Kashkari Daydreams While Bailout Teeters

November 11th, 2008 by Phil Mattera

When Treasury Secretary Henry Paulson chose his protégé Neel Kashkari last month to run the Big Bailout, we were led to believe Kashkari was some kind of whiz kid who would use his background in both engineering and finance to stop the meltdown of the financial sector. A month later, Kashkari has succeeded—in his own mind.

Appearing at an event sponsored by the Securities Industry and Financial Markets Association, the Interim Assistant Secretary for Financial Stability gave a speech yesterday with a surprisingly upbeat tone. Kashkari spoke of having made “tremendous progress” and of having “accomplished a great deal in a short period of time.” He bragged that his team is “working around the clock” while “ensuring high quality execution.” The only problem is that, to the outside world, the bailout is looking more and more like a disaster.

As Kashkari was speaking, news was circulating that American International Group, one of the biggest recipients of federal bailout aid, had reported a $25 billion quarterly loss. At the same time, Treasury revealed it was upping its rescue package for AIG to $150 billion in capital infusions and purchases of the company’s toxic assets. Fannie Mae, another ward of the state, reported a $29 billion quarterly loss.

Also while Kashkari was speaking, readers of the Washington Post were learning that amid the initial phase of the bailout in September, the Treasury Department quietly announced a tax code change that gives a huge windfall (estimated by some tax lawyers at $140 billion) to banks that are buying up other financial institutions. The article reports that some tax experts believe the rule change was illegal.

And all this follows several weeks in which it has grown clear that many banks intend to use the capital infusions they are receiving from Treasury for making acquisitions and paying dividends rather than expanding their loan activity. Today the Post is reporting that the feds have concluded they need to draw up rules that will, in effect, coerce banks to use their rescue money to expand lending—something we were led to believe would happen spontaneously.

The only way all this translates into “tremendous progress” is if Kashkari is a financial Walter Mitty caught up in daydreams about financial greatness. Unfortunately for Kashkari—and fortunately for the country—his reveries will soon be brought to an abrupt end as the Paulson team is displaced by the new Administration.

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