Former TARP Inspector says banks are still risky

Bloomberg interview

Video: Jan 10: Neil Barofsky on Bank Capitalization, Regulation

This was in response to Warren Buffett's outlandish comment, “The banks will not get this country in trouble, I guarantee it”

Neil Barofsky is the former Special US Treasury Inspector General of TARP. If you think I'm unreasonably bearish on the banks and am exaggerating their risk, maybe you'll take him more seriously.

Interview transcript: Neil Barofsky

[ Text from interview; bolds are my emphasis ]

I think that there's a difference between things being improved and sufficient. The capital for the banks, it's definitely much better than we were at the heart of the crisis - and that's a good thing. And the banks get some credit, government gets some credit for pushing that. That's not to say that it's sufficient.

If you look at how much capital they actually have, when you get through all the complex risk weightings and non-tangible things that count as capital, and you go the more aggressive way that Europe counts capital for its banks: you're looking at leverage ratios that are still, for the top six banks according to a recent Bloomberg study, that are 33:1. Lehman-type territory. I think it's good that there are higher capital ratios, but for [Buffett] to guarantee they won't cause trouble again, is a bit too far.

[ Interviewer: one of Buffett's arguments is that our ratios are much better than they are in the rest of the world, and in Europe ]

Our ratios are better than Europe even if you use the apple-to-apples comparison. We allow more netting of derivates when calculating assets than Europe does. So we're still better, but being better is not enough, does not make us safe. You have people like Tom Hoenig, vice chair of the FDIC, who said we should have 10% where we now have 3.3%. Sheila Bair says we should have 8%.

[ Interviewer: what's sufficient capital? ]

They would say 8% or 10% of tangible equity. But the academic research indicates it should be far higher than that, maybe 20% to 30%, to really be safe when you have institutions of the size and character of the ones we have.

. . .

When Warren Buffett talks about how they got rid of the troubled assets. We can't really know that. There's so much opacity with these institutions. There's the recent cover story of The Atlantic that showed how Wells Fargo (one of the so-called good banks) is indecipherable. It's really almost impossible to tell where those risks are. As we saw last summer with the whole London Whale [massive JPM loss], even the CEOs of these banks may not know where all the risks are.

. . .

Given what's happening today at this moment, no bank is on the precipice of bringing down the economy. But that could change. [ Interviewer: are any of them big enough to? ] I think most of them are, the giant banks. I think Wells Fargo, JP Morgan Chase, Citi, Goldman, probably Morgan Stanley. An external shock could push them over the edge pretty quickly, given how thin their capital really is, even if it is "much better" than 2008.