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Shining Light on the Bailout Effort
Despite Pushback, Watchdog Calls for More Transparency at Treasury

By Amit R. Paley
Washington Post Staff Writer
Tuesday, March 24, 2009

In the days after President Obama's inauguration, Neil M. Barofsky, the chief watchdog overseeing the $700 billion federal bailout of the financial system, walked up from his office in the basement of the Treasury building to the ornate suite of the official running the rescue program.

Barofsky had a simple message: The government should require any bank receiving taxpayer dollars to explain how it is spending the money.

The official, Neel Kashkari, disagreed. So Barofsky, the special inspector general for the program, said his office would do it instead.

"I don't think Treasury's done enough," he said. "Frankly, I'm not terribly concerned if anyone in Treasury actually thinks we're being too aggressive. That's our job."

The episode illustrates why lawmakers and watchdog groups say Barofsky is emerging as the primary check on waste and fraud in the six-month-old financial rescue effort. But Wall Street executives and Treasury officials criticize him as an overreaching zealot scaring banks from joining the financial rescue, and even his supporters wonder whether his office has sufficient resources to adequately oversee such a gigantic program.

The special inspector general now has 30 employees to monitor the mind-bogglingly complex bailout programs. Congress has not yet passed a law giving Barofsky's office the same hiring flexibility as other special inspectors general. The problem is exacerbated because of the staffing issues at the Treasury, where the compliance office for the bailout program has only seven employees.

"Twenty people for, what, 8,000 banks in this country?" said Rep. Patrick J. Kennedy (D-R.I.), a member of the House oversight committee. "That's where concerns come in. Because before we're going to be able to pass another nickel in this Congress, we're going to have to get the due diligence on these things."

Barofsky, a 38-year-old former federal prosecutor who survived an assassination attempt during a case against Colombian drug dealers, has been working 14-hour days. He said he considers himself responsible for any of the government initiatives that use funds from the bailout program, whether or not they're run by Treasury. With the Federal Reserve putting up even more money, the total price tag has already reached $2.9 trillion, he estimates.

Though Barofsky refuses to eat with senior administration officials in the building's executive dining room to maintain his independence, he says he has a cooperative working relationship with Kashkari. But the difference in their approaches and priorities is highlighted by their disagreement over monitoring how banks are spending the bailout money.

Barofsky first recommended to department officials in December that they require banks to detail their use of the funds. But Kashkari made clear that he thought such a requirement would be too time-consuming and that it would be impossible to determine exactly what the banks did with the money.

"It's been very hard for us to say, well this dollar went for this purpose, the tax dollars went for another purpose," Kashkari said recently. "We've taken great care to not try to micromanage institutions."

Kashkari instead made a much narrower request of the banks, asking the top 20 recipients to report on how the funds affected their lending. That request was later expanded to all the banks. Barofsky's office took a more ambitious approach, demanding in a letter last month that every firm then in the program describe in detail how it was using the money.

Government officials said that Barofsky's letter caused several banks to withdraw their applications for the program and that his overall approach -- along with public outrage over executives' multimillion-dollar bonuses -- was part of the reason firms are afraid to participate in the bailout. "Some banks have said, 'Wow, this is scaring us,' " a senior Treasury official said.

The responses to Barofsky's letter are now stuffed into five brown cardboard boxes crowding a folding table, and a sixth one is stored elsewhere. Barofsky doubts that any bank has withdrawn from the program because of his letter but said it doesn't matter even if they have. "Any institution that is so concerned about having to report on its use of funds of taxpayer money," he said, "really calls into question what their intent was on how to use that money," he said.

On a recent Monday, Barofsky arrived at the Treasury at 7:30 a.m., wearing a black trench coat and a backpack slung over his shoulder. He headed downstairs to his makeshift office in the basement, which reeks of mildew. "Pardon the smell," Kevin Puvalowski, the office's chief of staff, joked to a visitor. "I think the Treasury people stuck dead fish in the rafters." (The Treasury recently temporarily moved them to different offices to try to get rid of the odor.)

Barofsky's office walls are completely bare. Nearly all of his belongings sit unpacked in boxes in the corner, awaiting his office's move to new headquarters. The only personal item on his desk is a giant knife seized from a group of Colombian guerrillas whose prosecution he led as an assistant U.S. attorney in the Southern District of New York. During one trip to Bogota, the guerrillas put in motion a plan to kidnap, torture and kill him that was foiled at the last minute.

President Bush nominated Barofsky last fall, even though he is a lifelong registered Democrat who contributed $200 to the Obama campaign. (Under his list of "dislikes" in his high school yearbook, he wrote: "Republicans.") He was reluctant to take the job at first because his wife, a psychologist, couldn't leave her practice. (She still works in New York but stays in Washington Thursday through Monday morning.)

Barofsky has a reputation for frugality. When he came to Washington from New York for the first time, he took the $5 Chinatown bus to save money. And at a recent morning meeting, he told his staff to save money by not ordering letterhead. His agency, officially known as the Office of the Special Inspector General for the Troubled Asset Relief Program, was allocated $50 million budget for a program that could stretch more than a decade.

He doesn't want to beg lawmakers for money yet, although several have raised the issue. During a recent private meeting, Rep. Jo Ann Emerson (Mo.), the senior Republican on the Appropriations subcommittee that funds Barofsky's agency, asked whether he had enough staff. He replied that he had about 25 employees out of the 125 or so that can fit in the agency's future office space.

Emerson gasped. "How are you making due?" she said.

"We have our hands full," Barofsky responded.

His office is cooperating with at least 16 other law enforcement groups and has formed a council of inspectors general focusing on the bailout. But officials at the agency, which has already opened several criminal investigations, said they know the office will always be understaffed. "We could be as big as the FBI -- it would take that size to truly cover this by ourselves," said Puvalowski, the chief of staff. "We always have to do more with less."

Despite his aggressive reputation, friends and colleagues describe Barofsky as a colorful character in what is often a world of stiff suits. He quotes from "The Simpsons"; his favorite music is by the punk rock group the Clash and, a vegetarian, he offers employees recipe tips on tofu tempura. Barofsky always wanted to be a prosecutor, even before he knew exactly what the word meant. His mother still keeps the fortune from a cookie he received when he was 12 years old that says: "You will be a great lawyer one day."

Anthony S. Barkow, a close friend and former colleague at the U.S. Attorney's Office, said anyone abusing the bailout should fear Barofsky. "When he says he wants to cause pain to the people who committed fraud, he means it," Barkow said.

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