Thursday, October 16, 2008

Bailout chief has credibility problem

For all the accolades that Secretary Paulson is getting now, it is important to remember that a month ago he was getting pummeled for his initial three-page plan giving him unchecked powers. It is equally important, if not more so, that three months ago orso he said he wanted a bazooka but thought he would never have to use it.

So, what about his choice for interim assistant secretary for financial stability? One writer thinks little of it.

Let's be optimistic, or just flat out pretend, that Treasury Secretary Henry Paulson did not pick Neel Kashkari to run the bailout program just because he worked at Goldman Sachs Group Inc.

Kashkari as prodigy, not Kashkari as favoritism, is clearly what Paulsonites at Treasury and their allies at the Federal Reserve want us to believe, considering they bypassed offers from people with much longer resumes including New York City Mayor Michael Bloomberg, who's clearly worried about losing his job, and Bill Gross, the bond king at Pimco, who offered to do it for free.

I thought Bill Gross's offer should have been taken; who could be better?

Whoever ends up at the permanent post will be getting the leftovers. Consider that 36% of the funds already have been spent. The rest almost certainly will be used to buy bum assets. So much for the "flexibility" Kashkari talked about last week in his first major speech after being named to the post.

Who is overseeing his performance, anyway?

The asset-purchase part of the program is voluntary for participants. If someone other than Kashkari gets the job, they will be left with only the thankless task of digging through the garbage and trying to put a value on it.


If Kashkari is on the job, does anyone think Treasury will be driving a hard bargain with Goldman on its mortgage assets? And while we're on the subject of Goldman, under what criteria did Goldman and Morgan Stanley qualify as two of the nation's nine strongest financial institutions? Just wondering.

Good question. Although I would say that their importance in the intricate web of finance is reason enough to slot them in that category.

Kashkari has advised Paulson on security and other issues at the Treasury Department since 2006, which would have been a good time to start thinking about the consequences of the housing market bubble bursting. It does not take an egghead to connect the dots and conclude that mortgage defaults would have an impact on the derivatives built from them. Instead, Kashkari urged U.S. banks to start a covered-bond market like they had in Europe. They probably would have, had they not been edging toward collapse.


Missing the bubble is a big reason why critics think Treasury is too narrow-minded in its approach to the crisis. When some in the market were advocating a plan to take stakes in U.S. banks, Paulson and Kashkari were advocating baby steps: a bailout here, a rescue there. That course would have been fine had they made provisions should the crisis deepen, which it did, in part, because there was no back-up plan.

I've so wondered: where were all the financial geniuses while the house was crumbling? If they performed this way at Goldman, how the hell did Kashkari and Paulson ever get that high up? And if they did better at Goldman, how come they're such putzes at Treasury?

The equity-for-cash plan that Paulson and Kashkari have implemented is the right way to go. Better to buy a bank dedicated to survival than its garbage. But let's be honest, they only did it because it was working in Europe. Paulson and Kashkari didn't have a choice.


Kashkari came from humble beginnings, but he studied hard. You can guess the rest of the resume: Wharton Business School, homes on both coasts, he met Paulson and got his job by knowing the right people. He stayed up all night working on the bailout proposal even though the document, at a total of three pages, was politically inept and borderline unconstitutional.

Borderline? It called for the Treasury Secretary's decision to not be reviewable even by courts. Didn't Chief Justice John Marshall settle that argument a couple of hundred years ago?

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