PDA

View Full Version : Economics Paulson's pick doesn't instill confidence


rrl308
10-16-2008, 02:25 AM
DAVID WEIDNER'S WRITING ON THE WALL
The Kashkari question
Commentary: Paulson's pick doesn't instill confidence
By David Weidner, MarketWatch
Last update: 12:05 a.m. EDT Oct. 16, 2008Comments: 31NEW YORK (MarketWatch) -- 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.
Let's hope that the 35-year-old whiz kid was chosen interim assistant secretary for financial stability on Oct. 6 because he is the Rain Man of asset valuation who may or may not be able to tie his shoes but can estimate within a nickel the losses on Alt-A mortgage-backed securities held to maturity.
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.
Gross and Bloomberg may have a shot at the long-term job of running the fund. Kashkari, technically, is temporary and needs to be confirmed by the Senate. By picking any of them, Paulson believes, or doesn't care, if there's anyone out there who can help who isn't wrapped like a mummy in conflicts of interest.
Our Treasury Secretary also seems to believe that in order to fix this mess, you have to have had a hand in creating it.
Leftovers
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.
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.
Doubtful decisions
Kashkari has not done much to assuage the market or critics that he's too green for the job.
He began his career as an investigator in the aerospace division at TRW.
That part of his resume has led to a lot of clever remarks about the job needing and getting a rocket scientist.
But Kashkari's record looks more like a failure to launch. He's 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.
Something borrowed
It's no wonder that the world is scratching its head. Congress approved a bailout of bad assets and the Treasury Department has used it to buy stakes in preferred banks. Some of those banks, J.P. Morgan Chase & Co. and Bank of New York Mellon, look to be in decent shape. Others, such as Morgan Stanley and Goldman are highly leveraged firms that, regardless of what kind of charters they hold, are not too far from hedge funds.
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.
Ultimately, Kashkari is yet to prove himself as anything more than someone who can recognize a good idea that's working. On the surface, it may be good to know that Paulson isn't looking at the same tired, old retreads to get us out of this mess. There are no William Donaldsons or Roger Altmans. And thank God, there are, no Robert Rubins or Felix Rohatyns.
But to many investors and citizens, Neel Kashkari is just another Wall Street insider who has close ties to the Treasury chief. Kashkari joins Paulson, Josh Bolton, Steve Shafran, Ken Wilson, Dan Jester as former Goldman bankers who now saturate the administration's team handling the crisis. See full story.
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.
He's young, but that doesn't mean he brings a fresh perspective or new and radical thinking. In short, he's really part of the elite that brought you The Biggest Financial Crisis Since The Great Depression.
Bloomberg's done a good job both as a businessman and as mayor of the nation's biggest city. Bill Gross at Pimco might have his conflicts, but he knows a thing or two about bonds.
If only either had worked at Goldman, maybe he would have landed an interview.
David Weidner covers Wall Street for MarketWatch