Kashkari Says ‘Too Big to Fail’ Gives Unfair Edge in Debt Sales
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By Ari Levy
May 19 (Bloomberg) -- Neel Kashkari, former administrator of the $700 billion U.S. bank-rescue program, said firms deemed too big to fail have an unfair advantage over smaller rivals because they can more cheaply raise money in the debt markets.
Kashkari, who left government May 1, said in a speech last night that some officials have discussed the possibility of a “debt tax” or “systemic tax” on those institutions, without saying if he supported that approach.
“If you have some huge, global institution that is systemically important, too big to fail, too interconnected to fail, in a sense it will always be able to issue debt cheaper,” said Kashkari, 35, at the San Francisco campus of the University of Pennsylvania’s Wharton School. “People who buy that debt believe that the government is standing behind it.”
As head of the Troubled Asset Relief Program under former Treasury Secretary Henry Paulson, Kashkari was at the helm when Citigroup Inc. and Bank of America Corp. were issued a combined $90 billion in government funds to keep the firms solvent amid the credit crisis. Kashkari said yesterday that those banks were saved to help prevent a collapse of the financial system.
Citigroup, the third-biggest U.S. bank by assets, sold $2 billion of 10-year notes without government support last week. Earlier this month, Bank of America, the country’s largest bank, sold $3 billion of five-year notes that weren’t guaranteed by the Federal Deposit Insurance Corp.
Kashkari kept his post for the first three months of the Obama administration at Treasury Secretary Timothy Geithner’s request. President Barack Obama has nominated former Fannie Mae Chief Executive Officer Herb Allison to take over for Kashkari. Allison, whose nomination is subject to Senate confirmation, is a counselor to Geithner.
Defending TARP
Kashkari, a former investment banker at Goldman Sachs Group Inc., spent a week in December defending TARP to Washington lawmakers and in speeches. He said the banking system was “more stable” than in October when Congress passed legislation for the rescue and said Treasury was working with regulators to determine how banks that received federal funds performed relative to those that didn’t.
The TARP program has distributed almost $300 billion to about 600 U.S. banks and financial firms. In last night’s speech, Kashkari said regulators will have to establish policies in coming years to better control the growth of institutions.
The rescues of New York-based Citigroup and Charlotte, North Carolina-based Bank of America were in a group of “higher risk investments” by Treasury, Kashkari said. That category included automakers General Motors Corp. and Chrysler LLC and insurer American International Group Inc., he said.
Kashkari said he didn’t have an estimate of when the government would get paid back for its investments and loans. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley applied yesterday to refund a combined $45 billion of funds, people familiar with the matter said. Kashkari said about a dozen small banks have already paid back TARP.
“The way we’re going to get paid back as much as possible is by banks and institutions earning money over the long term and paying back the money over the long term,” he said.
To contact the reporter on this story: Ari Levy in San Francisco at [email protected].
Last Updated: May 19, 2009 13:46 EDT
Share | Email | Print | A A A
By Ari Levy
May 19 (Bloomberg) -- Neel Kashkari, former administrator of the $700 billion U.S. bank-rescue program, said firms deemed too big to fail have an unfair advantage over smaller rivals because they can more cheaply raise money in the debt markets.
Kashkari, who left government May 1, said in a speech last night that some officials have discussed the possibility of a “debt tax” or “systemic tax” on those institutions, without saying if he supported that approach.
“If you have some huge, global institution that is systemically important, too big to fail, too interconnected to fail, in a sense it will always be able to issue debt cheaper,” said Kashkari, 35, at the San Francisco campus of the University of Pennsylvania’s Wharton School. “People who buy that debt believe that the government is standing behind it.”
As head of the Troubled Asset Relief Program under former Treasury Secretary Henry Paulson, Kashkari was at the helm when Citigroup Inc. and Bank of America Corp. were issued a combined $90 billion in government funds to keep the firms solvent amid the credit crisis. Kashkari said yesterday that those banks were saved to help prevent a collapse of the financial system.
Citigroup, the third-biggest U.S. bank by assets, sold $2 billion of 10-year notes without government support last week. Earlier this month, Bank of America, the country’s largest bank, sold $3 billion of five-year notes that weren’t guaranteed by the Federal Deposit Insurance Corp.
Kashkari kept his post for the first three months of the Obama administration at Treasury Secretary Timothy Geithner’s request. President Barack Obama has nominated former Fannie Mae Chief Executive Officer Herb Allison to take over for Kashkari. Allison, whose nomination is subject to Senate confirmation, is a counselor to Geithner.
Defending TARP
Kashkari, a former investment banker at Goldman Sachs Group Inc., spent a week in December defending TARP to Washington lawmakers and in speeches. He said the banking system was “more stable” than in October when Congress passed legislation for the rescue and said Treasury was working with regulators to determine how banks that received federal funds performed relative to those that didn’t.
The TARP program has distributed almost $300 billion to about 600 U.S. banks and financial firms. In last night’s speech, Kashkari said regulators will have to establish policies in coming years to better control the growth of institutions.
The rescues of New York-based Citigroup and Charlotte, North Carolina-based Bank of America were in a group of “higher risk investments” by Treasury, Kashkari said. That category included automakers General Motors Corp. and Chrysler LLC and insurer American International Group Inc., he said.
Kashkari said he didn’t have an estimate of when the government would get paid back for its investments and loans. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley applied yesterday to refund a combined $45 billion of funds, people familiar with the matter said. Kashkari said about a dozen small banks have already paid back TARP.
“The way we’re going to get paid back as much as possible is by banks and institutions earning money over the long term and paying back the money over the long term,” he said.
To contact the reporter on this story: Ari Levy in San Francisco at [email protected].
Last Updated: May 19, 2009 13:46 EDT
