Paulson turns to Goldman to unclog credit markets

Treasury Secretary Henry Paulson turned to a familiar source when he picked a director for the government's $700 billion bailout program: his former Wall Street firm, Goldman Sachs.

Neel Kashkari, a former Goldman executive who has worked with Paulson at the department since July 2006, was chosen Monday as the interim head of the government's unprecedented effort to unclog the credit markets.

Kashkari, who was a vice president in Goldman's San Francisco office before joining the department, is one of four former executives from the firm now working feverishly to resolve the financial crisis.

Paulson also leans heavily on former Goldman Sachs executives Dan Jester and Ken Wilson, both financial institutions bankers, and Steve Shafran, who focused on corporate restructuring while at Goldman.

Shafran joined the department in February 2008, while Paulson brought Jester and Wilson on board in July and August, respectively, as the credit crisis worsened.

All four are members of a domestic finance team at Treasury that has worked nearly nonstop on the crisis for months.

Other members of the team without a Goldman background are: Anthony Ryan, the assistant secretary for financial markets; David Nason, assistant secretary for financial institutions; and Bob Hoyt, Treasury's general counsel.

Not everyone shares Paulson's enthusiasm for Goldman Sachs.

Robert A. Eisenbeis, a former director of research at the Federal Reserve Bank of Atlanta, said Paulson should have chosen someone more familiar with the government's response to the savings and loan crisis of the late 1980s and 1990s, when the Resolution Trust Corp., was created to dispose of billions of dollars of assets from bankrupt savings and loans.

"The kind of people that you need are the ones who were associated with RTC and had experience dealing with these large volumes of assets," Eisenbeis said. "Working at Goldman Sachs doesn't qualify you for doing this job."

But Steve Adamske, a spokesman for Massachusetts Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, said Kashkari is "very knowledgeable and very smart."

The department didn't have time to engage in a "months-long search," Adamske said, and Kashkari's appointment is "consistent with the urgency with which they said we had to move."

Officials said that Paulson was particularly impressed with Kashkari's critical help in the creation of the HOPE Now program, an October 2007 Treasury initiative to cajole private mortgage companies into stemming a tidal wave of foreclosures by getting faltering borrowers into more-affordable mortgages.

The program has been criticized for offering too little in terms of assistance, but the Bush administration points to it with pride as an example of a successful effort to harness private sector forces to deal with the steepest slump in housing in decades.

Kashkari (pronounced KASH-kar-ee), 35 years old, has had a varied career since getting his bachelor's degree and master's degree in engineering from the University of Illinois at Urbana-Champaign, following in the footsteps of his father, also an engineer.

Kashkari worked in research and development for TRW Inc., which is now part of defense contractor Northrop Grumman Corp., developing technology for NASA space science missions such as the James Webb Space Telescope, the replacement program for the Hubble telescope.

Kashkari decided to switch from rockets to finance, returning to college where he got a master's degree in business administration from the Wharton School, the business school of the University of Pennsylvania. He then joined Goldman Sachs Group Inc. in San Francisco, where he headed up Goldman's information technology security investment banking practice.

At Treasury, Kashkari has been given a string of key tasks from helping to get Hope Now launched to helping to draft the legislation that Congress passed last week creating the $700 billion rescue effort.

Scott Talbott, a lobbyist for the Financial Services Roundtable, a group of 100 large companies, said Kashkari will have his work cut out for him.

"He's got the health of the housing market and the economy on his shoulders," he said. "But he's got a $700 billion checkbook too."

Kashkari will keep his current title as assistant Treasury secretary for international affairs, but will head up the newly created Office of Financial Stability on an interim basis.

The designation of Kashkari as the interim head of the new office was necessary because the permanent head of the office, which is a presidential appointee, must be confirmed by the Senate, currently in recess ahead of the November elections.

It is quite possible that Kashkari may never get the job on a permanent basis since the Senate, now controlled by Democrats, will probably leave an interim head in place so that the next president, either Barack Obama or John McCain, can choose a permanent replacement. Paulson has already announced that regardless of who wins the election, he plans to step down as Treasury secretary on Jan. 20 when the next president is sworn into office.

The selection of Kashkari was one of a number of steps the administration took Monday in an effort to demonstrate it is moving quickly to implement the bailout program.

It issued interim guidelines for the choice of the expected five to 10 asset management firms who will set up a process to buy up to $700 billion of distressed mortgages and mortgage-related assets from financial firms. The hope is that by removing the toxic assets from the firms' books it will encouraged banks and other financial institutions to resume more normal lending operations.

Emphasizing speed, the Treasury Department posted on its Web site the specifications companies will have to meet to apply for the asset jobs and asked interested companies to submit applications by 5 p.m. EDT Wednesday. Even with this fast approach, it is not expected that the first asset sales will occur until after the Nov. 4 presidential election.

Treasury also announced that it was expanding its debt auctions in order to obtain the resources to make the upcoming asset purchases, announcing the sale of $100 billion in short-term debt just this week.

In addition, the President's Working Group on Financial Markets, which includes Paulson and Federal Reserve Chairman Ben Bernanke, said in a statement released Monday before markets opened that it would move "with substantial force on a number of fronts" to implement the expanded authorities granted to the government when Congress passed the emergency rescue package last Friday.

The Fed also took a number of moves Monday to bolster its resources to supply emergency loans to the financial system.

Investors initially were not reassured. Stocks tumbled with the Dow Jones industrial average falling at one point by as much as 800 points, a record, before recovering to close down by 370 points.