Ex-TARP Watchdog: 'We hit huge resistance from Day 1'

Former inspector general for TARP details why failsafe for financial institutions has been abused and the opposition he faced in new book, 'Bailout'

This is a rush transcript from "On the Record," August 9, 2012. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: There's no doubt about it, our economy is on shaky ground, at best. And in October 2008, the federal government authorized TARP. It was supposed to stabilize our collapsing financial system, providing critical help to businesses, banks and home owners. But four years later, taxpayers are still owed more than $100 billion. So is there any way out of this mess?

Neil Barofsky is the former special inspector general for TARP and the author of the new book, "Bailout." He joins us.

Neil, I read your book, and I was hoping you were going to say the inspector general system at least was going to protect us and we shouldn't worry so much, that help is on the way. I read your book, and it looks like you came to Washington and you were scandalized by what you saw. Is that a good start?

NEIL BAROFSKY, FORMER SPECIAL IG FOR TARP OVERSIGHT: Yes, Greta. I was -- I was pretty shocked when I got down to D.C., after 8 years as a federal prosecutor in Manhattan, to see just how the degree of control a handful of Wall Street banks and financial institutions had over our economy and over our institutions and getting involved in the inspector general community and seeing that, you know, they're a lot like many other government agencies, with the priorities of budget and appearances really oftentimes over the job of protecting the taxpayer, which was, of course, my job.

VAN SUSTEREN: When I read your book -- and I hadn't realized it, but the inspector general office was created -- you're the first one to hold it -- with the creation of TARP. I'm just so struck by the fact that it seemed like every place you went, it was like running your head into the wall, that no one wanted to seem to cooperate, that basically, the thinking was, you know, Hey, buddy, you don't know the way of Washington. You know -- it almost seemed like the fix was in on the other side of you.

BAROFSKY: Yes. They threw up roadblocks everywhere we -- every time we turned around. It took us three days just to get garbage cans in our offices. They did not exactly roll out the red carpet.

And a lot of that was because of what our job was, which was to shine a light and bring transparency in a lot of areas that, frankly, the government and Wall Street wanted to keep dark, you know, basic concepts like what happened to the TARP money? You know, we just hit huge, huge resistance from day one.

VAN SUSTEREN: I was going to say that the discussion of the bank bailout in your book is when you wanted to find out what the banks were doing with the money, were the banks actually lending the money or doing something else, it's -- nobody wanted to get on the same page with you and find out.

BAROFSKY: No. I mean, all we had was sort of these repetitions of these arguments that were made by the banks themselves, that it couldn't be done, it wasn't possible. And as I pushed this -- because, you know, I consulted some accountant friends, some economists and we demonstrated that it could be done.

The push-back was amazing. I was told that I was stupid. I was told that if I pushed this, I would bring down the banking system. I mean, eventually, I was confronted by Secretary Geithner in an expletive-laced tirade when I suggested that not doing this and not being transparent with the American people was going to harm the reputation of the government and put a big black mark on the legacy of him and the president. It was relentless, the type of opposition that we faced.

VAN SUSTEREN: At the end of the book, you write, you -- to the effect -- you say, It's my own anger that compelled me to write this book. Do you now feel, having completed your run -- you were a federal prosecutor, as you noted, for years. You've got a long history of being an aggressive prosecutor.

Do you now feel that -- I mean, do you walk away from Washington thinking this is basically hopeless and this is a mess? Or is there any light at the end of the tunnel in terms of figuring out how to sort our way out of the economy, how to monitor where this money is going and getting paid back?

BAROFSKY: You know, if I thought it was hopeless, I wouldn't have bothered to write the book. But it is a grim situation. You know, we have a country right now and a regulatory system that does not operate to protect the American people.

I was told point blank one time when I was down in Washington that because of my tone -- I had a harsh tone on Wall Street and on the government -- that if I didn't change it, I was going to do real harm to myself and my family and my ability to work again in the future, but that if I changed my tone and was a little bit more upbeat, you know, great things could happen to me, a judgeship or maybe a pot of gold at the end of the Wall Street rainbow.

And that's the same approach that's faced by every inspector general and every regulator in Washington. You know, go along to get along. And we need to rethink our regulatory process so we can incentivize regulators to do their jobs, not protect the banks or their own behind.

VAN SUSTEREN: Have the banks been gaming the rules?

BAROFSKY: I mean, since the -- since there were rules, banks have been gaming the rules. And part of the problem is, is that when we bailed them out, we solidified this perception that they don't operate by the normal rules of capitalism, that they're too big to fail, and if they get in trouble, or if they break the rules, they're not going to be held to the same standard because of this fear that if we do hold them accountable, if we indict them or something like that, we risk bringing them down, and with them the entire financial system.

And they know that and the regulators know that, and that's why you see scandal after scandal after scandal.

VAN SUSTEREN: Are there any heroes in this TARP money? I mean, is there anyone, as you were down here in White House, you thought, you know, This person really is doing something, this person really knows what he's doing and this person has the right motive?

BAROFSKY: You know, there were some people who I was pretty impressed with. I worked closely with Elizabeth Warren, who was the head of a congressional oversight panel. And I was really impressed with her ferocity. And you know, even she was up for the job of the Consumer Protection Bureau, I thought she -- you know, she went after and really eviscerated Secretary Geithner at a hearing once at a time when it would have been easy for her to pull her punches.

So I really admired her and thought that she really put her job above her own personal interests. And she was definitely someone who impressed me.

VAN SUSTEREN: At one point in the book, you write the criminal justice system, of which, I might note -- as I've already noted, you were a long -- you were a federal prosecutor for a long time -- the criminal justice system has proven itself ill-equipped to address the deep, fundamental problems at the heart of the financial crisis.

Let me ask you about that, and also fold into it the news tonight that DoJ has decided, and the SEC, that there will be no prosecution of Goldman Sachs in connection with the financial meltdown. Tell me what you think.

BAROFSKY: Yes, I wish I could say I was shocked by this, but I have to tell you I'm not. You know, part of my job at SIGTARP was we built a law enforcement agency that investigated and prosecuted those who tried to steal from the TARP program. You know, almost 100 people have so far been criminally charged. We had some great success.

But part of it is I had to deal with Department of Justice to get my cases charged, and I consistently saw a timidity and a lack of sophistication that was really -- they were gun-shy and they were afraid to bring some of the tough cases. And it was remarkably frustrating.

I recount some of the events in the book. And I think this latest news on Goldman -- it's just a stark reminder that here we are and there hasn't been a single major case against a financial executive or an institution that helped lead into this financial crisis. And this reaffirms that message that they're playing by a different set of rules.

VAN SUSTEREN: All right, is it that the laws aren't there to prosecute them? Is it that they haven't done anything wrong or the prosecutors are not sophisticated or nobody cares?

BAROFSKY: You know, I think it might be a combination of all of those things. I mean, there's a lot of people that care. But you know, the combination -- you know, we saw a huge diversion of law enforcement resources away from white-collar crime over to counterterrorism, understandably, after 9/11. And there just is an experience gap when it comes to complicated accounting frauds. And you know, I banged my head against the wall a number of times, trying to get our cases charged. I can't say I'm surprised by this.

VAN SUSTEREN: And of course, the -- you know, I read all about it in the book, "Bailout." It's a great book. It's a real eye-opening, but a little shocking. Neil, thank you.

BAROFSKY: Thanks for having me.