Legacy of a Bailout: Why Kashkari Is Proud of TARP, But Doesn't Trumpet It

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Neel Kashkari testifies before the House Domestic Policy Subcommittee during a 2009 hearing on Capitol Hill. Kashkari, the Treasury's acting interim assistant secretary for financial stabilization at the time, answered questions about the TARP, or Troubled Asset Relief Program, and heard complaints from both Republicans and Democrats that few people know where exactly the money is being spent. (Chip Somodevilla/Getty Images)

There’s no question about what the top line is on Republican gubernatorial candidate Neel Kashkari’s resume: He led the federal government’s high-profile response to the 2008 economic meltdown.

But on the campaign trail, Kashkari doesn’t spend too much time talking about the Troubled Asset Relief Program, or TARP. And there’s a reason: Even though the bailout plan worked, it was messy, complicated and deeply unpopular.

It’s not that Kashkari completely ignores TARP. He briefly mentions it during his stump speech and has a stock answer prepared when voters and reporters ask about the program. By and large, Kashkari paints the $450 billion program as a bipartisan success.

“Everyone told us, 'Washington, D.C., is so complicated. You can’t get Republicans and Democrats to work together. You can’t navigate the House and the Senate.' ” Kashkari said during his September debate with Gov. Jerry Brown. “We figured it out. We got them to work together. We got the leaders of both parties to put their country before their political careers.”


That’s not the way Kashkari characterized it six years ago, at the depths of the economic crisis.

“Hard choices are easy to make when you really don’t have a choice,” he told a group in the fall of 2008, his voice sounding strained and stressed. “When the consequences of inaction are so grave we have to step in.”

'Your ATM Wouldn't Work'

Let’s back up a bit. The economy imploded in 2008 for a long list of complicated reasons. The short summary is that too many banks bought up too many bad mortgages, and the global credit market basically dried up. (Need a refresher? "This American Life’s" 2008 episode on the subprime lending crisis remains one of the best explanations out there.)

As Kashkari likes to put it on the campaign trail, the economy was on the verge of a situation where “literally, your ATM wouldn’t work. You type in your code, no money comes out. You get your paycheck, you can’t cash it.”

And because Kashkari had decided to leave a comfortable job at Goldman Sachs when the bank’s CEO, Hank Paulson, became President George W. Bush’s Treasury secretary, this was suddenly Kashkari’s problem. He was all of 35.

Kashkari was just one staffer in the U.S. Treasury Department, of course, but he played a major role in shaping, and eventually implementing, the federal government’s response to the crisis. A big enough role that he was portrayed in the HBO movie, "Too Big To Fail." (Like the real-life Kashkari, the movie character has a massive Newfoundland dog.)

The movie was based on Andrew Ross Sorkin’s book of the same name, which has become the definitive account of the 2008 crisis. According to Sorkin, Kashkari not only came up with the idea that became TARP, he came up with the initial $700 billion price tag, too. The total had more to do with politics than economics. The deliberations, as recounted by Sorkin:

"What about $1 trillion?" Kashkari said.

"We’ll get killed,” Paulson said grimly.

... "Okay," Kashkari said. "How about $700 billion?"

The initial plan: The Treasury would buy up these so-called toxic assets of subprime mortgages that had paralyzed all the banks. Kashari eventually justified the $700 billion as about 5 percent of the nation’s total residential and commercial mortgages.

Shifting Gears

But shortly after Congress approved the plan, the Treasury Department shifted gears in a major way. Instead of buying up “toxic” mortgages, the government would now basically give the money directly to the nation’s largest banks. The first round of purchases distributed $125 billion to banks like JP Morgan Chase, Citigroup, Goldman Sachs and Bank of America. By this point, Kashkari had been tapped as the head of the program.

Congress, to put it mildly, freaked out. San Diego Republican Darrell Issa may be endorsing Kashkari this year, but at the time he ripped into Kashkari:

“I want to know whether Congress was lied to,” Issa demanded of a somewhat flustered Kashkari during a memorable hearing.

Kashkari and the rest of the Treasury Department argued that the direct stock purchases were the better way to unfreeze the markets quickly.

TARP eventually doled out $250 billion to banks and $450 billion overall.

That included more than $60 billion for insurance giant AIG, which would become the most controversial aspect of Kashkari’s tenure. That’s because months after receiving federal assistance, AIG distributed more than $1 billion in bonuses and other payments to its employees.

'A Failure of Oversight by Treasury'

Gov. Brown’s campaign strategy has been to ignore Kashkari’s existence. The main critique Brown lobbed at the Republican during their sole debate, however, focused on the AIG bonuses.

“Yeah, let’s bail them out,” Brown said. “But don’t give them bonuses on top of all the money the taxpayers have to pay. The people who caused the problem, they got rewarded.”

AIG had to be bailed out, Treasury Department officials argued at the time, because the company had been left essentially holding the bag on a large chunk of the insurance policies that banks had purchased to protect themselves against foreclosures.

“This action was necessary to maintain stability of our financial system,” Kashkari said the day the department purchased its initial round of preferred stock. “In return, AIG must comply with stringent limitations on executive compensation for its top executives.”

What the department didn’t realize was that it wasn’t just executives -- AIG had a massive, companywide bonus program in place. In March 2009, it handed out more than $1.7 billion in bonuses, retention payments and deferred compensation. The move generated a political firestorm, and was one of the first (of many) PR nightmares to confront the Obama administration.

The special inspector general overseeing TARP, Neil Barofsky, told Congress that Kashkari’s team dropped the ball.

“Treasury didn’t know about [the bonuses] until two weeks beforehand,” he testified after releasing an audit focused on the AIG bonuses. “And they didn’t know the scope of those payments. That they were going to apply not just to essential personnel, but also to nonessential. People who worked in the mail room, in the kitchen, the file room. Our audit concludes this was a failure. A failure of oversight by Treasury.”

“I love the luxury of 20/20 hindsight,” Kashkari responded during a recent appearance on KQED’s Forum. “We were trying to prevent the American, and the global, economy from collapsing.” Still, he didn’t dispute the critique. “With all the luxury of six years to contemplate this, sure, we’d do lots of little things differently.”

A Thankless Task

On the campaign trail, Kashkari says TARP got every dollar back, and turned billions in profit.

That’s actually a contested point. While repayments, interest and dividends have generated billions more in revenue than what the government paid out, TARP’s special inspector general argues the government is still owed about $40 billion in principal. Kashkari disputes that figure, pointing to the Treasury Department’s official accounting, which backs his claim.

But to the larger point, UC Berkeley Law Professor Steven Davidoff Solomon says the answer is pretty clear.

“TARP was undoubtedly a success,” said Solomon, who has written several papers on the government’s response to the financial meltdown. “The fact that we’re standing here and the banks are up, and the economy is growing -- maybe not as fast as we want [it] to -- clearly shows that TARP was a success. It stopped the financial crisis.”

But it was seen as rewarding the banks that helped create the crisis to begin with. That doesn’t play well in politics, which may explain why candidate Kashkari doesn’t talk about TARP a lot.

Yes, it may have kept the country out of a depression. But elections aren’t won based on things that never happened.