Kashkari’s Gang of Five

November 4th, 2008 by Phil Mattera

The Bush Administration Treasury Department has been executing the big bailout with a limited amount of transparency, but today an article in the New York Times business section pulls back the curtain and gives a fuller picture of how Henry Paulson’s minions are functioning.

While the country has been preoccupied with the presidential election, a group of five young officials have been meeting to decide which banks will receive federal capital investment funds and which will not. While it originally appeared that Treasury would provide the infusions to any bank that wanted them, the Times describes a very different process. The five officials, led by Interim Assistant Secretary Neel Kashkari, Paulson’s 35-year-old protégé who used to work for him at Goldman Sachs, is unilaterally giving a thumbs up or thumbs down to each institution that applies. Their decisions are said to make use of rankings on a scale of 1-5 determined by each bank’s regulatory agency.

Given that eligibility for the infusions is now being treated by the market as key factor in a bank’s viability, Kashkari’s gang of five is making what the Times calls a “life-or-death decision” for each institution.

It’s amazing how far we have come from the bailout plan approved by Congress, which centered on the federal purchase of “troubled” assets. That scheme, which Paulson insisted be approved immediately to prevent financial doom, has been put on a back burner, while the capital infusion program, which was never debated by Congress, has taken center stage.

It now looks as if the Kashkari group will be remaking not only the banking sector but other portions of the financial world as well. The Wall Street Journal is reporting today that Treasury is considering using some of its investment funds to invest in bond insurers and specialty finance firms such as General Electric’s GE Capital unit and CIT Group.

With remarkably little oversight, Treasury is making wide-ranging decisions about the future of a major sector of the U.S. economy. Even before taking office, the new Administration should put an end to this undemocratic process and replace it with a coherent, transparent plan for economic recovery.

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