I just got around to watching a rare television appearance by Neel Kashkari, the former head of Treasury's $700 billion Troubled Asset Relief Program (TARP), on last week's Charlie Rose Show.
While there were several noteworthy moments in the interview--including Kashkari's secret for coping with an occasionally hostile Congress (" I put a little index card in front of me that said, 'The louder he yells, the calmer I shall be'")--I wanted to take a closer look at two points he made:
1. Kashkari's continued insistence that it would be nearly impossible to track what banks do with TARP funds because money is fungible. In his latest report (pp. 137-138), Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, called this argument "unfounded." Although we haven't seen them yet, Barofsky reported to Congress that he got a 100 percent response rate from the 364 banks he surveyed about their use of TARP funds, including some granular-level detail about the banks' lending activities. Frankly, it's looking more and more like Kashkari and other Treasury officials have been hiding behind the "money is fungible" argument as a way of protecting the banks from rigorous oversight. Of course, it doesn't help that Kashkari's previous employer was Goldman Sachs, which has benefited from $10 billion in TARP assistance, not to mention the counterparty payments it received from the AIG bailout.
2. Kashkari's claim that the Public-Private Investment Program (PPIP) is set up so that "if taxpayers lose a dollar, you [the private investment firm] lose a dollar. You can't make a dollar unless we make a dollar. So we share the upside and downside equally on the equity side." To be fair, he was making a larger point about some of the compromises that had to be made in order to develop initiatives that would be politically feasible. And he's technically correct that taxpayers and private firms will share the gains and losses when it comes to equity. But Kashkari conveniently neglects to mention that the government is guaranteeing a majority of the total financing for the public-private partnerships: the FDIC is providing up to 6:1 leverage in debt guarantees for the Legacy Loans Program, and the Legacy Securities Program will be bolstered by additional non-recourse government loans. This means that if the investments go south, the government (and taxpayers) will ultimately have to absorb a vast majority of the losses.
As we wrote in our public comment on the Legacy Loans Program, POGO takes no position on the strategic merits of these initiatives. But it would be nice if officials like Kashkari were a little more honest about the terms of the PPIP, which, as pointed out in a recent hearing by the Congressional Oversight Panel, will allow private investors to make huge profits while assuming almost none of the risk.
-- Michael Smallberg