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2008 Bank Bailout Chief Has A Plan To Prevent The Need For Another One

RACHEL MARTIN, HOST:

The change of power in Washington, D.C., next year could mean changes to the rules that govern the nation's banks. One big idea for new rules comes from Neel Kashkari. He was the man who ran the government's bank bailouts during the financial crisis. As Jacob Goldstein of our Planet Money podcast reports, Kashkari says his plan would make another bailout much less likely.

JACOB GOLDSTEIN, BYLINE: In 2008, Neel Kashkari was working in Washington for the Treasury Department. The banks were collapsing, and he got put in charge of the bailout. It was a big job.

How old were you at the time?

NEEL KASHKARI: I was 35 at the time.

GOLDSTEIN: And how much money were you in charge of?

KASHKARI: The program's maximum size was $700 billion.

GOLDSTEIN: Kashkari became the face of the bailout - got yelled at a lot in Congress.

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DENNIS KUCINICH: Mr. Kashkari, we told you in there that we wanted Treasury to safeguard the TARP monies from waste and abuse.

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DAN BURTON: (Sighing) I'll tell you, Mr. Kashkari...

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PATRICK KENNEDY: The people that don't have savings are bailing out the very wealthiest in this country. There's something inherently wrong in this picture.

GOLDSTEIN: And then, in the spring of 2009, Kashkari left his job in Washington. He moved to the mountains of Northern California.

KASHKARI: One of the things I liked to do when I was in the woods was chop wood. So trust me, when I was sitting there chopping wood, I was reliving some of my moments taking my beatings on Capitol Hill. What I realized is when you violate the core beliefs of a society, it leads to great anger in that society. And so as a society, we have a core belief that's been passed down from generation to generation in free markets. If you take a risk, you get the upside. You get the downside. Well, we violated that fundamentally when we bailed out the banks.

GOLDSTEIN: Kashkari is now the president of the Federal Reserve Bank of Minneapolis, part of the National Federal Reserve System. And, he says, if the nation's banks got into trouble today, they would be bailed out again. He says they're still too big to fail. The problem, according to Kashkari, is debt. We think of the banks as lending out money, but banks also borrow lots of money. And when a bank gets into financial trouble, it can't pay back all that money it borrowed. In the case of a really big bank, this can set off a chain reaction that causes problems throughout the economy.

So Kashkari and his team in Minneapolis came up with a plan they say would make future bailouts less likely - don't let the banks use so much borrowed money. Force them to use more of their own money, money they haven't borrowed from anyone and don't have to pay back.

KASHKARI: We decide that banks need much higher buffer so that if they make mistakes, they have enough buffer to absorb those losses.

GOLDSTEIN: Today big banks borrow about 93 percent of the money they lend out. The other 7 percent is their own money. Seven percent is their capital in the jargon of banking. For the biggest banks, Kashkari says, that number should be twice as high.

KASHKARI: The rough measure is 15 percent will have to come out of their own money in their capital as we call it.

GOLDSTEIN: The rest they can still borrow. One group that does not like Kashkari's plan? Big banks. For this story, I reached out to the two trade groups that represent big banks. Neither one of them got back to me. But when Kashkari's plan was released, a spokeswoman for one of the groups, the Financial Services Forum, said, quote, "for those looking to accelerate economic growth and job creation, tripling bank capital levels - already double from pre-crisis levels - will make it much harder to meet those goals." In other words, the plan will be bad for economic growth. Kashkari more or less agrees with this.

KASHKARI: Safety isn't free. If we raise capital requirements, make the banks fund themselves with their own money instead of borrowed money, there will be an economic cost.

GOLDSTEIN: Specifically, Kashkari says, his rules would make it more expensive for ordinary people and businesses to borrow money. Interest rates would be higher. Economic growth, he says, would be a little lower. For Kashkari, this tradeoff - higher interest rates, lower economic growth - in exchange for a much lower risk of a financial crisis is worth it. It will be up to Congress and the president to decide whether to adopt the rules.

Jacob Goldstein, NPR News.

(SOUNDBITE OF AESOP ROCK SONG, "PIGS") Transcript provided by NPR, Copyright NPR.