FORTUNE — Neil Barofsky has been chasing bad guys for much of his professional career. Whether it was as an assistant US Attorney in the Southern District of New York or in his most recent gig as the man trying to make sure hundreds of billions of government money doesn’t get stolen by scheming bankers, he is naturally prone to suspicion, if not outright distrust.
“My view of financial institutions is colored by my years as a prosecutor,” Barofsky says. “None of this surprises me. They are profit-driven corporations that seek to maximize profitability without much regard to social gain.”
This squinty-eyed attitude made him an effective special investigator general overseeing the Troubled Asset Relief Program, or TARP — which is to say, the guy policing the banks and auto companies that received $411 billion from taxpayers. But as the mood in Washington has shifted away from confrontation toward accommodation, Barofsky has become a lonely voice of dissent.
After more than two years as the SIGTARP — an acronym of off-putting proportion — Barofsky resigned on March 30. “When I first started this job in 2008, I felt like there was a collaborative effort with the Treasury Department,” he says. “We were in the trenches together. Then my job turned into blunting the effects of their bad decisions. And then it just devolved into battling with Treasury itself. I used to have a weekly meeting with them, but I didn’t have one after late September.”
The cooled ardor from the Treasury doesn’t really surprise Barofsky. In quarterly reports and more than a dozen TARP audits, his office often showed the Treasury in a dim light. His resignation not only ends that unusually open bureaucratic drama, but, more significantly, also shrinks the tiny activist, take-on-the-banks wing of government insiders.
It will shrink further soon. Federal Deposit Insurance Corp. chief Sheila Bair is stepping down in June at the end of her five-year term. Even Elizabeth Warren, a near-holy warrior on behalf of consumers, remains in limbo at the temporary head of the Consumer Financial Protection Bureau, as congressional Republicans have dug in against her as a nominee for the permanent position. The moment of maximum anger toward the financial industry has passed.
“The tolerance of the executive branch for the kind of truth-telling that Barofsky, Bair and Warren bring is actually pretty limited,” says Simon Johnson, an economics professor at MIT and a critic, from the left, of the Obama administration. “These people are trying to find practical, responsible solutions to the issues, but the White House never really wanted to get into that kind of fight.”
Barofsky did. As someone whose early career was spent chasing down drug kingpins, Barofsky knows how to hard-knuckle his way to success. Since he took office in December 2008, his agency helped convict 17 individuals of fraud. Some 153 investigations are still in process. His efforts helped prevent $555.2 million in taxpayer funds from being lost to fraud and assisted in the recovery of $151 million more. The agency, in other words, has paid for itself, while also serving as a bulwark against scams financed with taxpayer dollars.
Barofsky, whose jurisdiction was limited to those who applied for or actually received TARP money, found shenanigans at regional banks, but never brought a big banker down. He helped Andrew Cuomo, who was then the New York Attorney General, bring fraud charges against Bank of America BAC and its former CEO, Ken Lewis, last year. At the time, he argued that the suit “should send a powerful message that we will work tirelessly to hold accountable those who have engaged in misconduct relating to the response to this national crisis.” But that suit is mired in the usual legal morass, and since the embarrassing failure to convict two Bear Stearns’ hedge fund managers of what appeared to be fraudulent communications to investors, the federal government seems largely to have lost interest in going after the big banks.
One exception is Sheila Bair. In March, the outgoing FDIC chair sued former Washington Mutual chief Kerry Killinger. “The one person who gave me hope was Sheila,” Barofsky says. “She articulated a plan that has a shot of working. Basically, it says that significant institutions have to present their resolution plans to their regulators, and if they’re not credible, regulators can do the things to make them credible, including shrinking business lines, eliminating certain transactions, or more. It’s at least a starting point. But the silence that her statements have been met with does not bode well. I think there are a lot of entrenched interests out there who are quite happy with the status quo.”
The status quo. Leaving well enough alone. This is not for Barofsky, particularly as it came to his relationship with the Treasury. He criticized then-Treasury Secretary Hank Paulson for failing to place conditions on the original $115 billion in payments that went to the eight largest banks and remained a thorn in Paulson successorTim Geithner’s side until the very end.
The Treasury is diplomatic in response to Barofsky’s criticism. “SIGTARP has been very helpful,” says Tim Massad, acting assistant secretary for financial stability. “They made a number of recommendations, and we adopted about 90% of them. TARP stabilized the financial system and stopped the panic faster than most people thought possible and at a lower cost. That success is in part a credit to the oversight bodies, of which SIGTARP is just one.”
What the Treasury is focused on, obviously, is the success of the program. According to the Treasury $251 billion of the $245 billion that went to rescue banks had been recovered by the end of March. Remarkably, that translates into a $6 billion profit –with $12.3 billion coming from the investment in Citigroup C alone.
Barofsky doesn’t deny that TARP was a financial success. But he argues that the non-financial costs of TARP outstrip its benefits. Most important, he contends that efforts at financial reform essentially failed to solve the problem of banks that are too big to fail. As of December 2010, the country’s five biggest financial institutions were 20% larger than before the crisis, and they controlled $8.6 trillion of assets, the equivalent of 60% of the nation’s gross domestic product –this despite the passage of the Dodd-Frank financial reform bill. “The big banks are bigger and more interconnected than before,” he says. “And they still benefit from an all but explicit guarantee of government support. The market knows this.”
Barofsky has taken a position as a senior fellow at the NYU School of Law, but eventually wants to return to public service. “But realistically, that’s not what I’m going to be doing next,” he told me. “For the simple reason that somebody has to appoint me to something. And I just don’t think I made a lot of friends in Washington.”