AIG Investigator: Where the Billions Went

Those added powers, and an attitude honed during eight years of fighting white-collar criminals and Colombian drug lords as an assistant United States attorney — he still has the knife from a foiled attempt on his life in a field outside Bogota — are propelling Mr. Barofsky over barriers that have slowed the others.

Not long after his nomination was confirmed at the end of 2008, he beat back an effort by the Treasury to have his office put under supervision of the secretary.

He also forced the Treasury to let him obtain a statement, under oath, from every recipient bank about how it used the taxpayers’ money.

“We were told we were playing politics,” he said of that battle over several months with the Treasury, which said the recipients should be required to disclose only their lending activity. “That it was a meaningless exercise. At least three times, we were told we should consider it closed.”

Mr. Barofsky’s report on the uses of government money found that some institutions had applied it to projects that directly contradicted the Congressional intent for the program.

The public seems pleased that someone is standing up to the banks and the officials who bailed them out. A Web site that Mr. Barofsky set up for tips has received about 30 million hits, he said. And Congress expanded his powers last year.

He made his most recent waves in November, when he issued the results of an eight-month audit of how tens of billions of dollars, sent by the government to a teetering A.I.G., wound up at a group of big banks in the United States and Europe.

The audit was requested by Representative Elijah Cummings, a Democrat of Maryland, who rounded up 26 other Democrats to sign his letter in March 2009. But by the time it was finished, it was pounced on by a no-holds-barred Republican, Darrell Issa of California, who called it “extremely useful in laying the foundation for our investigation.”

The report describes how the Federal Reserve Bank of New York sealed its own fate in September 2008, when it tried unsuccessfully to put together a private bank loan for A.I.G., then in the throes of a terrifying worldwide run on the bank.

“This is the moment when the greatest amount of leverage to negotiate exists,” said Mr. Barofsky.

But instead of negotiating from a position of strength, the New York Fed poured $85 billion of its own money into A.I.G., on hard-nosed terms that Goldman Sachs and JPMorgan Chase had planned to charge before they got cold feet. Much of the Fed’s money was gone within minutes — and so was the Fed’s leverage, or any real chance of getting the money back.

“I don’t want to play Monday morning quarterback, but there are other things that could have happened,” Mr. Barofsky said. He said the Fed could have achieved better results if it had behaved more like a regulator and less like a creditor.

Mr. Issa, the ranking Republican on the House Oversight Committee, recently asked to see the original documents that Mr. Barofsky had collected while conducting that audit. Mr. Barofsky politely declined, saying that to gain the Fed’s cooperation, he had promised not to give out its documents without its permission.

Left empty-handed, Mr. Issa suddenly found himself on rare common ground with the Oversight Committee’s Democratic chairman, Edolphus Towns of New York. Mr. Towns took Mr. Issa’s cue and subpoenaed the Fed documents, and also called the Wednesday hearing, where the Treasury secretary, Timothy Geithner, will answer questions, as will Mr. Barofsky, among others. Mr. Paulson may also appear but has not confirmed.

Congressional staff members have been circulating e-mail messages showing close interactions between A.I.G. and the New York Fed in deciding how much information should be made public.

Mr. Barofsky said that as a lifelong Democrat, he was caught off-guard by his selection by President George W. Bush. He was three years into a complicated criminal case, and moving to Washington would disrupt his plans for a January wedding and honeymoon in Costa Rica.

His boss, the United States attorney, persuaded him with what he called “the God-and-country speech,” Mr. Barofsky said. The honeymoon was postponed until May.

When he arrived in Washington, he said he was shocked to find how much money was flying out the door, with so few controls.

In one conference call, he said, he asked what safeguards would be built into a new program to help investors buy banks’ impaired assets.

“They said, ‘Rating agencies and investor due diligence,’ and my jaw just dropped,” he said. “They said, ‘Yes, the ratings agencies will not be embarrassed again.’ I can’t tell you how often I heard the phrase, ‘reputational risk.’ ‘Oh, the banks wouldn’t do that.’ This is trying to shame the shameless.”

The Fed and Treasury have grown more receptive to his ideas, he said. And his office has also grown. It now has a branch in New York, and there are plans for two more in California.

“We’re following the TARP crimes,” he said.