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our guest today is neel kashkari Neil
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thank you so much for joining us today
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it's my pleasure thanks for having me
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you have a background in aerospace
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engineering and after you finished your
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MBA at Wharton you joined goldman sachs
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i wonder if you could we could start by
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talking a little bit about what you did
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at goldman sachs and what really
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attracted you to public service sure as
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an engineer I really enjoyed technology
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development and I went to Wharton to try
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to find a way to learn about business
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and marry my technology skills with
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business and I was a technology
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investment banker at Goldman in San
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Francisco advising tech companies on
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mergers and acquisitions and financings
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such as I POS for as long as I can
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remember I've had an interest in
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government and I had been at Goldman for
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four years and getting to go with henry
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paulson to the treasury department was a
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once-in-a-lifetime opportunity and i
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jumped at it as soon as i had the chance
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now when you giant henry paulson at
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Treasury what was their expectation
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about what was your job going to be and
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when did it and how did it become
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apparent that basically what you were
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being called upon to do was to arrest
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the meltdown of the US financial system
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you know for the I didn't know what my
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job would be I came in as senior adviser
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to secretary Paulson to work on a
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variety of policy issues the first year
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I was there I spent a lot of my time on
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energy policy developing a new
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alternative energy program to encourage
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the development of alternative energies
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to replace oil I did work with him on
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India increasing Treasuries economic
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engagement with India it was after about
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a year in august of 2007 that he asked
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me to lead the Treasury Department's
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work on the housing market we were
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beginning to see real strain in the
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housing market especially in subprime
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and as the chief government official in
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charge of the economy he wanted to make
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sure that Treasury had a strong view on
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housing and so that's where I first
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started getting involved in the credit
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crisis and that then later evolved and
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developed into my role on financial
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stability and ultimately the tarp help
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you understand since you had such an
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insider's view of the whole process but
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as different signs of the economic
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crisis became a pan
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and large institutions began to face
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problems how is the decision-making
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process within Treasury and the Fed
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managed and how did you develop your
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strategic response to these situations
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there was very very close collaboration
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between Treasury in the Fed between
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secretary Paulson Chairman Bernanke and
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then New York Fed President Geithner I
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would call us co-equal partners where we
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were literally looking at every tool
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available and trying to figure out what
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would be the right policy response for
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the country not looking at it from a
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Treasury perspective or a Fed
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perspective and I think that that
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collaboration and that trust was
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absolutely essential as the crisis
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progressed our tactic shifted you know
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we started out pushing the private
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sector to raise capital and to recognize
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losses hoping that the private sector
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could adjust and deal with the housing
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correction on its own at some point it
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became apparent that it couldn't and
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when we realized that risk we began
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contingency planning treasuring the Fed
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together on what we would do if the
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prime if the government had to step in
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to stabilize the private sector how for
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example where decisions made about
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whether an institution should be allowed
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to fail or whether it needed a rescue I
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see ultimately that was the combined
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judgments of Treasury and the Fed
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secretary Paulson Chairman Bernanke then
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president Geithner at the New York Fed
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there was no one test that we looked at
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it was a combination of understanding
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that institution understanding how
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connected that institution was to other
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institutions what stresses and strains
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were in the credit markets in the
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financial markets what was the state of
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the economy if you look at Bear Stearns
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as an example it is very possible that
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if Bear Stearns had run into similar
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trouble two or three years ago it may
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have been allowed to fail but given the
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state of the credit markets and the
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broader economy the decision was made
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that we needed to step in to prevent a
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collapse and arrange the merger with
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JPMorgan and so there's no one metric I
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can point to ultimately it's the
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combined judgment of Treasury in the Fed
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that made those decisions now did you
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have any debates for unissued
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say for example like moral hazard and
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how did how did you arrive at consensus
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and what did that experience teach you
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about making decisions under pressure
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sure we talked about moral hazard all
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the time from the earliest days of the
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credit crisis and it's known publicly
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that you know we offered a perspective
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that if the government had to step in to
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help stabilize Bear Stearns that the
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barrister and shareholder should not be
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rewarded for that specifically because
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of the moral hazard issue so something
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that we've been aware of the entire time
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at the end of the day though the test
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was is the cost of action more or less
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than the cost of inaction and when the
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cost of inaction is potentially so
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damaging to our economy and to every
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American citizen then it's an easy
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decision to make even if it's an
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unpleasant decision to make in terms of
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making decisions under pressure I
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learned a lot about myself and my
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ability to build a team and lead a team
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under excruciating pressure and get that
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team to perform but at the end of the
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day let's not forget secretary Paulson
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was driving this was making the ultimate
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decisions on our big strategic moves and
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you know he handles pressure well and he
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drove us and steered us in the right
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direction and working closely with
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Chairman Bernanke ultimately made the
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tough calls when we had to make the
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tough calls in October Congress approved
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the 700 billion bailout package and and
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then you had to head the office for
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financial stability did you have a team
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in place at that time that could do what
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needed to be done how did you go about
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building that team not at all you know
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Treasury is a policy department so year
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in year out what treasure is good at is
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writing papers writing proposals doing
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analysis of policy options we had to
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build an investing function to be able
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to deploy seven hundred billion dollars
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in a very short period of time in very
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complex investments so we had to build
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that from scratch and that was although
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I was very involved in the policy making
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my primary responsibility was building
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the team recruiting the team and
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executing so we started out by
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recruiting the very best senior
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government officials we could from
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around the government and we drafted
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them and said
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we need you here tomorrow and we were
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able to recruit the very best room
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across the government I would call it
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bringing on board the best athletes we
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could find regardless of what their
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specific skillset was each of those
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folks was charged then with building out
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their specific operations let's say the
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CFO function or the investing function
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or the compliance function getting our
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operations going and then finding and
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hiring their replacement so we drafted
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great professionals very experienced
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people people who are much more
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experienced than I am to come in and run
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different parts of this with me setting
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the direction for the team and then
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building the operation hiring their
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successors that worked extremely well by
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the time I left two weeks ago after
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seven months we'd hired about 135 people
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who all of whom were non-political it
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was very important for me that we'd be
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able to hand a new administration a
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fully functioning office of financial
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stability and that meant I didn't want
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political appointees I wanted the very
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best career professionals from
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government from the private sector so
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that the new administration would get a
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fully staffed office and we achieved
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that so clearly that that's that goes to
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the heart of the toughest part of your
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job I would imagine what would you see
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the main challenges and how did you
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overcome them well honestly the toughest
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part we recruited wonderful people who
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were committed to doing whatever they
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could to try to help us implement our
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program successfully and they were not
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interested in credit or money or glory
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it was just about doing the right thing
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for the country so that was not the
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hardest part that took a lot of effort
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but it was solvable because we had
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wonderful people who are committed to
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this the hardest part was communicating
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the very complex issues that we're
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dealing with you know the vast majority
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of Americans had nothing to do with
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creating this crisis they didn't buy
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homes they couldn't afford or make risky
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investments yet because the credit
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crisis has triggered the recession it
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affects every single American family so
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everyone is suffering because of this
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and trying to explain to the American
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people why we have to step in to
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stabilize an institution that made bad
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decisions with the money of the American
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people is extremely complex and our
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programs are so complex we've really
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struggled with that communication
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challenge that's been the hardest part
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of this
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you know it that's very interesting and
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it's absolutely true i would guess that
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the pr challenge was probably the
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hardest one in fact i saw in the
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washington post did recently described
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you as the sponge for congressional
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anger in terms of coming up with your
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own communication strategy did you
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consciously choose not to have too many
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press conferences and so forth or was it
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did you weigh the pros and cons between
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having a high communication strategy in
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a low communication strategy how do you
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think about that I focused on I didn't
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do any television interviews until I
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left Treasury and even since I've only
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done one with Charlie Rose and now this
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interview I was focused on getting as
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much information out to the people and
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to the markets as possible so I focus my
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own personal communications on major
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speeches that I gave once every couple
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weeks and then testimony when I
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testified before Congress I testified
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five or six times on average four to
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five hours each time and if you would go
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back and read my speeches of my
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testimony it was very detailed because
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in a crisis in my experience people want
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information they want to know what we're
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doing the details of what we're doing
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why we're doing it and so I tried to
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provide as much detail as possible in
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hindsight I don't know if that was the
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right answer because while I was
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providing tremendous details on what we
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were doing we were still struggling to
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get some of our broader messages out to
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the general population in terms of why
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we're tapping to take this action and
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what the consequences are if we don't
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take this action if I could do it again
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I'm a change my communication strategy
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and in fact focus less on details
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because and more on the broader messages
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many experts were asking us for details
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and I think a lot of my communication
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was focused on meeting their needs
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rather than needing some of the broader
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needs of why we're taking these actions
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I think that that that's very very
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interesting how did you formulate your
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bailout strategy for tarp the
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specifically and again this goes to the
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communication issue how would you how
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did you respond to critics who may have
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charged that form of Wall Street
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insiders were using billions of dollars
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taxpayer money to rescue greedy or
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incompetent you know Wall Streeters
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again every action that we took was
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taken to try to minimize damage to our
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economy for the American people not
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about Wall Street not about bankers
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that's the lens through which we look
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through everything we have finite
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resources seven hundred billion dollars
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is a tremendous amount of money but it's
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a finite amount of money and we receive
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I personally received phone calls from
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homeowners from mayor's from governor's
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from business leaders around the country
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talking about the stress and strain they
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feel because of the credit crisis if we
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went out to everybody individually who
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needed help the money wouldn't go far
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enough wouldn't come close so we tried
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to focus our resources on the parts of
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the financial system that would provide
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the most bang for the buck if we could
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stabilize the system as a whole then
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credit would flow out to all the
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individuals the businesses in the cities
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that need it so we were always
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evaluating where are we going to get the
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maximum benefit given our finite
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resources and we were using every tool
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in the federal government's arsenal to
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try to solve this problem so we also
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wanted to use the right tool for the
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right job you know the Fed can lend
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money and so there's no reason that we
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should use the tarp as a lending
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facility if the Fed can do that so again
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the tarp was the only facility in the
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federal government's arsenal that could
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inject equity or fundamentally take a
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risk in our financial system you know
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when the Fed lends money they need to be
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secured so they're not taking much risk
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because the private sector was unwilling
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to take risk we needed to take risk in
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the financial sector now how do you
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think the situation might play out in
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the future because as I understand it
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the banks that have these toxic assets
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will no longer be required to mark them
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to market how do you think these toxic
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toxic assets will get absorbed well I
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don't think that's true i think that the
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account fazli has made some changes on
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how mark to market is interpreted I
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think that it's too strong a statement
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to say they will not have to mark them
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to market okay i think that the
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practical implication of that is unclear
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at this point because it depends on how
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the accountants and the company's
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interpret some of these faz be rules
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I think that we're seeing the actions we
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took in the fall putting in capital in
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the bank's fundamentally stabilize the
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system when we were facing financial
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collapse now the focus is on getting
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lending out to consumers and businesses
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to minimize damage to our economy
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secretary Geithner has announced a
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public-private partnership to combine
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private sector resources with government
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resources to go after some of these
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assets and I'm optimistic that that
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program will help restart these markets
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it's not a silver bullet and buy itself
00:14:06
will not solve all problems but I think
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it's one important complementary tool
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well you have a very unique perspective
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because you were on Wall Street Goldman
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Sachs before but you also were at
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government how has your view of some of
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these exotic financial products changed
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and we see like credit default swaps for
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example they seem to create the
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impression that they transfer risk but
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in practice sometimes they almost appear
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to make risk invisible do you think that
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we really need products like these
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exotic financial products I think
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financial innovation has served our
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economy very well over the years and I
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think clearly it got ahead of itself in
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recent years and I wouldn't point to the
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CD s market necessarily i would point to
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things like CDOs or CDO squared where
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people thought that they were reducing
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distributing risks when they really
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weren't i think that financial
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innovation is important but we need to
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really understand the products
00:15:04
understand how they can behave in
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unexpected ways i mean a fundamental
00:15:09
assumption behind almost all the
00:15:12
analysis that was done by the by the
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rating agencies by the banks by hedge
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funds by the investors was that home
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prices can only go up if all of your
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models are built on that assumption and
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that assumption proves to be false no
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financial product will work the way it
00:15:27
was intended and so I think that we all
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can do better in terms of understanding
00:15:30
risks and testing those risks and some
00:15:34
of those financial products will never
00:15:35
come back again we may never see a CDO
00:15:37
squared again and maybe that's a good
00:15:38
thing but I don't think we should throw
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out all financial innovation our country
00:15:43
has really benefited from it that's
00:15:45
that's it that's absolutely true and not
00:15:47
moves that are foot to standardize
00:15:49
derivatives so they can be traded on
00:15:51
exchanges
00:15:52
backward collateral and so forth is
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there any downside to this any of you to
00:15:58
be did we ever really need the high
00:16:01
degree of customization that
00:16:02
characterize these markets I don't know
00:16:07
enough to know for certain I mean I can
00:16:08
see the benefits of customization if you
00:16:10
are an institution not necessarily a
00:16:13
bank an industrial company with a
00:16:15
specific risk that you're trying to
00:16:16
hedge it seems rational to me that there
00:16:19
may not be a standard product and then
00:16:21
if you can find someone to do a contract
00:16:22
with that it makes sense in both cases
00:16:24
nonetheless I think that more
00:16:26
standardization is a good thing more
00:16:28
transparency more disclosure is a good
00:16:30
thing I think for all of us we clearly
00:16:33
need to make regulatory changes my hope
00:16:36
is that we do not rush and try to make
00:16:38
too many changes in the middle of the
00:16:39
crisis we need to put the fire out get
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the crisis behind us with the benefit of
00:16:44
hindsight then take a deep breath and
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look at what changes we need to make so
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that we make rational changes going
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forward what lessons did your experience
00:16:53
teach you about government and Wall
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Street and also what what did lyrics
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lessons did you learn about yourself you
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know when I was in the private sector I
00:17:06
foolishly had the perspective the people
00:17:08
in government don't work hard and let me
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tell you something there are people who
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have been working night and day career
00:17:15
people again not for glory or for pay or
00:17:18
for-profit just to try to serve their
00:17:20
country and do their best to help the
00:17:22
economy working night and day and
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Treasury and the Federal Reserve in the
00:17:25
regulators and I have tremendous respect
00:17:28
for those folks that I didn't appreciate
00:17:29
when I was in the private sector they
00:17:31
work every bit as hard or harder than
00:17:33
people on Wall Street without the glory
00:17:35
or the pay so that was an important
00:17:38
humbling lesson for me when I came in
00:17:40
and had the privilege of working
00:17:41
alongside them in terms of learning
00:17:44
about myself I feel incredibly blessed
00:17:47
to have had this experience to get to
00:17:49
serve at this important time in our
00:17:50
history I hope that in the future I have
00:17:53
the chance in ten years to come back to
00:17:55
government to serve again I learned a
00:17:57
lot about myself and my ability to
00:17:59
handle pressure and to try to build a
00:18:01
team and motivate people to perform
00:18:03
under exclusive
00:18:04
getting scrutiny and excruciating
00:18:07
pressure and I'm proud of what we
00:18:09
accomplished and I'm proud of the team
00:18:10
that I left behind that are now
00:18:12
continuing our programs just one final
00:18:14
question what advice would you give to
00:18:16
CEOs about working with the government
00:18:18
and should business schools start
00:18:21
teaching MBA is more about government
00:18:23
relations the latter question I think
00:18:26
definitely I think that careers in
00:18:28
government can be incredibly rewarding
00:18:30
and I think that business schools
00:18:31
preparing their graduates for potential
00:18:33
careers and government will not only
00:18:35
help those who go into government I
00:18:36
think it will help those who go into the
00:18:38
private sector who later have to do
00:18:39
business with the government better
00:18:41
understanding between both sectors I
00:18:43
think will be helpful what was the first
00:18:45
part of your question what advice would
00:18:47
you give CEO is about looking with the
00:18:49
government I think in this time the
00:18:53
private sector should over communicate
00:18:55
to the public sector don't assume that
00:18:58
in government we're hearing all the
00:19:00
messages from the private sector all of
00:19:02
the perspectives i would say pick up the
00:19:04
phone call you don't have to call the
00:19:06
secretary call the staff make sure your
00:19:09
voice is heard so the government has the
00:19:11
benefit of the best information we can
00:19:13
get from the private sector so we
00:19:15
understand your perspective what's
00:19:17
happening in the markets and then we can
00:19:19
design policies that strike the right
00:19:20
balance you'll thank you so much for
00:19:23
joining today and good luck to you thank
00:19:24
you it's my pleasure
00:19:32
you
