations, is totally convincing on this—we can finally hone in on the mystery of Just What Is Making That Guy So Evil.
And for starters, there’s his “brain,” if you will, which is to say that of his close friend and frequent tennis partner Lewis “Lee” Sachs, a graduate of Denison University and Wall Street lifer who joins Geithner at Treasury straight from chairing the investment committee of Mariner Investment Group, a miscellaneous hedge fund manager and financial adviser with a typically dizzying array of subsidiaries, spinoffs and parent companies.
One notable subsidiary was Tricadia, a hedge fund at the vanguard of CDO “innovation” back at the peak of the mortgage bubble that pursued a rare but not unheard-of “arbitrage” strategy by which it would agree to “sponsor” a subprime mortgage CDO deal by agreeing to buy the riskiest, unrated “equity” slice of the deal—also known as the “raunch tranche”—of the offering, entitling them the right to pick which mortgage backed securities the deal would “invest” in. Then they’d pinpoint the crappiest looking mortgage bonds on the market, fill the whole thing with manufactured derivative clones of those, and get some credit rating agency to stamp the thing Triple-A while some investment bank pitched its (foreign or public pension fund) clients on the “innovative new structured credit investment opportunity” to essentially be the sucker on the losing side of Tricadia’s covert short.
The better known example of a hedge fund that deployed this innovative “trade” was Magnetar, but Tricadia, while not as prolific as Magnetar, took the scheme a step further in terms of “shamelessness” because it also served as the “CDO manager” for its deals, meaning it actually had a formal fiduciary obligation to the deal’s suckers. Naturally, no law enforcement authority has bothered trying to censure Tricadia in any way over any of this flagrant fraud, because no law enforcement authority with any power in this country actually believes in such a thing as “fraud.” But Charlie Ledley, one of the protagonists of Michael Lewis’ The Big Short, told me last year he that Tricadia seemed considerably fishier to him than Magnetar. That is saying something.
(And that was an understatement.)
Now, it might be interesting if Geithner had chosen as his closest adviser the leader of such an enterprise because he actually cared how Wall Street worked, and wanted to know its dirty secrets and ins and outs for the purpose of, say, asserting his authority over the place, putting a little fear into the bad guys, who knows even reforming the place. Heh: no.
Sachs’ first order of business, as Barofsky describes in his book, was to expand the TALF—through which the New York Fed essentially offered 1,800% “matching funds” to all hedge funds willing to “invest” in bonds backed by AAA-rated car loans, small business loans and commercial real estate—into the residential mortgage security market. There were many reasons this was an utterly deranged proposition, starting with the fact that since Fannie Mae and Freddie Mac were already preoccupied hemorrhaging hundreds of billions of dollars in the effort to maintain “liquidity” in the residential mortgage market, but Sachs blithely insists in his first conference call with Barofsky in 2009 that the plan is to “go big”—a trillion dollars big, it turns out!—with the idea.
This was no doubt a good deal for his firm; even with $215 million in TALF loans Mariner was facing a severe cash crunch in the beginning of 2009 and had to impose an investor lockup on its distressed debt fund in March 2009. But Barofsky, rightly, saw it as not merely an invitation but essentially a presidential command to steal, and got to work freaking out, mercifully squelching it and the even-more-obscene PPIP proposal that followed before it could get off the ground.
It’s little wonder Sachs thought he’d pull one over on taxpayers, though; that’s the goddamn business model. Last year the conservator of Fannie Mae and Freddie Mac sued two principals of Mariner’s mortgage investment arm, Matt Whalen and Paul Park, personally for their involvement in the underwriting and sale of $24.853 billion worth of allegedly fraudulent mortgage securities from Merrill Lynch, in a dramatic reversal of the agency’s three year policy of not even pretending to care how badly they’d been fucked by the banks. (Geithner, naturally, immediately began campaigning to fire conservator Ed DeMarco. And last year the firm extracted a staggering $38 million in management fees from the South Carolina Retirement Systems alone, all for its piddling share of mostly single-digit returns.
Barofsky does all he can to take an inventory of the aggregate bailouts and assess their total cost, pissing off Barney Frank when he adds all the various “commitments” and “guarantees” together and arrives at the staggering sum of $23 trillion. But even that number misses some critical costs to the public, as he finally realizes while listening to Geithner defend the abject failure of Treasury’s mortgage modification initiative to help homeowners:
In defense of the program, Geithner finally blurted out, “We estimate that they can handle ten million foreclosures, over time,” referring to the banks. “This program will help foam the runway for them.”
A lightbulb went on for me. Elizabeth had been challenging Geithner on how the program was going to help the home owners, and he had responded by citing how much it would help the banks. Geithner apparently looked at HAMP as an aid to the banks, keeping the full flush of foreclosures form hitting the financial system all at the same time. Though they could handle up to “ten million foreclosures” over time, any more than that, or if the foreclosures were too concentrated, and the losses that the banks might suffer on their first and second mortgages could push them into insolvency, requiring yet another round of TARP bailouts. So HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb the losses while the other parts of the bailouts juiced bank profits that could then fill the capital holes created by housing losses.
In other words, Geithner did not have the remotest intention of avoiding foreclosures; quite the contrary. Because foreclosures—and delinquencies, and modifications, and just about any kind of mortgage that isn’t getting paid on time as usual—are such massive profit center for banks due to the gargantuan fees servicers reap off them, he fully intended to do whatever it took to keep the foreclosure boom booming!
All of a sudden, bits and pieces of conversations that I had had began to fall into place. Allison had used the phrase “helping them earn their way out of this” during part of a more extended conversation that summer about his worry that the banks could still collapse. HAMP was not separate from the bank bailouts; it was an essential part of them. From that perspective, it didn’t matter if the modifications failed after a year or so of trial payments or if struggling borrowers placed into doomed trial modifications ended up far worse off, as long as the banks were able to stretch out their plan until the profits returned.
Geithner’s revelation (he apparently similarly told bloggers in 2010 during an off-the-record conversation that HAMP had succeeded in extending out the foreclosure crisis) also helped explain one of the odder aspects of HAMP. For many borrowers, the modifications weren’t really all that “permanent.” Instead, after five years, the interest rate would be permitted to rise, much like the resetting adjustable rate mortgages of the financial crisis. This meant that within a handful of years after the “permanent” period of HAMP expired, the average borrower whose interest rate had been reduced to the minimum rate during his modification would eventually see his monthly payments rise by 23 percent,possibly putting him once again at risk for a default. Though that policy might undermine the long-term success of the program from the borrowers’ perspective, it made perfect sense if an immediate “foaming of the runway” for the banks was Treasury’s primary goal. For the banks, five years was an eternity.
Another byproduct of this policy that did not go unnoticed at Mariner: the thriving market in mortgage servicing rights that has cropped up in the wake of all these profitable evictions and lucrative neighborhood destruction: last year Galton announced an exciting new “investment product offering” related to this dynamic growth industry, and that it was hiring an executive from the most predatory bank of all in anticipation of its launch.
That effort is, incidentally, being spearheaded by one Kevin Finnerty, a mortgage bond veteran who spent much of the peak of the housing bubble on a press and lawsuit-filing tour to clear the name of his son Collin, one of the lacrosse players exonerated of having gang-raped a stripper. (He was not, however, ever cleared of beating the shit out of some stranger at a DC bar while taunting him with homophobic slurs.)
So I dunno, Finnerty could be a man of immaculate character. But given the company he keeps, I’d bet his son Collin is a total mensch by comparison. Go Devils!