Fresh off his stint playing Thoreau in the Sierra Nevadas, former Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari has a new role to play: Managing Director and Head of New Investment Initiatives at the Pacific Investment Management Company (PIMCO), a Southern California-based investment firm.
Given the harsh treatment he often received when attempting to defend Treasury’s Troubled Asset Relief Program (TARP) before an angry and skeptical Congress, it should perhaps come as little surprise that Kashkari has chosen to relocate on the opposite side of the country. But despite his physical separation from D.C., Kashkari’s movement through the revolving door will likely make the incestuous relationship between the government and the financial services industry even stronger, and may call into question how effective he was at serving the interests of taxpayers during his time in office.
Prior to entering the government in 2006, Kashkari was a Vice President at Goldman Sachs, where he led the company’s IT Security and Investment Banking practice. In 2008, then-Treasury Secretary Hank Paulson—the former Chairman and CEO of Goldman Sachs—appointed Kashkari to oversee Treasury’s Office of Financial Stability, including the $700 billion TARP. Kashkari soon became the subject of controversy when the government’s bailout of AIG funneled billions of dollars to his former company, one of AIG’s major counterparties. Now, with his pending return to industry, Kashkari’s spin through the revolving door has officially come full circle.
It should go without saying that there is nothing inherently wrong with Kashkari’s decision to return to the private sector. The reason we’re particularly concerned about his new job is that PIMCO had an uncomfortably cozy relationship with Treasury throughout Kashkari’s time in office.
As Felix Salmon correctly points out, when Kashkari first started at Treasury, he was working on a plan to have the government purchase troubled assets from banks and other financial institutions—an idea that was designed and promoted by PIMCO, which also volunteered to work on the program for free:
Remember too what Kashkari’s job was at Treasury, before Hank Paulson came out with the Plan B of simply buying equity stakes in the banks: he was meant to be putting in place a mechanism to value precisely the kind of complex debt instruments that Pimco considers itself an expert in. In doing so, he doubtless spent a great deal of time with very senior Pimco officials who were probably flattering him daily in an attempt to bring him round to their way of thinking on the matter. It hardly matters whether or not they explicitly said at the time that they’d be interested in hiring him when he left government — Kashkari’s a smart guy, and he knows how the revolving door works.
A recent New York Times article describes other uncanny parallels between PIMCO’s investment strategies and Treasury’s bailout decisions. Last fall, for instance, PIMCO was promoting investments in government-backed mortgages guaranteed by Fannie Mae and Freddie Mac. In short time, the government announced it was taking over Fannie and Freddie, causing PIMCO’s Total Returns Fund to rise by $1.7 billion in a single day.
Granted, Treasury ended up abandoning PIMCO’s initial proposal to purchase troubled assets, and even when that idea morphed into the Public-Private Investment Program (PPIP), the company surprised many by withdrawing its application to become a PPIP asset manager. But it’s important to keep in mind that PIMCO has also played a central role in the Federal Reserve’s bailout programs. Over the past year, for instance, the company has worked as a collateral monitor for the Term Asset-Backed Securities Loan Facility (TALF), and as an asset manager for the New York Fed’s agency mortgage-backed securities purchase program and its Commercial Paper Funding Facility. In the meantime, PIMCO has significant private investments in the same types of assets it has monitored and managed for the government (according to a recent report by the Special Inspector General for the Troubled Asset Relief Program, mortgage-backed securities make up 61% of PIMCO’s $161 billion Total Return Fund, and the company manages $983 million in assets under its Mortgage-Backed Securities Fund).
We have no reason to doubt that Kashkari will adhere to all conflict-of-interest laws and regulations that apply to his post-government employment at PIMCO, including any “cooling off” periods during which he is banned from lobbying Treasury. But even if no laws are broken, PIMCO might be positioned to gain a competitive advantage by picking up a senior Treasury official who can at least provide behind-the-scenes guidance on how to lobby his former agency. This latest example of the revolving door is also sure to weaken the public’s confidence in its elected and appointed officials, especially those that are working on the government’s controversial bailout programs.
-- Michael Smallberg