When: Tonight, February 2nd at 7pm ET
Where: CNBC’s “The Kudlow Report”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Neil Barofsky, TARP Special Inspector General, tonight, February 2nd, on CNBC’s “The Kudlow Report” at 7pm ET.
All references must be sourced to CNBC.
Mr. Barofsky, welcome to the program.
Mr. NEIL BAROFSKY: Thanks for having me.
KUDLOW: All right, so let me go--you were talking a few days ago that the federal modification program for mortgages is not working. You were very critical of that. And I wondered if you could flesh that out. What's the biggest problem with it?
Mr. BAROFSKY: Well, the biggest problem is that it's just not meeting the original expectations. When this program was first announced, it was expected that three to four million homeowners were going to get permanent mortgage modifications so they could stay in their homes. And the results have been anemic, with fewer than 550,000 total modifications to date, and projections of numbers of only 7- or 800,000. The whole program is just--is just floundering right now.
KUDLOW: How much does this cost the taxpayers?
Mr. BAROFSKY: Well, that's part of the good news is that the program, to the extent it's unsuccessful, it's--the expense is a lot less. So right now it's been about a billion dollars out the door. And I don't want to say just a billion, but the original idea is that this program would cost about $45 billion from TARP, with an additional $20 billion from the GSEs, Fannie Mae and Freddie Mac. It's a little bit more than a billion dollars out the door so far.
KUDLOW: Do you think there's any help for it, or we should just scrap it, let market forces work?
Mr. BAROFSKY: I think that, you know, there is a growing chorus in Congress and among commentators just to scrap the program. You know, from my perspective, when TARP was enacted, helping homeowners was a specific part of the legislation's intent. And Treasury was supposed to help, you know, Main Street, and help homeowners just as much as Wall Street. So I would like to see the act's original intent be fulfilled. But if they don't make the necessary changes to this program, if they don't start bringing accountability, if they don't start making this actually live up to those expectations, you know, calls for it to be--being terminated are going to get louder and louder and, I think, harder to deflect.
KUDLOW: Well, let's go to the bigger picture of TARP and the Dodd-Frank bill and so forth, reform. You also have been testifying that you are concerned that there are going to be more government bailouts, that in fact the criteria and analysis for the last set of bailouts, in particular Citigroup, were so ad hoc that your fear the moral hazard is still there and the taxpayers are going to face more bailouts. Can you tell us about that?
Mr. BAROFSKY: Sure. I mean, when you look at TARP, I think one of its most significant legacies is going to be that it has increased the possibility of future bailouts in so many different ways. You know, TARP--the reason why TARP helped assure markets and helped prevent a financial collapse was because Secretary Geithner and before him Secretary Paulson told the markets that, hey, the United States government is not going to let these banks fail, and it's going to use the $700 billion in TARP funds to make sure that the—you know, as a backstop, to make sure that wouldn't happen. Well, here we are today, the largest banks have gotten larger, more concentrated, more interconnected. Although we've had regulatory reform in the Dodd-Frank Act, that alone is not a magic wand that's going to cure the problem of too big to fail. And as long as the market perceives that the government is going to be a backstop, that whole distortion of the market, of an implicit government backstop, the cheaper credit the larger banks get, the lack of due diligence that their counterparties and their investors are going to do, are going to continue to work the system, encourage more and more risk taking and put us right back where we were in late 2008.
KUDLOW: And one of your criticisms, as I understand it, is the definition of systemic risk. Both back in late 2008 I believe you mentioned Citi, but it's probably still the same now. The Financial Stability Oversight Council met, that's what Secretary Geithner heads up, they don't have any clear analytical criteria. We didn't have any clear analytical criteria for systemic risk back two years ago. Is that the case? Is it all seat of the pants? And is it going to happen again because it's seat of the pants?
Mr. BAROFSKY: It's certainly looking that way. You know, back then, when we looked at 2008, the general notion was it's systemic risk because—for Citigroup because "if this isn't systemic risk, what is?" was one of the comments. "We don't know what the effects will be, but we don't want to find out" were other comments. And when you look at some of the original criteria that are--have been put out by the Financial Stability Oversight Council, and statements that Secretary Geithner indeed said to us during the course of our most recent report, it re-emphasizes this emphasis on subjective criteria. And, you know, one of the criteria that--that's set forth in the--in the rules that were set forth by the council was whatever the council deems to be systemic risk. This is not clear rules, this is not bright lines that the market will need. Because ultimately, for this to work, they have to be able to convince the market that banks will be allowed to fail, that there will not be a bailout.
KUDLOW: Well, what--what's the lesson here? What should we be doing? I mean, a lot of us are objecting to Dodd-Frank because it did not end too big to fail. Some of the regulators and supervisors said, `No, you're wrong, Larry, it is too big to fail. We have a whole new apparatus now.' You're saying really very little, if anything, has changed at all. What's the lesson here? Where should the improvement be? You got a new Congress, what should they do?
Mr. BAROFSKY: Well, I think--just to be clear, I think under Dodd-Frank there does exist the possibility of addressing too big to fail. I think Chairman Sheila Bair came out, and we quote her in the report, and said, you know, there are tools here that can be used to limit too big to fail if this Financial Stability Oversight Council has the regulatory will and the political will to make sure that a system is in place. We haven't seen that expressed yet. I'm still hoping that they will get their act together, that they will address this. But there are mechanisms in place, things like living wills where, you know, the banks are required to set forth in advance how they should be dismantled if they--if they run into trouble.
Mr. BAROFSKY: And, you know, Chairman Bair says, `OK, we can use this, and if there's not a credible plan we're going to make the bank have a credible plan, whether it's by shrinking or getting rid of certain types of businesses.' So there is the possibility within Dodd-Frank that it can address too big to fail.
KUDLOW: Are you hoping for a miracle, Mr. Barofsky? It sounds like you're reaching for a miracle. Now, I'm an optimist, but it sounds like you're really reaching for a miracle.
Mr. BAROFSKY: I don't--you know, I think it's an--it's going to--they're going to have to demonstrate a degree of will that has not yet been demonstrated. But look, you know, if--as you said, there's a new Congress, and with the right type of pressure, hopefully we can get there.
KUDLOW: All right, Neil Barofsky, we appreciate your time very much.
Mr. BAROFSKY: Thank you.
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