ABC News’ Matthew Jaffe & Arlette Saenz report: When the Wall Street reform bill passed Congress last summer, President Obama said the new regulations would mean that taxpayers would never again be asked to bail out financial institutions.
“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts – period,” the President said July 15.
Not so fast, warns bailout watchdog Neil Barofsky.
Barofsky, the Special Inspector General for TARP (SIGTARP), said in a new report to Congress that he interviewed Treasury Secretary Tim Geithner last month and Geithner acknowledged that “in the future we may have to do exceptional things again” if the government faces a financial crisis as severe as the 2008 one.
“To the extent that those “exceptional things” include taxpayer-supported bailouts,” Barofsky said, “his acknowledgement serves as an important reminder that TARP’s price tag goes far beyond dollars and cents, and that the ultimate cost of TARP will remain unknown until the next financial crisis occurs.”
At a hearing today before the House Oversight Committee, Barofsky cautioned that future bailouts can occur if the government does not act to reduce the size of “too big to fail” banks.
“One of the legacy results of TARP is that the market still believes that the United States government is backstopping the largest too big to fail institutions and that causes a whole range of problems,” Barofsky said. “This is a market distortion, and as a result, the executives of those banks get back into the position where it’s heads I win, tails the taxpayer bails me out.”
“They need to have the regulatory will and the political will to rein in the size of these banks,” he said. “If they don’t have the credibility that they will not be bailing out institutions going into the future, it almost won’t matter otherwise because again those incentives will still be warped, that discipline will still be gone, and those risks where the idea the taxpayer will bail out the executives, the shareholders, the counter parties will continue a perversion of the system.”
However Tim Massad, the acting assistant secretary for financial stability at the Treasury Department, argued that the Wall Street reform law, known as Dodd-Frank, had given the government the tools to make sure that future bailouts do not occur.
“I think Dodd-Frank gives us the tools to regulate any financial institution, regardless of its size, that poses systemic risks, and it gives us the tools to shut down such financial institutions,” Massad told the House panel.